Earnings Call
Affirm Holdings, Inc. (AFRM)
Earnings Call Transcript - AFRM Q4 2023
Operator, Operator
Good afternoon. Welcome to the Affirm Holdings Fourth Quarter and Fiscal Year 2023 Earnings Call. Following the speakers’ remarks, we will open the line for your questions. As a reminder, this conference call is being recorded, and a replay of the call will be available on our Investor Relations website for a reasonable period of time after the call. I’d now like to turn the call over to Zane Keller, Director, Investor Relations. Thank you. You may begin.
Zane Keller, Director, Investor Relations
Thank you, operator. Before we begin, I'd like to remind everyone listening 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. Actual results may differ materially from any forward-looking statements that 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. For historical non-GAAP financial measures, reconciliations to the most directly comparable GAAP measures can be found in our earnings supplement slide deck, which is available on our Investor Relations website. Hosting today's call with me are Max Levchin, Affirm Founder and Chief Executive Officer; and Michael Linford, Affirm Chief Financial Officer. In line with our practice in prior quarters, we will begin with brief opening remarks from Max before proceeding immediately into Q&A. On that note, I will turn the call over to Max to begin. Max?
Max Levchin, CEO
Thank you, Zane. Thanks, everyone, for joining, and I hope you've had a chance to read our quarterly letter as it includes lots of great information. I mentioned in the letter, we're very proud of the team's accomplishments this quarter, closing out the fiscal year on a high note. In our fiscal Q4, we exceeded our outlook across all key metrics, were profitable on an adjusted operating income basis, improved our already great credit metrics while accelerating growth, and launched with some amazing brands on the platform. Some of these brands are so cool, we can't even say their names. You just have to go shopping to find them. Dear to my product-developing heart, we're finally able to brag about the Affirm Cards' progress. We're energized by the momentum we're seeing and are investing significant energy into making the card the top of wallet choice for our consumers. We also expect to deliver annual profitability on an adjusted operating income basis going forward, and our disciplined performance over the last several quarters has earned us the right to return to a more aggressive pace of network growth while maintaining discipline. I tried hard to make my letter a breathy read this quarter, so I hope you have a chance to peruse it if you haven't yet. For a deeper dive into our numbers, please have a look at the one from Michael. He's a good man and thorough. But in case you would like even more investor information about Affirm, we're pleased to announce that we will be holding an investor forum on November 14 in New York. At the event, you will hear from several of our management team members, and we will provide an update on our commercial and product initiatives as well as our financial framework. Please look for additional information, including registration details on our Investor Relations website as we get closer to the event. Back to you, Zane.
Zane Keller, Director, Investor Relations
Thank you, Max. With that, we will now take your questions. Operator, please open the line for our first question.
Operator, Operator
Thank you. We will now begin the question-and-answer session. Our first question comes from Tim Chiodo with Credit Suisse. Please go ahead with your question.
Tim Chiodo, Analyst
Great. Thank you for the introduction there and looking forward to the Investor Day. Max, I believe you were just saying around the right to reaccelerate investment. I just want to make sure I have this right, though, in terms of what's implied to the guide for the upcoming year. If we take the GMV guide and the ROTC as a percentage of GMV and think about the 2% operating margin, it seems to imply that there's only sort of a low-single digit growth in your OpEx base for this year. One, is that investment under the hood with some savings elsewhere and maybe just provide a little added context around that, seems to imply not a whole lot of expense growth.
Max Levchin, CEO
That is accurate. Some sort of a lean and mean code writing machine joke comes to mind, but I'm not capable of those, but we have been more productive than perhaps ever in our history over the last six months or so? Certainly last three, we’ve really just built a lot of great stuff, and we have no intention of slowing down, looking for efficiencies.
Tim Chiodo, Analyst
Okay. Thank you for the confirmation. Appreciate it.
Operator, Operator
Our next question comes from the line of Ramsey El-Assal with Barclays. Please proceed with your question.
Ramsey El-Assal, Analyst
Hi. Thank you for taking my question this evening. You mentioned that you are adding merchants at a significant year-over-year rate, along with new partner signings and expansions. Can you share your updated thoughts on the growth strategy of the business regarding expectations from current customers compared to new ones, and perhaps a new category driven by the momentum of the Affirm Holdings Card? How should we consider these three factors and their importance in driving growth in the future?
Max Levchin, CEO
That's a great question. Thank you for asking. It should be clear from some of our recent communications that the most effective way for us to grow our existing business is through partnerships with our platform partners. This is where we can truly excel, focusing on developing products and features, and collaborating comprehensively across major platforms like Shopify and Walmart. This approach allows us to maximize the impact of every line of code we create, resulting in significant financial returns. The growth strategy for our current business is evident; we've seen strong sign-ups with the card, although it starts from a small base. I believe this will eventually become a substantial revenue stream for us, and we are confident in our ability to support this growth with our investments. However, in the near term, most of our gross merchandise value growth will come from our existing partnerships with platforms. We are actively bringing on new merchants and exploring ways to enhance our programs and increase our card share with them. This is where we will be focusing our efforts. My main priority is to strategize our next moves. The core business is running smoothly; we have excellent partners, and they are satisfied with our collaboration, and we plan to continue achieving great results together.
Ramsey El-Assal, Analyst
Okay. Really quick follow-up for me. Are you worried or what do you expect from the student loan repayment restarting coming up here? There's been a little bit of media but I'm just curious what your view is in terms of how that would impact the credit environment in the U.S.?
Max Levchin, CEO
So we've included that in our forecast. So we don't expect it to be something that just happens to a different galaxy. We expect it to be a modest headwind for us or at least we're prepared for that, and it's priced in, if you will, to our numbers. I have to give a little bit of credit where it's due. I read Mizuho, Dan Dolev's colleagues wrote a nice piece describing what they think will happen to the BNPL industry if the student loan repayment restarts. And I won’t comment on exact numbers, but I have to say directionally, we’re in agreement with what they found in the research. So I think it’s a good place to look for thoughts on that. But we don’t think it’s nothing. We don’t think it’s very significant either.
Ramsey El-Assal, Analyst
Got it. Thanks so much.
Operator, Operator
Our next question comes from the line of Rayna Kumar with UBS. Please proceed with your question.
Rayna Kumar, Analyst
Hi. Good evening. Thanks for taking my question and good quarter. I just want to ask you about your loan delinquency rate, it came in better than expected in the fourth quarter. You saw a sequential decline in 3Q versus 4Q. What makes you think that there will be an increase in the first half in '24?
Max Levchin, CEO
We understand our borrowers well, including when their cash flow improves and when they face challenges. We are attentive to their circumstances. However, maintaining strong credit quality remains our top priority. We have a solid grasp on both current and future developments.
Rayna Kumar, Analyst
Got it. Okay. And then I just want to ask you about the CFPB and the credit reporting bureaus. They, of course, continue to push for greater reporting of purchases financed through the BNPL. And you've been a proponent of greater reporting transparency. But this could also be at odds with your strategy of increasing the frequency and usage of your financing solutions. Do you think greater credit reporting will drive down consumer usage of BNPL or if you can just talk about your thoughts on that. Thank you.
Max Levchin, CEO
We're actively engaged with the CFPB, which we view as our regulator since we are a significant financial services provider. My team and I believe that credit reporting is a crucial element of the process. We aim to ensure that consumers, especially those who pay on time, benefit from their timely payments reflected in their credit reports. Our efforts with credit bureaus, as well as our industry peers and competitors, focus on ensuring that the reporting accurately reflects the actual use of the products without unfairly penalizing or rewarding consumers based on inconsistent scoring outcomes. The reason the BNPL sector is hesitant to report to the bureaus is that the traditional scoring systems fail to accurately assess these types of loans, particularly given the numerous options available. Therefore, part of our collaboration with the industry and the bureaus is to ensure that the credit reporting functions correctly for younger customers.
Rayna Kumar, Analyst
Very helpful. Thank you.
Operator, Operator
Our next question comes from the line of Dan Dolev with Mizuho. Please proceed with your question.
Dan Dolev, Analyst
Hey, guys. Hey, Max. Thanks. Appreciate it. Amazing results here. I can't get more excited about the Affirm cards, Debit+. My only question is, can you maybe give us the main building blocks for the 2024 guide? So what are you incorporating in terms of Debit+ what should we know like? Can you maybe give us like a little path of like a bridge of how we can think about 2024 with all the puts and takes. Again, great results. Thank you.
Michael Linford, CFO
Thanks, I'll take that one, and Max, feel free to add anything. For the full year, we anticipate that our GMV will exceed $24 billion, which reflects some uncertainty about the potential upper limit, partly due to the Affirm card. The Affirm card is still in its early stages. The data we shared shows a significant upward trend, which is encouraging, but we're uncertain about when we will reach a peak. Regarding our margin structure, we expect to see the full-year effects of a higher interest rate environment, as we are at or near the peak of that cycle, which may create some challenges on the cost side. To counterbalance this, we have consumer pricing initiatives that should start yielding positive results, all of which will impact the top line. Additionally, in terms of operating expenses, we expect to see the full-year benefits from the restructuring actions we implemented earlier this year, positioning us for what we believe will be a profitable year based on adjusted operating income.
Dan Dolev, Analyst
Got it. And can I squeeze one more in. Shopify is pretty bold on the in-store experience. Are you seeing any of that in the new initiatives?
Max Levchin, CEO
It's there. It's certainly not fully rolled out yet, but it's definitely something that Shopify is very committed to and as a good partner with so are we. So we have lots of work to do there. I've said many times before, in-store is the next frontier. I think frequency is the single most important thing we can focus on in terms of building out the network and most people still shop in stores, at least as much as online or more like four times more. And so being offline is really important. That was a great opportunity. We're scaling that up with them.
Dan Dolev, Analyst
Yeah. Great results. Thanks again.
Max Levchin, CEO
Thank you.
Operator, Operator
Our next question comes from the line of James Faucette with Morgan Stanley. Please proceed with your question.
James Faucette, Analyst
Great. Thank you very much. I wanted to just ask a follow-up question on acceptance and merchants. It seems like in the current environment with interest rates now quite a bit higher than they were just even a year ago that it would be a good opportunity for merchants to find up places where they could use zero percent promotions and in conjunction with Affirm to help drive volumes, so without having to resort to product discounting, et cetera. So I'm just wondering kind of what your engagement is like with merchants and what is the opportunity to further drive Affirm acceptance and use through some of those promotional activities.
Max Levchin, CEO
Certainly, the right estimation, there are plenty of merchants who are focused on driving their top line. I mean, I think this tends to come up in our conversations on and off. But basically, if you're a fully integrated merchant with a healthy gross margin, then the best way in my biased opinion to protect your price and perception of your prices with consumers is to use Affirm zero percent deals or fixed APR deals at this point, support much more than just zero percent. There's lots and lots of different promotional offerings that we've constructed for our various partners. So we see great interest in that with plenty of merchants who are resellers, and they're fairly far down the supply chain, they do not have the margin to support zeros, and it's difficult for them. Sometimes, we're able to bring in manufacturers of the original equipment or the original items, and they step in and create zero percent deals, and we have a healthy number of those and have a lot of plans to expand that. But generally speaking, you're exactly right. There's plenty of worry by merchants to keep moving the merchandise they need to discount; discounting kills price integrity and we're here to help.
James Faucette, Analyst
Thank you. And then on RLTC, it seems like it was good to see that margin, particularly on Debit+ and the ramp you're seeing obviously. How should we think about the mix between interest-bearing or paying now or plan for on more of a medium-term basis for that product?
Max Levchin, CEO
That's a great question. So for the moment, I am personally a little bit undecided in a sense that we are not quite done improving the frequency. So my goal or the company's goal, the team's goal anyway is to make the Affirm card the top of wallet purchasing device, which means that whatever your percentage of paying out transactions is, I want them all and whatever you might put in your credit card, I want you to put on the Debit+ flash Affirm card. So for the moment, that sits at 42% pay now or something like that, and the rest is both interest-bearing and non-interest-bearing. The really cool footnote in the non-paying out part of this is that we are in control of which one you choose. We are the ones presenting a modified version of Adaptive checkout, both before and after the swipe wherever you decide to go in terms of borrowing. And so we have a lot of control over where you're seeing 0s and we're not seeing 0s and depends very much on the merchant contracts and promotional activities we have with them. But in terms of the target pay now versus not, we'll start reporting on those once we get to a certain level of scale, but at the moment, more of each kind is better.
Michael Linford, CFO
The other thing I would add just to be really clear, the 42% stat, and we break it out in our shareholder letter, that's on a transaction basis. We would continue to expect the AOVs of pay now to be substantially lower than the interest-bearing transaction, which means on a GMV basis, the mix would be much lower in terms of percentage of pay now.
James Faucette, Analyst
Okay. Great. Thanks for that, Michael, and great color there, Max. Appreciate it.
Operator, Operator
Our next question comes from the line of Eugene Simuni with MoffettNathanson. Please proceed with your question.
Eugene Simuni, Analyst
Thank you very much. Hi, everyone. I wanted to ask about GMV growth. It seems to have exceeded expectations this quarter at 25% year-over-year. It would be helpful to understand the factors that contributed to this faster growth, whether they are macroeconomic or specific to Affirm. Additionally, I would like to know how you approached your GMV guidance for next year. I understand that the $24 billion is the minimum, but that figure, if I calculate it correctly, suggests a slowdown from this level. Why do you believe you won’t be able to maintain the same growth rate for GMV next year as you achieved this quarter?
Michael Linford, CFO
In the fourth quarter, we experienced significant growth in our travel and ticketing sector. Consumers were actively engaging in the economy, particularly in experiences and events. Our extensive distribution allowed us to benefit from this trend. We also focused on optimizing the checkout process to enhance both uptake and our ability to capture volume across various channels and partnerships. Our largest enterprise partnerships showed considerable growth this quarter, with many even accelerating. Being well-positioned in the economy, along with our product improvements, greatly contributed to our success. Looking ahead, we feel optimistic about the direction of our business and the initiatives we are pursuing, while remaining cautious of ongoing economic volatility. We are starting the year with a careful mindset and ensuring we can deliver on our commitments. We anticipate a slight deceleration in growth rates on our largest platforms as we begin to normalize distribution and penetration. However, there is considerable potential for growth in our direct-to-consumer sector. We will keep you updated on how these factors develop throughout the fiscal year.
Eugene Simuni, Analyst
Got it. Okay. That's very helpful. If I can ask one more question related to the uncertainty and economic environment next year, could you share your assumption about the unemployment rate for next year? It's such an important driver of credit, as you often point out.
Max Levchin, CEO
We more than anything benefit from the fact that our terms are short and controllable by us and we price and underwrite every transaction individually. I think if we were in the business of issuing lines, we would have to have an internal economic bureau trying to predict what unemployment looks like six quarters from now because the lines we would have granted today would still be getting utilized or repaid then. And instead, we have the benefit of saying we don't like the latest unemployment imprint, and therefore, we're going to change our credit posture. The way we achieve the results that we are bragging about today in credit has nothing to do with our ability to see the future. We never knew what unemployment would be. We never knew it would be better or worse, but that's just not how this business works. We have the controls to react to literally daily outcomes of our credit monitoring, and whatever the future brings, we will adjust to that future. So our assumptions are, we will continue being diligent. We’re going to continue meeting. Every Monday morning the entire executive team looks at all the credit results and asks the question, is everything great or do we need to do something. So I don’t have a promise or a projection on unemployment, but I can assure you that whatever the number will be, we’ll be ready for it.
Eugene Simuni, Analyst
Got it. Okay. Thank you, guys.
Operator, Operator
Our next question comes from the line of Dan Perlin with RBC Capital Markets. Please proceed with your question.
Daniel Perlin, Analyst
Thanks. I have a question about the Affirm card, Max. In your description, you explain how it works, and I want to clarify my understanding. Specifically, I’m curious about the early data regarding engagement and usage frequency. You mention that consumers can request a payment plan in the app before checking out and that it connects to their bank account to make payments with the Affirm card, followed by a post-decision experience after a transaction. Considering these two consumer experiences, what are you seeing at this early stage? I would think that linking to a bank account could lead to more habitual use, but I’d like to know your observations so far. Is there a way to encourage consumers to choose one option over the other that would be beneficial for you without it being a disadvantage for them? Thank you.
Max Levchin, CEO
I don't know if there's a question in that; that was eloquently put and pretty much accurate. You're on the dot on everything you just said. So you're exactly right, the way the product works. And I'll break it down for like a couple of minutes just to be super clear for everybody. So you sign up for the Affirm card, you get one in the mail. You don't have to do very much work at all. If you are an Affirm user, you are eligible to use Affirm card, and it's basically literally an Affirm card; you request a loan, and then you swipe the card or you chip it, and the next transaction becomes that loan. So simple as that. It is absolutely much better for us and for our users if you connect your bank account because then you can swipe, and if you didn't bother asking for a loan, you can still do it ex post facto. And if you have nothing, it becomes a pay now transaction that settles. And so it's basically this journey from, I like Affirm, I use Affirm, now I can use it in store; nothing new to learn. As soon as you get a card in the mail, it is our job, and this is exactly where I'm spending the most recent conversation I had about what we call the first user experience. It's something between 1 and 2 o'clock in the morning last night, so what I spend my time on is making sure that conversion from Affirm card for my well-understood part of the Affirm experience to, I can connect to my bank account and get access to all these amazing features. Of course, I want to do that. So that is where we're spending lots and lots of cycles right now. It's going really well. I don't want to get into exact numbers, but where we started and where we ended is a massive progress, and we're very, very far from done. The economics improve, our ability to underwrite improves because we get to see your cash flow, and our ability to offer you interesting access to things like zero percent loans improves because we understand the economics a little better and just see frequently high engagement. Therefore, we can make more educated bets around lifetime value over consumers. So everything you said is pretty spot on. Let's see if there's anything else I can share on this topic. Both the frequency and the amounts and the LTV, like every metric possibly imagined is better once the card becomes fully fledged. We have internal terminology, specifically describing the sort of unconnected and connected state of the card exactly because it's such an important thing. And yes, we can absolutely incentivize, and we have a lot of good results that show that the incentives are not going to be especially expensive at all.
Daniel Perlin, Analyst
That’s excellent. Thanks so much. I appreciate it.
Max Levchin, CEO
If no one can tell I’m excited by this product.
Operator, Operator
Our next question comes from the line of Bryan Keane with Deutsche Bank. Please proceed with your question.
Bryan Keane, Analyst
Hey, guys. Max, you're going to be excited because I'm going to ask you more questions about the Affirm card. So the active consumer base, I think, spiked in the quarter. I think it's north of 200,000. I remember we had a waitlist of about 1 million or so. I'm just trying to figure out, is there another big change of growth that we expect or kind of the users will be more modest growth from this level? Just trying to figure out how big that waitlist is? And is there a big rollout to consumers happening as we speak.
Max Levchin, CEO
The waitlist included everyone interested in the Affirm card, but our current active user base does not reflect everyone who wants one, as we carefully managed credit standards during the rollout. While I'm impressed with this fantastic product now in the market, we must maintain a strict approach to credit, and we will not launch new products without a clear understanding of repayment expectations for all users. The demand for the card remains significant, but we are not actively pushing it at the moment. There is ongoing internal discussion about how strongly we should encourage our users. We have a few million users who are fully engaged with Affirm, utilizing our services both online and at the point of sale with the virtual card number, which currently offers a limited experience. I am confident that once they have access to the card, they will embrace it, and we are prepared to encourage them to adopt it. However, we haven't fully pursued that yet. There are many other users who need to better understand Affirm, and some are already signing up for the card. Our goal is to improve the first-user experience and assist them through the learning curve. Research shows that doing one transaction does not guarantee ongoing engagement; two transactions typically lead to sustained use, and three transactions yield integration of the card into their purchasing habits. Our objective is to simplify the process for users and guide them to that third transaction to ensure their understanding. We will keep working on this and anticipate additional releases before we feel satisfied. Once that happens, we can begin promoting the card as the primary method for using Affirm with unintegrated merchants and offline, although other options will still be available for good reasons.
Bryan Keane, Analyst
Yeah. Got it. And so when you talk about this step function change or whenever that is, it's not built into the guidance, obviously. But when it happens, it's a lot of these things that you just talked about you have to feel comfortable with so that you can roll it out in mass and then obviously, the transaction volumes will continue. Just trying to figure out exactly when that step function happens where we go from these small numbers to, obviously, you think this could be pretty material. So just trying to figure out what to watch for.
Max Levchin, CEO
We believe this will become significant in the future, although I cannot specify when that will occur. There is still much work ahead. At this point, the offering is widely available. If you're eligible in your app, you should see an invitation to apply for the Affirm card. We are not yet announcing specific functionalities, such as when you tap on the card tab in the app. If you've previously used the Affirm virtual card number, you can continue to do so. We will notify users about their eligibility for the Affirm card, encouraging them to take advantage of it. However, this is not the same as saying the onetime Affirm card is no longer available; transitioning to the Affirm card we send by mail has not yet been fully implemented. We are making progress, as evidenced by our numbers, and we have various plans in place to educate borrowers about how the debit card works. We will take proactive measures to ensure that all eligible users are informed about the opportunity to obtain the card.
Bryan Keane, Analyst
Got it. Super helpful. Thanks so much.
Operator, Operator
Our next question comes from the line of Andrew Jeffrey with Truist Securities. Please proceed with your question.
Andrew Jeffrey, Analyst
Hi. Good afternoon. Appreciate taking the question. 4Q seemed like a really strong quarter from an enterprise customer standpoint. And it seems like from what we've seen, perhaps Affirm even punched above its weight or well above trended tender share on Prime Day. Max, can you just talk about your thought process around how much tender share you can ultimately gain at least in e-com at your enterprise customers and whether the fourth quarter might be a preview of things to come in terms of share and spend, hence GMV growth?
Max Levchin, CEO
Yes, we definitely appreciate that. We're gaining mindshare, checkout share, and wallet share, which makes me feel optimistic. In more established buy now pay later markets, the figures vary, but there are several regions where buy now pay later exceeds 10%, and in some cases, even surpasses 20%. In the U.S. online market, I believe we're hovering around 5% or 6% based on my last observation. This number isn't exact, but it's in that ballpark. When considering full commerce, encompassing both online and offline, we're clearly below 1%. This indicates that we have 99% growth potential, and I expect significant momentum before we see any slowdown. It requires ongoing effort. Launching a new payment method involves educating customers and ensuring proper promotion in the sales process. This is not an overnight achievement. However, I do see this quarter as a preview of what lies ahead. We have focused on effectively introducing the product to a wider audience, and it has yielded positive results.
Andrew Jeffrey, Analyst
Yeah. That's clear. As a follow-on for Michael, can you remind us when you lap the tighter credit box? I mean I know you reserved the right to sort of change your underwriting on the slide, but assuming that you sort of maintain the current level of economic activity, when do we see growth perhaps benefit from that?
Michael Linford, CFO
The timing initiatives we implemented last year began in early summer and continued through early fall, so we are currently seeing the effects of those actions. I anticipate that by the second quarter, we will have a more normalized comparison for the most significant changes. It’s important to emphasize that we continuously adjust our credit decisions. We don’t only meet to decide on tightening or loosening credit in a broad manner; we take a very tactical and precise approach in determining when and where to take risks. The specific decisions we made in response to consumer stress will be behind us by the time we reach Q2.
Andrew Jeffrey, Analyst
Okay. Appreciate that. Thank you.
Operator, Operator
Our next question comes from the line of Rob Wildhack with Autonomous Research. Please proceed with your question.
Robert Wildhack, Analyst
Hi, guys. I wanted to unpack some of the earlier commentary on the margin. The guidance is for fiscal '24 revenues as a percentage of GMV to be similar to '23, '24 RLTC is the same as ‘23. That would imply transaction costs are also similar to '23 as a percentage of GMV. And then within that, I would assume funding costs are going to be higher. So a, is that right? And then b, is there something that's offsetting that on the cost side in terms of keeping overall transaction costs flat as a percentage of volume this year?
Michael Linford, CFO
Yeah. It's exactly right. And we do expect funding costs to be higher, but we also have some continued changes in the mix of the business, both in terms of the largest platforms. We'll continue to take share, which will change the shape of the timing and how we earn it. The balance sheet will also be very different this year to last year, which again will change the shape quite a bit. There's a lot of different factors that caused that go into that, that assessment. But the top line is right. Those things will net out to being largely flat from a revenue standpoint and an RLTC standpoint as a percentage of GMV.
Robert Wildhack, Analyst
Got it. Thanks. Could you just give some more detail or color on what you mean by the balance sheet is going to be different from this year to next year?
Michael Linford, CFO
Yeah. So you saw the loans on the balance sheet were obviously higher in Q4 versus the prior year and also up sequentially. We talked about an equity capital require ratio being higher as well. And we would expect there or there would be a lot more dollars sitting on the balance sheet this year than last year, which just changes the shape of the earning of the loans.
Operator, Operator
Our next question comes from the line of Reginald Smith with JPMorgan. Please proceed with your question.
Reginald Smith, Analyst
Hey, guys. Thanks for taking the question. I've got two actually. one, I guess, a point of clarification. I guess previously, you guys talked about sustainable profitability beginning in 2024. And I guess I just wanted to check the language and see if there's been any change to your guidance. Now you're talking about annually profitability. And I'm curious if that was always the expectation or is that a minor change?
Michael Linford, CFO
No, it was always the expectation. We talked about sustainable profitability. We were always thoughtful around our second quarter being a time when the timing of GMV within the quarter as well as the sequential build from Q1 to Q2, always being distortive. And so we're careful to say that, that may be a trough, and we reiterated that in our letter while we do expect full-year profitability, we may have a quarter that may fall outside of that. Clearly, you see our Q1 guidance suggests that, that won't be in Q1 and the full-year guidance being where it is, suggests, I think we're – certainly feel pretty good about that overall. But we won't be disappointed if we have a quarter of negative adjusted operating income.
Reginald Smith, Analyst
Got it. Understood. If I could ask one more follow-up. There's a slide in your presentation showing the merchant discount rate for different products. It's notable that the rate for zero-interest loans, both short and long term, hasn't changed significantly in the past two years. I'm curious about the reasons behind that. What is driving this? Is it due to competition, strategy, or product mix? Why have you not been able or willing to increase your discount rates given the current interest rate and funding environment? Thank you.
Michael Linford, CFO
Yes, that's a great question. One important aspect to note is that in a rising rate environment, many retailers are experiencing significant pressure on their profit margins. Over the past year, we have focused on finding methods to continue facilitating as many transactions as possible for those retailers without significantly increasing their merchant discount rates. For instance, we have introduced fixed APRs with low amounts that are still subsidized by the merchant, which do not appear as traditional zero percent offers. Consequently, you won't see a substantial increase by product even though we have adjusted the economic offer that ultimately affects the merchant and consumer. This perspective is useful for understanding the costs for merchants related to our products; however, it's part of a larger picture as we consider adjustments in down payments or credit approval criteria. All these elements influence how we approach total pricing with the merchant. Therefore, the value we achieve in our relationship with Affirm may not immediately reflect in the merchant's pace.
Reginald Smith, Analyst
Understood. And I guess, Max, you mentioned some higher gross margin merchants. And I think a previous analyst had asked about whether you're seeing any increased interest there. Is the right way to read that, that you guys haven't pushed on some of those higher margin merchants that may be a little less price-sensitive? Or like what's the takeaway from that?
Max Levchin, CEO
We have a leading product in a highly competitive market that is quite dynamic with many new entrants. We take pride in maintaining our pricing in this competitive landscape, despite broader economic challenges. We recognize that merchants differ significantly based on their margin structures and promotional strategies, which influences our approach to determining what makes sense for merchant discount rates. However, it's important to note that the merchant discount rate is just one component of the overall pricing strategy; we also consider the costs associated with the program. When we evaluate everything together, we focus on the profitability of each merchant rather than solely on the discount rate they pay.
Operator, Operator
Our next question comes from Jason Kupferberg with Bank of America. Please go ahead with your question.
Jason Kupferberg, Analyst
Great. Thanks. I just wanted to start with the guidance on RLTC as a percent of GMV for F '24. I know we're saying it's going to be similar. It's hard to be precise in this macro backdrop. But just want to get a sense of kind of range of outcomes. I mean, are we talking about 10-ish basis points or so on either side of the F '23 results or just trying to get a sense of how wide of a range you guys might be envisioning? Like do you think there's a wider range of outcomes in F '24 compared to the way you guided F '23, for example? Just wanted to get a little more detail on that. Thanks.
Michael Linford, CFO
Good question. And the first part of your question is exactly right. I think that we're not giving a precise range because of the uncertainty and macroeconomic backdrop. I think that if you look at the range that we guided to in Q4, which we were ahead of, you can get a pretty good sense of the fact that we are sitting in a period where you're going to see quarter-to-quarter variability. What is not in doubt in our eyes is continuing to stick within the 3% to 4% long-term framework we've put out there for revenue less transaction costs as a percentage of GMV. And what's netting out is our ability to pull the right cost and revenue levers to choose that outcome when we talked about full-year guidance as being things that were within our control, and we think this is one where we're going to be able to deliver. We're not going to get more specific than similar to last year right now.
Jason Kupferberg, Analyst
Right. Okay. So I guess it kind of sounds like you see maybe a fairly similar probability of being a little better in F '24 than being a little worse in F '24 because I know similar could obviously mean in either direction. Is that kind of how it feels?
Michael Linford, CFO
Yes, that's correct. We believe that the results we achieved in 2023 reflect what we aim to achieve moving forward in this interest rate environment. While results can vary significantly from quarter to quarter, we feel that modeling the business similarly to 2023 is a solid approach.
Jason Kupferberg, Analyst
Yeah. For sure. Just a quick one on Affirm card. I saw $130 million of GMV in Q4. What are you assuming in the Q1 and the full-year guidance for the Affirm card GMV and will you disclose the Affirm card volumes each quarter going forward as you did this past quarter?
Michael Linford, CFO
Yeah. We do intend to share the Affirm card GMV every quarter. We may not share all the same stats that we did this quarter as we get going. We do think it’s important to communicate the total volume there. We’re not going to give super precise numbers with respect to the Affirm card guidance for the year, but what we will say is there are a couple of points of growth that we think the card will drive.
Operator, Operator
Our next question comes from the line of John Hecht with Jefferies. Please proceed with your question.
John Hecht, Analyst
Good afternoon, everyone. Thank you for taking my question. I'm interested in the balance sheet and marketplace aspects. I've noticed that your interest income as a percentage of total revenues has increased along with your balance sheet growth. Can you provide some insight on whether this trend will continue or if we might see a stabilization in the contribution from interest income? Additionally, what level of leverage are you comfortable with on the balance sheet? Finally, how is the marketplace progressing, and when do you anticipate being more active in selling loans to third parties?
Michael Linford, CFO
There are several factors contributing to the increase in interest income. First, the loans held for investment have risen. Additionally, our largest enterprise partners are primarily utilizing interest-bearing programs, leading to a shift in our product mix. Lastly, we have made efforts to raise APRs, and collectively, these actions have resulted in higher interest income. What's crucial for us is our ability to implement this at the point of sale without affecting conversion, which showcases our technological leadership in a way that's challenging for others to replicate. Regarding our forward flow program or the sale of whole loans, it's true that macroeconomic volatility has altered our business mix between on-balance sheet and off-balance sheet loan funding. Nonetheless, the discussions with capital partners remain positive. Our platform's differentiated credit performance is something that loan investors value. They recognize our attention to this aspect and our ability to deliver unique results, and we are confident in our offering. This gives us some reason to be optimistic for the long term, even as we navigate a period of high volatility and uncertainty. As we consider the start of the year and provide guidance, we are being careful not to commit to more than we can realistically deliver.
Operator, Operator
And our next question comes from the line of Michael Ng with Goldman Sachs. Please proceed with your question.
Michael Ng, Analyst
Hey. Good afternoon. I just have two. So the first one is just about the strength of your enterprise partnerships amidst BNPL competition. Are non-exclusive merchants incentivized to offer as many BNPL products as possible, including an in-house product? If not, what are some reasons that they choose Affirm? Is it the adapted checkout, the reputation for underwriting and transparency, a desire to have a less cluttered checkout? Just any thoughts there would be great. And then I have a quick follow-up.
Max Levchin, CEO
You know the situation well. You articulate certain parts of the answer effectively. Generally, we have been highlighting for some time the industry's gradual shift towards what we refer to as side-by-side offerings. At this point, we can confidently say that we have some of the best underwriters in the industry, along with a superior range of products. There are only a handful of players capable of scaling both long-term and short-term zeros. We have tested various products that aren't yet widely available, yet we continually introduce new financing programs. Additionally, there’s our Power by Affirm initiative, with the PBA stack that partners like Shopify use for deeper integration. Our technical expertise, scalability, and capacity to support an extensive variety of products generally position us as the leader in these enterprise partnerships. There is certainly interest from many parties; however, it remains a very competitive market. Many are considering whether they need an in-house product. In reality, if a business isn't quite like Affirm's, it can be challenging to duplicate our model. We have been operating for nearly 15 years and have performed well. We anticipate continuing to lead in that segment. Enterprises prefer collaborating with established companies that have strong engineering teams to enhance those relationships. This is why we secured the original significant API deal with Shopify, and we've consistently built on that success. I don't foresee much change in this regard. There will undoubtedly be new players emerging alongside us, but we don't expect this to significantly impact our results.
Michael Ng, Analyst
Great. Thanks, Max. And then the second question was just about Affirm card. I was surprised to read that the card volumes are delivering at a similar RLTC as Affirm overall. And I was also surprised that pay now was only 10% of volumes. Was that surprising to you at all? Is there anything that you guys are doing that have resulted in interest-bearing being such an outsized volume on the Affirm card for with such a high frequency kind of top of wallet product.
Max Levchin, CEO
Surprise, no. It's definitely something to consider. We designed the card with a clear goal of creating a leading choice for users, often referred to in psychology as a top of wallet experience. On average, Affirm is utilized about four times a year, which is good but not sufficient for a payment network. You need to cater to everyday purchases like coffee and doughnuts, as well as larger items like bicycles and couches. We've made significant progress in the bicycle and couch categories, and now we aim to capture more of the everyday purchases. We expect our pay now volume to grow and we plan to make it attractive for pay now transactions, not just for food items. While we typically see an average transaction value in the several hundreds of dollars, we are optimistic about our plans moving forward. We still have a lot of work ahead, and there is potential for consumer rewards that we haven't introduced yet, which is important for standing out among competitors. Once we implement those features, we'll see how much of the spending will shift towards pay now and pay later options. Additionally, I think it's important to note that comparing the Affirm card directly to debit or credit cards can be misleading; it’s a unique product that isn't quite like anything else available. So, no, I'm not surprised by the results since we had strong expectations based on the existing demand. We'll continue to strive for increased volume.
Michael Linford, CFO
And then just on the margin point, as we outlined in the letter, we're actually not starting from zero with the direct-to-consumer business. We have a virtual card product today. That's one of our most profitable products because it is direct-to-consumer, and we own the whole experience. And that really does give us a lot of advantages. And of the many things that Affirm card does, one of the easiest to understand is it simply takes that experience and turns it into a form factor consumers are super used to and really expands the amount of times you can use the card, use it offline. You can use it in a lot more use cases, whether or not you're integrated with Affirm. And so that part is really unsurprising. We always knew that that part of the business was going to be really successful. I do think that we want to continue to make it used more. But remember, we are still running at 42% of the transactions being pay now transactions. So we’re getting the frequency that we want out of the card even if the GMV isn’t there because the AOVs are obviously much lower on doughnuts and coffee than they are on bikes and couches.
Michael Ng, Analyst
Great. Thanks, Max. Thanks, Michael.
Operator, Operator
And we have reached the end of the question-and-answer session. And I’ll now turn the call back over to Zane Keller for closing remarks.
Zane Keller, Director, Investor Relations
Thank you, everybody, for joining the call today, and we look forward to speaking with you all next quarter.
Operator, Operator
And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.