Earnings Call Transcript
Affirm Holdings, Inc. (AFRM)
Earnings Call Transcript - AFRM Q2 2021
Operator, Operator
Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Affirm Holdings Fiscal Second Quarter 2021 Earnings Conference Call. As a reminder, this conference call is being recorded.
Robert O'Hare, Senior Vice President of Finance
Thanks, operator. Before we begin, I would like to remind everyone that today's call may contain forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including those set forth in our filings with the SEC, which are available on our Investor Relations website, including our prospectus filed on January 14, 2021. Actual results may differ materially from any forward-looking statements we make today. These forward-looking statements speak only as of today, and the company does not assume any obligation or intent to update them, except as required by law. In addition, today's call may include non-GAAP financial measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures. Reconciliation to the most directly comparable GAAP measures can be found in today's earnings press release, which is available on our Investor Relations website. Hosting today's call are Max Levchin, Affirm's Founder and Chief Executive Officer; and Michael Linford, Affirm's Chief Financial Officer. With that, I'd like to turn the call over to Max to begin.
Max Levchin, CEO
Thanks, Rob. Thank you all for joining us for our first earnings call as a public company. We are pleased with the results for the quarter, which included revenue growth of 57% year-over-year and a 55% year-over-year increase in quarterly gross merchandise volume to a record $2.1 billion as our product offerings continue to resonate with consumers and merchants alike. In the second quarter, we also grew active consumers by 52% and our merchant base by 90% from the prior year. Michael will provide more details on our second quarter performance in a few minutes, but since this is our first earnings call, I'd like to spend some time providing a brief overview of Affirm, the industry tailwinds driving our growth and our strategic initiatives. Affirm was founded almost a decade ago with the mission to build honest financial products that improve lives. We knew that consumers were tired of the constant penalties like late fees and deferred interest from credit cards. And we knew that merchants needed new payment solutions that could help them attract and retain customers while avoiding discounts and promotional gimmicks, which can dilute their brands and their bottom lines. Since the beginning, we focused on building a new kind of payment network, the first to align its own success with the success of both consumers and merchants. Affirm wins when our consumers and our merchant partners win. In the last 12 months, we've empowered 4.5 million consumers to take control of their finances, enabling them to pay for the things they want and need over time, almost anywhere in the U.S. We've also helped merchants drive growth by adding new customers, accelerating sales and increasing conversion. We've enabled over $12.7 billion in transactions in the past 4.5 years, and we've never charged a late fee or $0.01 of deferred interest. Our approach has led to trusted relationships on both sides of the commerce ecosystem. Our payment platform has enabled us to advance our mission and enhance the role we play at the center of commerce for both consumers and merchants. Before I go into the details of what we have built so far and where we're headed, I wanted to give you a sense for how consumers feel about Affirm in their own words. For example, a military mom, who otherwise would not have been able to attend the graduation of her kids, told us, 'To make it to their graduations, I was able to get tickets through Affirm and make payments on such expensive plane tickets that I would not normally be able to get. It's been so nice. Payments are reasonable and the app is easy to use.' Another satisfied consumer said, 'For a company to be completely honest about no late fees and working with you on timing of payments is a godsend. I couldn't thank Affirm enough for being such a great company.' We have received many more testimonials such as these which validate our founding mission and empower us to deliver on that mission every single day. Our platform consists of 3 core solutions: a point-of-sale payment solution for consumers, a merchant commerce technology solution and our Affirm app. Our point-of-sale payment solution gives consumers control and flexibility at merchant checkout. After selecting Affirm as a payment option, consumers enter up to 5 pieces of information and then choose how they wish to pay. Payment schedules include biweekly and monthly options and terms range from as little as 6 weeks to as long as 48 months. Our merchant technology solutions help merchants from small businesses to the world's largest retailers, more efficiently reach new consumers and drive incremental sales. Not only do we enable merchants to address affordability and increase their customers' purchasing power, we also provide them with valuable, high-quality data that they cannot get elsewhere. This includes item-level data, prepayment data, consumer behavior data and repeat purchase data. These insights can be used to more efficiently target customers, tailor promotions and achieve a greater return on marketing spend. And third, the Affirm app knows our marketplace is where consumers can discover relevant merchants and get exclusive offers tailored to their spending and shopping habits. In addition to being a great tool for consumers, it's also valued by merchants. Merchants love that their outreach can be highly targeted through placement on our app, making it a great vehicle for customer acquisition. The app also offers consumers an Affirm virtual card that can be used almost anywhere in the U.S., a simple interface where they can manage their payments and a place to open a high-yield savings account. In the December quarter, approximately 1.2 million transactions originated from Affirm Properties, twice as many as we saw in the same period last year and approximately 1/3 of our overall transaction volume. As we look to expand our current network, there are several strong tailwinds powering our business and combining to create a massive and durable opportunity for Affirm. Consumers, particularly millennials and Gen Z, have lost trust in financial institutions and increasingly prefer more flexible and innovative digital payment solutions in lieu of traditional credit payment options. In 2020, these younger generations represented over 160 million U.S. consumers with more than $2.5 trillion in estimated spending power. Additionally, every element of commerce is moving online. Even as total worldwide retail sales declined by 3% in 2020, retail e-commerce boomed, increasing by 27.6%. The significant change in consumer behavior, coupled with the fact that the cost to acquire a customer and convert to sale are two of the biggest challenges facing merchants, are fueling demand for Affirm. By continuing to leverage our core strengths and competitive advantages, we believe we can capture an even larger portion of the ecosystem we've set out to reinvent. Our proprietary technology is custom-built from the ground up so we don't have the constraints of legacy systems. This means we can efficiently respond to changes in the world, scale quickly and innovate on new products. And we've maximized the value of our data to benefit our consumers and merchants, leveraging item-level data, repayment data, consumer behavior data and repeat purchase data to more finely price transactions and personalize experiences, all while managing risk. Further, our ability to service all transactions from low-average order value to high-average order value, online and offline, our flexible payment terms and the breadth and depth of our merchant and partner network set us apart. As a result, we see strong consumer satisfaction. In calendar year 2020, approximately 67% of purchases were made by repeat Affirm users. And we're proud to have earned a Net Promoter Score of 78, a score that is on par with some of the most admired tech brands and significantly higher than the scores of traditional financial institutions. We can accommodate and partner with merchants regardless of industry size, average order value or customer profile. During the quarter, we generated significant traction with new merchants, growing our affiliate merchant base to over 650 paying merchants. Our merchant wins range from Alice and Olivia, Tom Ford International, to Neiman Marcus and Williams-Sonoma, to some of the largest brands in the world. We recently signed an agreement with American Airlines and expect to be available on aa.com in the American Airlines app soon. Most excited about the new 3-year agreement with Walmart that we signed in January. This wide range of marquee brands demonstrates our broad merchant appeal. We also added new strategic partnerships in the quarter that increase our access to millions more consumers and hundreds of thousands of merchants. For example, we recently launched with Adyen, a global omnichannel payment platform for many of the world's leading businesses as well as Inntopia, positioning Affirm as a leader in the ski resort and ticketing space. Additionally, we continue to make progress on our partnership with Shopify, first announced last summer. We are currently in beta with nearly 100 merchants and have been very pleased with our results so far. Our partnership with Shopify is enabled through our point-of-sale API products, which allows partner platforms to deliver buy-now-pay-later with a customized user experience to the merchants and consumers that are on their platform. The deeper integration for external commerce platforms enables us to offer Affirm as a service to any partner. Similarly, in December, Rakuten, a leading cash-back shopping platform, debuted with us as the launch partner for our marketplace API, which allows consumer shopping platforms to offer their customers Affirm financing via virtual carts. We're excited to augment our strong merchant and consumer networks through these large, high-growth partners like Shopify, Rakuten and many others. Just a few weeks ago, we made our first strategic acquisition, purchasing PayBright, one of Canada's leading buy-now-pay-later providers. We expect PayBright's complementary merchant relationships and first-mover advantage in Canada to enable us to expand our scale and reach across North America. We're very pleased with our results on the acquisition so far with gross merchandise volume performance in Canada exceeding our expectations quarter-to-date with growth in both split-pay and pay-monthly offerings. Key merchants driving this growth include Samsung, both online and in-store, as well as Hudson's Bay, Canada's largest department store retailer. As we look ahead, we believe we can address not only the $600 billion of e-commerce spent in the U.S., but the $7.6 trillion of card spent, processed online and offline at merchants in the United States. Furthermore, by continuing to bring merchants new, high-quality and loyal customers, we believe we can address a large portion of the estimated $1 trillion they spend on customer acquisition. We have successfully demonstrated how our solutions can enable and accelerate commerce for larger, more considered purchases. A key principle of our next phase of growth is to expand into higher frequency purchases by investing in our split-pay product, ramping up our partnership with Shopify and making strategic investments in marketing. We also made our first foray into brand marketing in the second quarter with a holiday campaign that featured Keke Palmer and focused on the benefits of Affirm over traditional credit cards. The campaign was amplified by Jimmy Kimmel Live, The Late Show with James Corden, Hasan Minhaj, Whitney Cummings, Ashley Park and other prominent personalities. During the holiday season, Affirm was prominently featured in more than 100 merchants' marketing and advertising. The response to these marketing efforts has been very positive, and we have seen a 10-point increase in brand awareness quarter-over-quarter. We believe these actions combined position us well to increase engagement with both consumers and merchants, leading to increased transaction volume on our platform. We also see significant opportunity to develop new products that can define the future of commerce and plan to continue making investments to drive growth. Take our savings product, for example. We've seen an interesting halo effect where our savings account growth has benefited from marketing and communications to our customer base that are focused on other products. And while our savings product isn't a large part of our business right now, it is great to see our existing consumers use savings accounts to deepen their engagement with Affirm and to see how new consumers start their permanent relationship with a non-lending product. In addition, we've introduced split pay across our point of sale, merchant platforms and in our app. The split-pay product, which is suited to higher frequency, lower average order value purchases, showed an approximately 71% higher repeat transaction rate than our core installment loan product over the November-December holiday period. And while we got our start in the high average order value segment and have expanded into the lower average order value, more frequent purchase area, we believe there's ample opportunity to further expand our use cases, eventually even addressing the largest category of all: daily spend. We expect all of this and more to further our ability to expand our consumer and merchant base, help our merchants grow their revenue on our platform and develop new innovative solutions to establish the ubiquity of our network and breadth of our platform. Finally, I want to thank all of our Affirm-ers for their incredible dedication to our mission over the last 9 years. Each day, you strive to put consumers back in control of their finances, aimed to be a powerful revenue accelerator for merchants. I'm so grateful for you and so proud of how we're transforming commerce. With that, I'd now like to turn the call over to Michael to discuss our second quarter financial results.
Michael Linford, CFO
Thanks, Max, and good afternoon, everyone. Before we get into our fiscal second quarter 2021 results, I first want to talk about our business model and capital funding models. We measure our success across a number of merchant and consumer KPIs, including gross merchandise value, or GMV; the total dollar amount of all transactions on our platform in the period, net of refunds; active consumers, defined as a consumer who engages in at least 1 transaction on our platform in the previous 12 months; and transactions per active consumer, the average number of transactions that an active consumer has conducted on the platform in the previous 12 months. As Max has mentioned, our business model is aligned with the interests of both consumers and merchants. We've proven that aligning incentives can result in great outcomes for our consumers, our merchants and Affirm. We generate revenue in several different ways. First, merchant partners are charged a fee on each transaction processed through the Affirm platform. We refer to this as the merchant discount rate, or MDR. We also generate revenue through interest earned on consumer loans we hold on our balance sheet purchased from our originating bank partners. In recent quarters, roughly 54% of our loans by GMV carried an interest rate borne by the consumer. A smaller portion of our revenue comes from interchange fees earned when consumers use our virtual card for purchases online or offline. While virtual card revenue has contributed roughly 5% of our total revenue in recent periods, it represents an important product capability that allows consumers to use Affirm's products at any U.S. merchant that accepts a credit card. Additionally, we sell a portion of the loans originating in our platform to third-party investors and recognize a gain or loss on the sale of these loans. Lastly, we earn a fee for providing loan services on behalf of third-party investors that have purchased consumer loans from us. Our transaction costs are made up of: loss-on-loan purchase commitment; a loss incurred on a subset of loans, which we purchased from our originating bank partner at a price that is above the loan's fair market value (this mainly occurs with 0% APR loans and loans with below-market interest rates); provision for credit losses, which consists of amounts charged against income during the period to maintain an allowance for all future expected credit losses; funding costs, which consists of the interest expense we incur on our borrowings and the amortization of fees and other costs incurred in connection with our funding facilities and consolidated securitization; and lastly, processing and servicing expense, which consists primarily of payment processing fees, third-party customer support and collection expenses, salaries and personnel-related costs of our customer care team and allocated overhead. We fund our business through 3 primary channels: warehouse credit facilities where we borrow against loans retained in our balance sheet; forward flow relationships where we sell loans to third-party investors; and securitization vehicles, where we bundle consumer loans into structured debt offerings. In January 2021, we entered into our first revolving credit agreement with the syndicated commercial banks for an unsecured revolving credit facility to further enhance our corporate liquidity, though the facility remains undrawn to date. We currently have no other drawn corporate debt on our balance sheet. Our funding model is built to be durable and resilient, as demonstrated during the pandemic. Not only were we able to retain our existing funding, but we added over $2 billion of additional committed capital and introduced 2 securitization programs into our ecosystem in calendar year 2020. We were able to do this in large part because of the high-quality assets we produce, which generate predictable servicing and interest income. Additionally, the assets we hold on our balance sheet are short in duration and thus do not need to withstand multiple credit cycles. Our performance during COVID-19 highlighted the quality of our assets and the capabilities of our proprietary risk management and underwriting approach. As of December 31, 2020, our delinquency rates, as a percentage of our loan portfolio and excluding the impact of our payment deferral program, were approximately 41% lower as compared to June 30, 2020, and 63% lower as compared to December 31, 2019. In addition, as of December 31, 2020, our trailing 3-month gross charge-off, as a percentage of loan portfolio and excluding the impact of our payment deferral program, were approximately 53% lower as compared to June 30, 2020, and 67% lower as compared to December 31, 2019. As a result of our consistent loan performance and strong investor demand for our assets, we have been able to expand our platform at scale while decreasing the equity capital requirement of our loan business. While we added $1.5 billion to our total platform loan portfolio in calendar year 2020, the relative equity capital required to service the portfolio decreased from 10% as of December 31, 2019, to 8% as of December 31, 2020. Turning now to our fiscal second quarter results for the 3-month period ending December 31, 2020. GMV increased 55% year-on-year to $2.1 billion. The increase in GMV was driven primarily by the 90% expansion of our active merchant base to approximately 7,890 at the end of the quarter from approximately 4,148 active merchants in the same time last year, and organic growth in active consumers which grew approximately 52% year-on-year to $4.5 million. Providing a little more color on the composition of GMV, we typically assess our GMV mix across a few different dimensions. First, 0% versus interest-bearing GMV. For the quarter ended December 31, 2020, 0% APR loans accounted for 46% of our total GMV compared to 40% for the 3 months ended December 31, 2019. Affirm versus non-Affirm-initiated transactions. We track the portion of transactions originated on Affirm's owned properties to assess the strength of our consumer network. For the 3 months ended December 31, 2020, 32% of our transactions occurred on Affirm's properties compared to 26% in the same quarter last fiscal year. Industry diversification. We believe the diversity of our merchant partners provides our business with a unique competitive offering as we are not tied to any one sector of the economy. During the 3 months ended December 31, 2020, no one segment accounted for more than 31% of our volume. Over the last 12 months, the largest and fastest-growing segments were sporting goods and outdoors, which includes merchants such as Peloton, Mirror and Rad Power Bikes; and home and lifestyle, which includes merchants such as Purple, Wayfair and West Elm. Both of these segments had pandemic tailwinds. Conversely, our small segment over the last 12 months was travel and ticketing, which declined 47% year-on-year and fell from 11% of our volume in calendar year 2019 to only 3% in calendar year 2020. Notable merchants in this space include marquee brands such as Expedia, Priceline and Delta Vacations. The strong GMV growth drove an increase in total revenue of $74.1 million or 57% compared to the same period last year. Total revenue as a percentage of GMV was 10%, an increase of approximately 14 basis points compared to the same period last year. Total transaction costs increased 23% year-on-year, significantly less than the 57% annual growth in revenue to $114.1 million. Transaction costs as a percentage of GMV were 5.5%, a decrease of approximately 141 basis points compared to the same period last year. The increase was primarily driven by a 59% increase in loss and loan purchase commitment due to a significant increase in the proportion of 0% loans purchased from our originating bank partners during the period and a 48% increase in funding costs, primarily due to a 99% increase in our average debt balances, corresponding to our 81% increase in average loans held for investment, and partially offset by a significantly lower average market interest rate. Our debt balances included only funding debts in fiscal year Q2 2020, and now will also include our fixed rate notes held by securitization trust issued during the current fiscal year; and a 44% increase in processing and servicing expenses, primarily due to an increase in third-party loan servicing and collection costs and an increase in payment processing fees due to an increase in servicing activity and payments volume. These increases were partially offset by a 42% decrease in provision for credit losses due to lower credit losses and improved credit quality. For all loans which we retain on our balance sheet, we are required to hold an allowance for credit losses. The provision for credit losses is generally determined by the change in estimates for future losses and the net charge-offs that occur in the period. During the 3 months that ended December 31, 2020, a stronger-than-expected credit performance of the existing portfolio and an improved credit outlook resulted in a decrease in the allowance for credit losses. This decrease was offset by allowances recorded on loans retained during the period with higher credit quality and a similarly improved credit outlook as the balances of loans held for investment continued to increase, resulting in provision expense of $17.5 million for the 3 months ended December 31, 2020. The combination of the decrease in allowance for credit losses in the 3 months ended December 31, 2020, and the overall credit quality improvement relative to the 3 months ended December 31, 2019, led the provision for credit losses to decrease by $12.7 million or 42% compared to the 3 months ending December 31, 2019, despite the growth in the balance of loans held for investment. Total revenue less transaction costs was $89.9 million in the second quarter, up 141% year-on-year. As a percentage of total revenues, total revenue less transaction cost was 44% as compared to 29% in the prior year period. Total revenue less transaction costs as a percentage of GMV was 4%, an increase of approximately 155 basis points compared to the same period last year. This increase was driven by a release of allowance for credit losses due to strong credit performance in our loan portfolio, which resulted in lower provision expense. Technology and data analytics expenses increased by $10 million or 32% year-on-year. This increase was primarily due to an increase in engineering, product and data science personnel costs as well as to an increase in the data infrastructure and hosting costs. These increases were partially offset by a decrease in underwriting data provider costs. Sales and marketing expense increased by $31.5 million or 411% year-on-year. This increase was primarily due to $17 million of noncash expense associated with the amortization of an asset associated with our commercial agreement with Shopify, which was executed in July 2020. Additionally, there was a $10.7 million increase in brand and consumer marketing, driven by our holiday shopping and brand activation marketing campaign, which resulted in a meaningful inclusion in over 100 merchants' marketing advertising over the holidays. Furthermore, we incurred $0.8 million of onetime marketing costs and professional fees resulting from our initial public offering. General and administrative expenses increased by $10.2 million or 33% year-on-year. This increase was primarily due to an increase of $4.5 million in personnel costs as we grew headcount in our finance, legal, operations, and administrative organizations. Additionally, professional fees increased by $4.3 million during the period to support the PayBright acquisition, our initial public offering and regulatory and compliance programs. G&A expenses included $2 million of onetime costs associated with our initial public offering and the acquisition of PayBright. Operating loss in the second quarter was $31.7 million as compared to $32.6 million in the prior year period. Excluding our noncash Shopify expenses, depreciation and amortization, stock-based compensation expenses and onetime costs associated with our initial public offering and the acquisition of PayBright, the adjusted operating loss was $1.8 million as compared to $21.1 million in the year-ago period. In the second quarter, net loss increased to $31.6 million from $31 million in the same period last year. Subsequent to the end of the quarter, on January 15, 2021, we closed our initial public offering of 28.3 million shares of Class A common stock at an offering price of $49 per share. The proceeds before expenses to us on the IPO were approximately $1.3 billion. A couple of things to keep in mind when thinking about our fiscal third quarter. In December, Peloton began delaying the capture of transactions based on shipment date, which is a change from the previous approach of capturing funds at checkout. This change resulted in approximately $83.9 million of GMV not captured in the current period, shifting a significant amount of revenue from our fiscal second quarter into future fiscal quarters. The effects of this are reflected in our guidance below. Additionally, our third quarter results will be the first to include the financial impact of the PayBright acquisition. We are providing the following guidance for our fiscal third quarter and fiscal year '21 based upon our current assumptions. For our fiscal third quarter ending March 31, 2021, we expect GMV of $1.8 billion to $1.85 billion, revenue of $185 million to $195 million, transaction costs of $125 million to $130 million, revenue less transaction costs of $60 million to $65 million, adjusted operating loss of $47.5 million to $52.5 million and a share count of 226 million. For our fiscal year 2021, ending June 30, 2021, we expect GMV of $7.25 billion to $7.35 billion, revenue of $760 million to $780 million, transaction costs of $500 million to $510 million, revenue less transaction costs of $260 million to $270 million, adjusted operating loss of $120 million to $130 million and a share count of 155 million. Thank you again for joining the call today. We are now happy to answer any questions you may have. Operator, please open the line for questions.
Operator, Operator
Our first question comes from James Faucette with Morgan Stanley.
James Faucette, Analyst
I wanted to ask about consumer behavior, Max, and what you're observing in terms of engagement and how people are searching for or discovering options through the Affirm platform compared to merchants that already accept it. I'm interested in understanding any cross benefits from your perspective regarding what you can track. Also, Michael, you mentioned several improvements in loan performance on various metrics. Can you elaborate on what you believe are the main drivers of those improvements?
Max Levchin, CEO
So I think we said it in the prepared remarks, which I'm sure one could use to watch paint dry. On the order of 1/3 of our transactions are now originated on Affirm properties. And vast majority of that are existing users coming back and using Affirm as a starting point in their shopping journey. And so I think that sort of speaks for itself. Part of our value proposition to the end customer isn't just, 'Hey, you find us at the checkout counter, and we are a better, more transparent, perhaps even lower-priced way to pay,' but also a great way to discover merchants that offer sometimes 0 interest and, in our case, it'd be true 0 interest transactions and also just have very interesting things to share with the customers. And so the Affirm platform in the form of our app, the marketplace is growing very nicely and we are investing in that area very heavily. Michael, do you want to add? I think you're still muted, Michael.
Michael Linford, CFO
In response to your second question, James, the key metrics are the delinquency rates and gross charge-offs, both of which have decreased significantly compared to last year. The primary factors are related to the credit approach we adopted this summer. Even though our portfolio turnover is rapid, a substantial portion remains from the time of originations to Q1. This credit approach was indeed more stringent than in the previous period. Additionally, we are consistently enhancing our underwriting model, which is contributing to the strong performance we're witnessing. However, I don't anticipate us maintaining these levels going forward as we have adopted a slightly more lenient credit stance following the summer. That is the main factor driving our results during this period.
James Faucette, Analyst
And quick, sorry for the interruption, Max. Please continue.
Max Levchin, CEO
I always enjoy discussing numbers. One thing I can share about the transactions generated on our platform is that the year-on-year growth exceeded 100%. Affirm-originated transactions are experiencing substantial triple-digit growth at this time.
James Faucette, Analyst
Got it. Got it. And sorry, back to Michael. When you said, we wouldn't expect those to remain at this level. Were you meaning in reference to kind of your credit box or the performance and delinquency? Just trying to clarify what you meant by we shouldn't expect them to remain at this level?
Michael Linford, CFO
Yes. Our delinquencies and charge-off rates are really at historic lows. And that's not how we intend to run the business.
Operator, Operator
Our next question comes from Ramsey El-Assal with Barclays Investment Bank.
Ramsey El-Assal, Analyst
I was wondering if you could give us some additional color on your expectations for the Shopify agreement in terms of the pace of the rollout, the magnitude of the eventual P&L impact? Or any other commentary there would be helpful?
Max Levchin, CEO
We're going to keep doing this, right? Apologies for that. There are two different mute buttons. Both Michael and I keep messing up. This is actually my first experience with this, and normally I'm confident with my mute buttons, but not this time. So let's get back to Shopify. Simply put, it's a huge platform, and the reason we were chosen as their exclusive partner is because we have an outstanding engineering team that builds well and takes the necessary time to ensure quality. We'll continue testing the systems. I believe we added another third, reaching almost 100 merchants to our beta program since our last meeting, and we're pleased with how these tests are progressing. We're happy with the conversion rates, and the integration, stability, and all the metrics we care about are performing well. However, I think it's unwise to overpromise and underdeliver. When we fully launch, we expect it to be significant, but it will only go live when we feel it's ready for high demand, including the scalability needed to handle such a large volume. So I wouldn’t anticipate quick results, but we will definitely take our time, and we've been conservative in our internal forecasts as well as in our public statements about when this will happen.
Ramsey El-Assal, Analyst
I wanted to ask about the yields in the quarter. The GMV performance was impressive, but the yields on the merchant network revenue were slightly below our expectations. I'm curious about the reasons behind this, particularly if it’s mainly due to mix or if there are other factors to consider.
Max Levchin, CEO
It's probably Michael. Press the right mute button.
Michael Linford, CFO
Yes, it's a good question. There's 2 things to think about. One is the seasonality. In our calendar Q4, our fiscal Q2, the holiday shopping season tends to have a little bit of lower average order values and lower revenue yields. It's actually up, I think, about 10 basis points year-on-year for the same period. So I think the seasonality is probably the biggest driver, which is really the mix that you see during the season. There's nothing material with respect to any sort of merchant pricing or mix shift around the end merchants to report there. It's more around just where the transactions tend to be this time of year.
Operator, Operator
Our next question comes from Matt O'Neill with Goldman Sachs.
Matthew O'Neill, Analyst
I guess, Max, I wanted to touch on the sort of long-term strategic. So understanding where the business is starting today and then the sort of higher average order value, a clear glide path moving into the low average order value. You've started to build out your own properties vis-à-vis the sort of customer acquisition channel and sort of purchasing through the app and website. You also built a savings account. So just curious, what else is on the road map? Any kind of hints or guideposts to what we can be thinking about what may come next for a more comprehensive suite of consumer services? And then I'll just ask my follow-up now. For Michael, just going back to James' question around the credit. Is the outperformance on the provision here a byproduct of mix as far as getting maybe more growth from partners like Peloton, which maybe skew more affluent, higher FICO? And that's part of what we'll add back? Or was it the conservatism at the onset of the pandemic and now kind of working back out of that as we've got some more clarity around the hopeful recovery here?
Max Levchin, CEO
Great questions. The reason for the dual mute is that we are on a Zoom call and my General Counsel and Legal Officer are right in front of me. I can't disclose any forward-looking statements without facing consequences, so I'll do my best to share some thoughts without crossing any lines. We're very excited about the significant untapped opportunities in the buy now, pay later space. While I'm not fond of the term BNPL, I believe in the concept of transparent, easy-to-understand cash payments where consumers know exactly what to expect. This model works well for high-value transactions, where we excel, and it’s also an area where we’re seeing substantial growth for low-value transactions. There’s a large segment of spending that continues to rely on outdated financial tools, and we aim to shed light on that issue. We have some intriguing ideas to enhance our offerings, and what is currently perceived as existing BNPL products is only a preliminary version. We plan to actively make significant improvements to these products. Additionally, we're proud of the work we've done for Shopify, where we've rebuilt major components of Affirm to operate as a service that integrates seamlessly with their platforms. This allows partners to offer finance-related transactions with ease, benefiting all involved with just a simple switch. We're excited about the potential of this approach and are already implementing it, with successful initiatives with both Shopify and Rakuten. This is an innovative way for us to grow our business, and I'll refrain from speculating on potential collaborations with cryptocurrencies, as Michael may provide more detailed insights.
Michael Linford, CFO
On the credit side, I want to clarify that as we increase our loans outstanding for Peloton, we are seeing an improvement in credit. However, we observe similar trends in both Peloton and other areas, which means that the credit position we adopted this summer has a more significant impact. We consistently evaluate the macro environment and aim to adopt a credit strategy that allows us to operate safely while also meeting our obligations in the capital markets and serving our consumers and merchants. Our cautious approach over the summer is reflected in the provision release this quarter, which indicates that the ongoing trends in delinquencies and charge-offs suggest that our portfolio is quite healthy. This is further supported by our active engagement in the capital markets at present.
Operator, Operator
Our next question comes from Dan Perlin with RBC.
Daniel Perlin, Analyst
Congratulations on a strong first quarter, it's really exciting. I wanted to revisit the topic of Shop Pay Installments briefly. I understand it's still in beta with around 100 merchants involved. Could you share any early insights or trends you've observed from those merchants? We're particularly interested in how this may impact the acceleration of lower average order value channels and repeat usage, among other metrics. Any initial information you could provide would be appreciated.
Max Levchin, CEO
Rob, it will be a little too early to say too much. I guess the metric that I am most concerned with as a product CEO probably more than anything else is interim conversion. What we want to make sure is that when a consumer comes up for a transaction in Shop Pay Installments, powered by Affirm, they don't have an experience that makes them think, 'Hmm, maybe I'll pull out my debit card instead next time because this was not smooth enough or wasn't simple or as simple as I thought it would be.' And so we're very, very focused and this is also why it will take time. I don't want to over promise here. We want the experience of using Shop Pay Installments to be ideally the highest converting, smoothest experience for customers, but we have a lot of work to do there. That said, end-to-end conversion numbers are looking very good. I am looking into my chat box to make sure I'm not disclosing anything that I'm not allowed to say out loud, but we're feeling very, very good about those metrics.
Matthew O'Neill, Analyst
Understand. That's helpful, though. And Michael, can you just maybe speak to the funding capacity available relative to kind of the GMV growth that you guys are expecting? We seem to get that question a lot. Just making sure everyone understands the velocity of the balance sheet and how you're able to fund the significant growth in GMV at these levels?
Max Levchin, CEO
Michael, unmute.
Michael Linford, CFO
That's a really good question. And you saw during this most recent quarter is a pretty healthy amount of securization volume. And for those who are tracking it, we actually did just price a securitization deal earlier this week for another $500 million in capacity. And we're doing that at pretty significantly enhanced capital efficiencies and at really attractive funding costs. So the capital markets remain kind of wide open to us right now and we intend to take advantage of that while they do remain open. We don't see any real constraints on funding and feel like we're in a really strong position there. We're both adding new partners, doing the securitizations and expanding existing ones. We feel really confident in the coverage we have.
Operator, Operator
Our next question comes from Timothy Chiodo with Crédit Suisse.
Timothy Chiodo, Analyst
On Shopify as well. Third one on this, so sorry to go there. But on the longer-term opportunity, maybe you could talk a little bit about the potential to expand that to higher average order value or perhaps other markets or regions with Shopify? And then more tactically, if you could just recap for everyone, the onboard mechanics, whether it's different for the new merchants, existing merchants, concepts around default on, opt in, opt out? And really the heart of the question that I think investors are trying to get to is how much of the Shopify volume could ultimately become addressable?
Max Levchin, CEO
That's a great question. I shouldn’t speculate about other regions since we are currently focused on our home markets, which are the U.S. and Canada. Regarding the overall potential reach on Shop, it would be irresponsible to try to define that number exactly. A significant part of our testing with partners in Ottawa is to determine how easy it will be for merchants to sign up. The goal of this partnership is to create a seamless and almost spontaneous experience for merchants, encouraging them to engage with the service. We aim to capture as much volume as possible, acknowledging that not all Shopify sellers deal in low average order value items; there are also high average order value items involved. Our priority now is to ensure that the sign-up process, merchant underwriting, acceptance, and the entire go-live conversion process is something we can all take pride in.
Operator, Operator
Our next question comes from Bryan Keane with Deutsche Bank.
Bryan Keane, Analyst
Congratulations on the first quarter as a public company. I wanted to ask about the travel area. The volumes have decreased significantly, and I believe you mentioned it was only 3% in 2020. When do you anticipate a recovery in that area, potentially by Q4, or will that be more of a fiscal year '22 occurrence? Additionally, when does American Airlines plan to increase their involvement in that sector? That will likely contribute positively as well.
Max Levchin, CEO
I'll answer qualitatively and let Michael answer to the modeling parts of it. Michael start unmuting yourself now. So American, obviously, it's a very recent deal. And so we're super excited about it and we think it's going to be incredibly valuable for us; not to in any way, disparage or to diminish our existing extremely awesome partnership with Delta, which has been with us for quite some time, and we've been very happy with them. The entire travel industry took quite a hit in 2020. We actually invested very heavily in 2019 in building up both our feature set and our partnership set in travel. And in fact, 2020 was going to be the year of travel for Affirm, except it was the year of not travel for everyone. And so we expect, at some point, it will be quite a nice tailwind for us. Obviously, our attention to the airline industry and the American deal speaks to our intent. I am probably not the right person to speculate about things like vaccine rollouts and what that really means. That said, I think I'm within bounds when I say that we are seeing an increase in our travel volume. In other words, we are seeing first signs of recovery. I'm not sure if this is a great quantitative answer in the sense that I'm not prepared to say, and here's when I think it's going to get back to normal or go back to what we all wanted it to be. But I think the world is starting to wake up a little bit to the idea of getting on a plane and going to some places, and Michael will probably tell you how we're thinking about it in terms of planning and forecast.
Michael Linford, CFO
Yes. Just in terms of outlook, we don't have a particular moment in this fiscal year for it to turn on. We're pretty cautious here. We've talked about it being more of a fiscal year '22 thing. So after the summer into the fall. Obviously, we'll keep you up-to-date if that starts to change and the volume starts to take off. But for right now, we're being pretty cautious here.
Bryan Keane, Analyst
Got it. As a follow-up regarding MDRs, there are concerns that MDR may decrease in the industry as BNPL penetration rises. PayPal is actively promoting BNPL as they enter the market. So, the question is, Max, regarding overall MDRs, can we expect them to remain sustainable at current levels, or is there a likelihood that they will naturally decline as volume increases?
Max Levchin, CEO
I believe it's quite challenging to predict what we will see in the future. We consider ourselves to be quite unique in the market, offering a service that stands out even in a competitive space like BNPL. A significant part of our advantage lies in our capability to handle the full transaction values. In the low average order value segment, the focus shifts from risk management to marketing, making it a bit easier to succeed, unlike the more complex and time-sensitive high average order values. Over the years, we've demonstrated our proficiency across all these segments and have seen success. As a technology and data-focused company, we deliver substantial value to merchants that goes beyond simply facilitating transactions. We offer data services and an extensive range of Affirm-as-a-service solutions that we are introducing to the market. We prefer competing based on value rather than price, focusing on the unique offerings we provide that others cannot. While I can't predict price trends, I assure you that we will keep innovating with features that are not available elsewhere.
Operator, Operator
Our next question comes from Andrew Jeffrey with Truist Securities.
Andrew Jeffrey, Analyst
Max, maybe I'll build a little bit off Bryan's question from a competitive perspective. There are a number of players in the market. Can you elaborate on why you think Affirm wins? And particularly, what differentiates Affirm from peers? I mean, you're not really doing Pay in 4 for per se today. It's a much more complex model. And I wonder if you could just speak a little bit about why you think you have a competitive advantage? And maybe why Affirm is uniquely positioned to take big share exclusivity with the platforms like Shopify, notwithstanding?
Max Levchin, CEO
I'm not entirely clear on what you meant by saying we're not doing Pay in 4. I believe Pay in 4 is now a trademark of PayPal. We aren't avoiding the trademark; rather, we have an interest rate installment product that we market as split pay, which competes in that area. Our offering is better because we don’t charge late fees, and it is much more transparent and straightforward. That said, we do offer a way to take an $80 item and divide it into four easy payments of $20, and it's performing quite well. I agree there are many competitors in this space. However, the options become more limited when discussing larger amounts, like $800. An $800 purchase can't typically be processed in one transaction, and splitting it into payments of $200 every two weeks might be tough from a cash flow perspective. That’s where we offer products ranging from 6 weeks to 48 months. This gives consumers choices and allows merchants to provide payment plans that work for both low and high average order value items. This flexibility is a key advantage, especially for enterprise merchants and platforms, who prefer partnering with a provider that excels in technology and can serve all their customers and products comprehensively. We excel in this regard. These reasons contribute to why we've been chosen by Shopify, Rakuten, and several others. Additionally, an important point that often doesn't get enough attention is that we're the only ones in the industry who communicate honestly with consumers. We don’t charge late fees or use deferred interest, avoiding practices that frustrate consumers. Building brand loyalty is crucial to us and to merchants because it fundamentally drives transactions. We are committed to continuing in this direction since merchants and platforms want to associate with brands that enhance their own reputation rather than embarrass them. We feel strongly about this and hope the industry will follow our lead. For now, we take great pride in being unique in this aspect, which helps us secure deals.
Andrew Jeffrey, Analyst
Okay. That's helpful point of distinction for me. And then, Michael, just on the guidance, I was wondering if you could offer color. It would appear that 3Q GMV is projected to slow a little bit and reaccelerate? Is there something in particular behind that?
Michael Linford, CFO
Yes. I think the biggest thing to think about in Q3 is that the Peloton capture issue we talked about in the prepared remarks, where we are seeing that take root. Ex-Peloton, we're seeing material acceleration. We saw a material acceleration in Q2, and we're projecting even more acceleration ex-Peloton Q3. So overall, very good consumer demand with Peloton, extremely strong, but the timing of the recognition of that GMV is going to be a function of when those orders ship.
Operator, Operator
Our last question comes from Chris Brendler with Seaport Global.
Christopher Brendler, Analyst
I would like to discuss the competitive landscape from a slightly different angle. It appears that there is currently a significant land grab occurring with buy-now-pay-later services rapidly gaining traction in the U.S. and globally. I have two questions regarding this. First, do you notice any effects or situations where multiple providers are present, and how does Affirm's market share at the point-of-sale perform in those scenarios? Second, more strategically, the Shopify deal seems very promising and full of potential. Do you anticipate pursuing more similar large-scale partnerships that involve some equity incentives, or is this the only one you'll focus on in the near term? How are you approaching these substantial marketplace transactions, given the high volume but also the potential equity costs?
Max Levchin, CEO
Great questions. Regarding the first part, history tends to be a reliable indicator. The initial phase of payment network development eventually resulted in a few widely recognized brands, depending on whether Discover is included. Visa, Mastercard, and Amex are present at almost every checkout today. Therefore, it is reasonable to expect that multiple Buy Now, Pay Later brands will emerge successfully. While “land grab” may not sound entirely positive, I believe we are all capturing a share of the credit card transaction volume, which is substantial and offers considerable growth opportunities for everyone involved. Of course, we are biased in our perspective, but under similar conditions, I anticipate that several players will be present at various checkouts. Some of our partnerships are exclusive, while others are not. In some scenarios, we integrate with an existing provider and must prove ourselves by outperforming them. Overall, we are pleased with how things are progressing.
Christopher Brendler, Analyst
Another Shopify?
Max Levchin, CEO
I was reviewing my notes and was focused on the previous question. Regarding Shopify, we would love to pursue more large deals. The nature of these deals is unique, and speculating on what it would take to secure another Shopify deal is not really the focus of this conversation. However, we consider ourselves the ideal partner for these large platforms due to our significant advantages in data and technology, along with our proven scalability and robustness. Ultimately, simply offering a stake in the company will not convince a major partner unless they believe we can handle their substantial volume. The reason companies choose Affirm is not just about equity; it’s because we excel at what we do and are capable of managing vast amounts of business effectively.
Operator, Operator
There are no further questions at this time. I would like to turn the floor back over to Michael Linford for any closing comments.
Michael Linford, CFO
Thanks, everybody, for joining on our call, and we'll look forward to seeing you guys next quarter. Thank you.
Operator, Operator
This concludes tonight's call. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.