Affirm Holdings, Inc. (AFRM) Earnings Call Transcript

Yes, I mentioned the new payments with DCH. A little bit in the same context as the AI gateway. There's a lot to save still inside our system. We're fairly well optimized in terms of managing operating expenses. But at our scale, fire engines going by. Hopefully, you cannot hear us. . So anyway, the -- and I guess what would you think about -- the we can analyze the savings the approach anyway. -- every time you switch from a real-time network to a non-real-time network, you are introducing an element of risk. We are very good at risk management. At a certain scale, we have enough data where you can essentially self-insure using debit card networks to take down payments, you buy -- you get a little bit of an insurance of good funds, but you're paying interchange by switching to each, you are introducing a delay. You don't necessarily know you're getting to fund that all time, but if you ever really going to do any mall or you're able to build a specialty model for that particular form of payment, you are saving money and effectively just putting it towards giving consumers better deals, save on OpEx. So that's kind of the general trust and I mentioned one, but there's many such initiatives going on. And they're always going on. This 1 was just a particularly dear to my heart cause is a long time making. And then on the wallet side of things No, we are -- we were trying not to talk in retail about any 1 particular product. So I'll keep it general -- it's been -- it's generally speaking, it's been very accretive. We find that folks that prefer digital wallets really stick to them. So having a direct integration is a great unlock for repeat usage. We definitely get some new users through the integrations as well, but the most compelling kind of benefit for those deals is always just being there when the consumer is. If you look at some of our merchant partnerships, you'll find our digital wallets right next to us. And if any door you go through, you will find a firm available, and some folks love going to our flows. Others like to do that inside well provider, and we see as an important part of our business to be a place. And so that's the kind of the most important thing. And that strategy was something we said we were some time since we embrace channel conflict sort of short hand for this. And we've embraced it for a while and it pay dividends. We're seeing those users come back through those doors over and over again and to become accustomed to finding Affirm exactly for the preferred shop.

Your next question comes from the line of Will Mats with Goldman Sachs.

I was going to dovetail off that last 1 there, at least the answer. It was great to see the DTC and wallet driving around half of the volume this quarter. And when we think about ways to kind of drive that even higher over time, obviously, you have things that you can do that I would kind of put in the network effect category, adding more merchants, more nodes to the network, and places where you can use a firm and that just driving good things for the overall business. If we think about it more from an issuing perspective, what are some of the things that you're contemplating just to enhance the overall experience of the firm user and just drive kind of more repeat usage, more habituation, I thought the example that you just gave on the wallet partnerships was great. Anything you could talk about just on kind of user experience and kind of things on the road map there? .

Never preannounce the road map, it takes longer than you think. I'll bite, but I'll try to keep it not really disclose. So there's a lot of work being put in right now into the card. Like we really think it's the best way to use it for or it should be the best way to Affirm. We think it already is there's so much more we think like the card should be uniquely best most protective, least difficult, it should be the thing that you prefer. And the reason I'm so excited on that is because it fits naturally into both normal waste point-of-sale integration to the menin processes parts also fits natively into older digital wallet. And so we're very, very focused on that product, just continuously adding benefits to that. So there's a lot of work being done. You'll see some of it actually launching literally in days, not weeks. So you'll see the answer and answer to this question in it. Media future, there are the card specific financing programs coming. There's a card-specific firm offers that are going to start appearing that will make the firm had the preferred way kind of just through the pure financial benefits to the consumers -- all sub there, but I think that's kind of the -- that's the trust -- some of this is, by the way, what we internally call the mainline development. And then there's even more coming a little bit later from a DT1 team where we're really thinking in the sort of the next generation of the car .

Your next question comes from the line of Andrew Jeffrey with William Blair. .

Max, you always speak so eloquently about credit and your ability to I think you talked about the we take risk come in the latter is great. But the credit and the ability to manage risk and increase approval rates across the credit spectrum. I wonder if a little bit of tonight's reaction to another really good quarter is just Michael explained the delinquencies in this quarter. But just a reaction to the higher provision and concerns that in a more uncertain economy, credit becomes a problem or credit weighs on our LTC. And I wonder if there's just this perception fundamentally about a firm's ability to compound GMV at 30-plus percent while maintaining the excellent credit outcomes we've seen. .

I'll start with I think Michael is the 1 who's going to give you the real eloquent answer, but I'm going to steal a line from him before we get anywhere. So I'll tell you a story. In May of 2020, -- we were not a 0-trade company. We did not have a lot of cash, and we had no idea with this coveting we're going to be all about. The status checks hasn't arrived yet, and Michael and I were staring at our book and asking the question, if the world goes SaaS with hell of a hand basket, no 1 can pay their build, what are we going to do? And he gave a very pity line that remains true to this day full 6.5 years later. This was in May, whatever happens by August, it won't matter because the entirety of the book at risk will have been paid off. We lend very, very short weighted average term. You can -- I'll leave it to Michael to repeat. I think actually, Rob is the 1 who explained that a lot of the delinquency changes are entirely seasonal, the year-over-year changes irrelevant. The provision uptake has to do with some -- we think it's very intelligent implementation. But it's only entirely in our control -- but the bigger point if you don't lead any of the eloquence that I bring to my storytelling around modeling and risk management, just note that the average term is still very, very short. We get to deal with whatever overexposure we might take on today is less than 90 days. So that should give a lot of people's -- I did great comfort in our ability to recover from whatever mistakes we might make. That said, like 1/3 of the company is involved in some form or another of managing credit. Credit is job #0. Used to be my call sign in every 1 of the letter that feel like I hired retreating myself, but it hasn't changed the way we run the business. So if that's the reason the market misunderstands this, let us stop at understand. .

And then just 2 things to add. First is the credit outcomes that we are getting now and have gotten over the past 6 years of our public life have been in line with what we wanted to have. Our credit outcomes are a choice point that we make in our business where we want them to be. Everything we do is intentional with respect to credit. And we can do that because we're looking at hundreds of millions of decisions every quarter when we're making underwriting decisions. And you can tune those models to the appropriate amount of losses you'd like to have based upon that just incredible volume of decisions that you're making in the quarter. The second is -- the capital markets have spoken very loudly on this topic, whether it's the ABS markets who both understand, appreciate and have the first risk in those kind of our loans, but also the forward flow market, really sophisticated world-class blue-chip loan buyers who understand the credit losses in our business exceptionally well. Continue to be extremely interested in exposure to our assets. These folks are, honestly, some of the smartest credit investors in the world, and they are still extremely excited to participate in our assets. Maybe I feel that we are in market right now on price today was over 4x described despite doing it in 1 of probably the worst 1 of the worst macroeconomic -- certainly in the equity Capital Markets Days we've had since COVID. to be able to price a deal like that without volatility. You can't do that without that market giving you too big sums up on your late controls model.

Okay. I appreciate that very much. Sorry about misrecognizing you, Rob, .

If you've been tuning in for a while, you know how we feel about cresting how much we care. It sometimes frustrates us, that's not everybody has gotten the message yet, but we'll just keep compounding at 30% and keeping that use in the right range and at some point, we'll be on parts. .

Your next question comes from the line of Nate Svennson with Deutsche Bank. .

Max, 1 for you. I was hoping you could talk a little bit about the time you're spending now with the ZT1 team, clearly sounds like it's positive for your mental health. But I guess, in terms of what your role in that team opens up for a firm as a whole, now that you're able to refocus your time a bit and I think in 1 of the prior questions, you said you're not going to preannounce road map, so I won't ask that. But I think more of a flavor on how you're spending your time with that team, what you're working on would be helpful. .

Sure. And I know some of them are listening to my donors. There are continuing delight of my daily grind here. So I guess, some sense for what we're actually worth. I'll give you a -- this is maybe a true look behind the curtain. So the that I set with DC-1 roughly trying to remind us live here for every quarter or so. . The 2 orphan projects that have either a risk-adjusted or probability-adjusted path to $1 billion in revenue in a span of 5 years from launch or to move the needle to the tune of 15% to 20% on an existing line of business. that is already $1 billion. In other words, we either want to take a bet on an existing thing that we believe a firm proper is misprioritizing and we have both the audacity and the capacity to try to move the needle there or just frequently back more frequently, we actually want to go into kind of the very big approach where we build something, and we have no if it's going to work or not, but we're going to try. And if we see a heartbeat, we go all in and build it until it gets to the point where we handed off to the main development team and then they pick it up. So 1 practical thing -- this is not a big reveal because we talked about this product report. So every once in a while when many sees our brand on to production. This is the idea that if you are a multi-SKU general merchandise, you're probably selling a lot of things that you are not marketing up more than 10%, maybe 15%. And so when a firm comes in and says, "Hey, you ought to do a 0% sales they don't think it's a great idea. Black Friday is coming up 0% drives the volume, let's do this. if you are a vertically integrated seller, like, of course, sounds like a great idea, here is my 6.5% to 9.5% MPR plus give lots of people access to so our general merchandiser and you're reselling a branded product on some of estate, your market is basically the app that we're making of you for the MDR. The 0% is not going to happen unless you're just try to have any color. However, the original equipment or the original item manufacturer retains a lot of margin, many of them are motivated to put their marketing dollars to work. In fact, they were have existing relationships with the retailer -- and so helping the retailer and the brand tie all those funds, which are typically fund, there's a lot more margin to go around, which usually gets spent in sort of silly promotions like driving -- as you know there's a 20% sale at retailer X on brand Y. It's an extremely, extremely amphisticated way of doing it. A much better way is, did you know that this particular skew -- he's done a 0% loan, at the exactly retail price. There's no discounting, but this retailer has this brand at 0% available right now. So -- all of this sounds kind of obvious. It's branded that nobody has done it. The reason that was done it is because it's really hard to scale. This actually happens in retail today. We didn't invent the genre. If you talk to any major player, any general merchandisers, they'll tell you, we do this all the time, it called vendor promotion, vendor-funded promotion. So you go to the vendor and say, "Hey, you have a couple of hundred thousand dollars. I want to put you into my circular, it's going to go out to people. And works okay, but it's run off of spreadsheets and people have to make phone calls and it's quite a lot of manual labor to the 1 or 2 year, and it's generally seeing applicable to every item or deep brand and it's very, very undifferentiated. We've been building a system that allows for all of this to be managed basically entirely electronically, where you can really have a large number of SKUs at any given time with these brand sponsored promotions -- this requires things like budget management because somebody wants to run these programs forever. They need to be launched and run down at exactly the right time. They have to hit at the same time as a marketing promotions that happen typically within the general merchandisers, retail media networks, all of them now have their own arm, so the test to echo through that and reach the consumers that way. So flowing all of that together and making sure it's still very profitable for the retailer. It's just an incredible amount of work. That's what we've been building at DT1. If you want to see what that looks like, if you actually play with a firm app, you will find that we scaled BSP out very significant. I'm not going to drop any names on this call, it would be a good calender hunt, but there's about 1 million different SKUs in the Affirm app that our brand sponsor funded. So -- that's very real. No. It's not any of his forecast is count heavily everything I say here, but I'm personally very excited with this will do for Christmas sales. And Hopefully, we'll scale it out to hundreds of millions of SKUs before too long. Hopefully half of this may this is like -- so if you want a flavor would you like to work with me, these rands occur in DT1 on either regular basis. .

Your next question comes from the line of Jason Kupferberg with Wells Fargo.

All right. Great. I wanted to just come back on GMV growth for a minute. The 34% in Q1, obviously, real strong, we're doing at least 30 according to the new guide for the full year. So on the surface, that implies some deceleration during the balance of the year. I know your compares get a little easier because you're got past the Walmart headwind, et cetera. So I mean, any factors that would actually drive a slowdown off of these Q1 levels? Or is this just the typical conservatism that we've come to know and love .

Yes. I mean, obviously, we've given a floor for growth for the full year at about 30%. So it's not a range. There's no ceiling to growth. We're doing everything we can to grow the business responsibly. We're seeing growth rates early in Q2 and certainly in September as well that were much north of what we posted in Q1. So no reason to -- nothing to point to specifically in terms of a deceleration in the business. We just wanted to set a responsible floor for growth for the full year. And that's what we did with F27 guide. .

Understood. I also saw in the shareholder letter you've got the first firm edge pilots are going live in the first half of the next calendar year. Talk a little bit more about how many banks that will be with? What's the general size of these institutions? And any other color because, obviously, based on what you talked about at the Investor Day, it seems that could be pretty exciting over a multiyear period. .

I'll take this one. This is Michael. We're really excited about Edge. It's a chance for us to distribute what we know is a better way for consumers to access credit to a really very wide audience partnering with the issuers of debit cards across banks of all sizes -- is also really early. We've been part of work, working to develop the product. We like we're really close to being wrapped up with some of the development work. And then we will need to figure out the right set of partners to get live weight, -- nothing to announce here today, but I think patience is a code word here. We have a set of partners, both the platform partners as well as the end customers here who don't move exceptionally fast. And we have to be really mindful of just the pace at which they can move, and we have to pace ourselves to them and they're going to govern that. So it's going to take a little bit of time, don't have a lot of partners, but are and continue to remain very excited about the products.

Your next question comes from Dan Dolev with Mizuho Securities. .

Thanks for squeezing me in. I appreciate it. I want to ask the question about Agentic commerce in a different way, Max, like -- maybe just help us understand, and this is what everyone has been trying to figure out. So if a merchant cares about a genetic conversion, shouldn't they subsidize more firm 0% loans or any other affirmed loans -- or does it not make a difference? Like what's the key hook here for the merchants in an agent world? .

Yes, they should. And part of why we've been so hard at work on things like BSD is to create programmatic APIs. So initially, humans with calendars and tools, but soon enough agents on their own and deploy dollars to compel a buying agent from their side to say yes. Agents are going to be shopping on your behalf. They'll certainly be looking for improved deals on your behalf. Affirm is really the only scaled player with capable of managing longer-term zeros that are differentiated, that are driven by SKUs that are driven by target targeting. And we should expect at some point this is very, very early. I just heard Dara talk about how there have been very few Agentic rights booked on Uber. So it's all very, very early days. But it is coming. It's exciting. I'm sure all of you have tried all the various agents and some of them are really, really compelling now. Each 1 of these will be programmed to finding the best financial transaction. That is going to be a combination of cost, which is going to matter and 0% is going to be the best cost because there's no cost to borrow. It's also going to matter that they are fully disclosive that the price hasn't changed, if you were somehow day late that it doesn't compound so you can estimate a dollar. So all the things that we've talked about is really, really important. -- a percentage of our consumers picks us, because of those features. Some thing is because we're there, and they don't necessarily grasp the full kind of value that they're getting by choosing a firm of old agents will grasp exactly the value they're getting. We do offer the best credit product there is like that's actually true. And so as agents find us it will help merchants sell more. Merchants can help. Merchants sell more by funding more promotions. And so I expect 0% volume to go up a lot. In the genetic, I expect agents to care about the ever-changing catalog of 0% loans or 3% deals inside the firm ecosystem. I think that's a really important service that we're going to provide to every genetic shopper tool out there. So there's a lot of lot to like about where this is headed. But I guess, like I would just caution anyone to create a spreadsheet that shows [indiscernible].

Your next question comes from the line of Dan Perlin with RBC Capital Markets. .

So I just wanted to follow up a little bit on that actually. But from the context of like cybersecurity investment cycles, it's definitely becoming a little bit more of a topic this quarter. And especially in a world that you just described Max around increasing genic opportunities. So the question is, -- how are you guys thinking about where you are in that cycle? And are you able to throttle up in or down given potential risks associated with that. And then the other part of the question is, is there any risk to you guys in terms of ownership of liability to the event that you start to see more Agentic fraud as a result of pointing in your direction. I don't know the answer. So I'm just trying to just kind of figure out what kind of, I guess, position that .

It's a great question. So on the cybersecurity side of things, obviously, we're taking super seriously. This is not -- and by the way, so shoot everyone, if you just -- like there's a mean unground. I wake up, there's another vulnerability. That is the life of our security team and every security team -- the job right now? And so I think we're all constantly watching out for use closures. We're trying to keep up with all the patches, trying to make sure that we're keeping our data safer users data safe, et cetera. So -- and this will be a -- I'm generally being quite bullish by way we're definitely not in security, but it is a little bit of my past life. So I have strong opinions. I think the vendors are getting access to better models quicker than attackers. And so we will go through an unpleasant period of patching and fixing game, learning how to write better software. But in some fairly short period of time, we're going to be better software builders with AI and generally speaking, better protected. So I -- we're in a little bit of a shooting more right now with the bugs that are being discovered every day, but it will end, hopefully, relatively quickly, and then we're all going to be better for it. So not not unconcerned, not even a little bit. In fact, I text our security team and all kinds of hours saying, have you guys seen the disclosure yet, like what are we doing to make sure we're not affected. So that's that's been lined right now, but we're technically very, very strong and we're definitely benefiting from the excellence of our engineering and anticlines. On the fraud and liability side, that is a fantastic question. Generally speaking, you can't expect Agentic commerce to be more than a little bit messy in the early days. Your agent will hallucinate, you must have said, yes, and here's an 85-inch screen for your tiny 1 veteran apartment and you don't care what you going to do it that we bought it and it's yours. And you love to return but the headaches and the as will be there. So as all of that gets bigger -- and by the way, they are improving very quickly. The region is going to learn, the models that how your agent is going to learn very including some in. So all of that is also going to resolve itself in a reasonably short term, but the messiness of consumer interaction with the Agentic purchase, unwanted purchases, not as described. And then as Craig very happily pointed out a Agentic fraud is going to be a thing. See speaking, if there's risk to manage. We like that world better than the world where there is. We are very good at it. We're very good at capturing the right data. We're very good at rapidly scaling model building and training things that allow us to mitigate price and ultimately manage risk. And so I don't want to say I'm excited for this new challenges are common ways. But to some extent, every time there is a servant in the force of payments, whether in a form of risk or rates or fraud or credit or new modalities, new channels, we tend to win because the solutions are inevitably engineering and AI and base, and we have a very strong advantage in the rest of the intra that space.

Your next question comes from the line of Matt O'Neil with Bank of America.

Here with a minute ago. Well, maybe Matt did cherry pick a word from the shareholder letter, it would be fatuous as me to double down on some many of the questions that have already been asked and answered. So maybe for closing or Mark, is there anything that none of us managed to ask that you would have liked to have been asked or you'd like to conclude with? .

I applaud your attentive thread of my references. That's one, there are several more. No 1 ever asks how many there are many in this one. Some of them are very deep cut. So that's a work antigen if you want to take your mind off the market. I think I think most of you really understand the business pretty well, and we're always happy to engage in these calls because it gives a chance to brag a little bit on the questions I've got that are about as far as fire over the years. . I don't know Michael and Rob, you guys have something that should have been asked. I feel like this is the last few quarters, if you want to back analyst community, we've done it really well. Like we look forward to these conversations. We like the questions. We feel appropriately challenged and we don't roll our eyes at any of them.

And our last question comes from James Faucette with Morgan Stanley.

I wanted to ask on some of the larger ticket sizes and transaction opportunities. thinking about what you could be doing with ServiceNow or service ties excuse me and others. How should we think about how that may impact MDRs, et cetera? It seems like 0 percentage you were talking about MAX could be really attractive part of the sales toolkit for those kinds of service providers. But I think 1 of the things that we grapple with is like what kind of impact would we have on MDRs and the overall economics of transactions compared to what you're doing today? .

Our large ticket items, large-ticket build service and included is our brand butter. There's no 1 else in the industry that's figured out how to do that. at scale in a differentiated manner. So we're always excited for more of that volume. You're totally right. There's a really healthy demand. I remember when I answer the largest transaction we have written was $7,000. And that was like, "Oh my God, I can't believe I said that out loud and that is not even close to our largest transaction." So we are carefully increasing our aperture for risk or only the deserving borrower only typically quite high credit quality. But there's definitely room there. It's actually hard for me to immediately reason about MDR changes because there's 2 opposing forces. The merchant is if you're selling an system, so maybe up as I go, but typically, HVAC is like $20,000, $29,000 range, that's a typical sort of replacement for a single-family home. A merchant trying to move that merchandise is more than excited to pay a substantial MDR to make the answer as compelling as possible. You don't want me to come back and shop at get. You just want me to buy this thing. So MDRs are naturally to get from merchants because they understand that they're only going to sell a dozen per quarter. 1 of them not being sold makes a huge difference to their bottom line. So specialty shops that all these things are particularly drawn to provision. So all of that is really, really good for -- on the flip side, the buyer, given the size of the transaction is actually typically very low risk. And so from our point of view, to extract a reasonable margin of safety on the loan, the requirements are meaningfully lower. So you kind of have 2 directional pressure in each direction. And I don't know if I can instantly handicap whether I mean the net result is higher or lower. Feels like it goes a little bit higher, but maybe not quite as high as a 4-year, 0% loan with compel or something like that. .

Yes. And I think for a larger ticket transaction, James, this is Rob. We would also go longer on duration. And so in terms of the overall total revenue quantum that we would get from the transaction because it is going to be a longer duration loan, it's probably on the higher end of the spectrum for us as well. Just just given there's going to be more funding costs associated with that loan on our side. .

This now concludes our question-and-answer session. I would like to turn the floor back over to Zane Keller for closing comments. .

Well, thank you, everyone, for joining today. Apologies again for the technical difficulties at the beginning of the call. And thank you for your time, and we'll talk to many of you again shortly. See then. Talk to you.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.