Afternoon. Welcome to the Affirm Holdings First Quarter 2023 Earnings Conference Call. Following the speakers' remarks, we will open the lines for your questions. As a reminder, this conference 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 of Investor Relations.
Thank you. You may begin.
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 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. Before turning the call over, We want to briefly note our shift to a quarterly shareholder letter instead of a lengthy press release and prepared remarks. We believe that this format will enable us to spend more time answering questions from the investment community. As such, we encourage you to review the shareholder letter commentary that we would typically include in our prepared remarks.
In addition, we believe that the shareholder letter, when read in conjunction with our earnings supplement, We'll enhance our ability to communicate with the investment community. Both documents are available on our Investor Relations website. This change was also influenced by feedback that we received from investors. We hope you find the shareholder letter informative, and we welcome any feedback. Hosting today's call with me 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.
Thank you, Zane. We appreciate everyone taking the time to join us. Our results reinforce the confidence we have in our strategy and Affirm's ability to capitalize on our opportunities. 2 years ago, that was We're now completing our 8th quarter for the publicly traded company And it seems like a good time to compare results for the 12 months ending September 30, 2022 versus the 12 months ending December 31, 2020, Which was the last calendar year as a private company for us. Since then, this comparison, We've more than tripled active consumers.
We quite coupled transactions almost. We grew transactions per active consumer 1.5 times, Grew transaction frequency by 50% and near tripled our trailing 12 month GMV. Both have doubled our revenue and almost tripled revenue less transaction costs, growing it up to $732,000,000 All while, we've been in control of our credit results. Delinquencies and the charge offs remain at or below pre pandemic levels, very important to us. We remain Focused on the long term, while making sure to navigate the present macro volatility very thoughtfully.
We're continuing to obsess over risk and transaction costs to maintain a strong unit economics. We will shift features that improve network scale and profitability like we always have. We're going to manage our CapEx OpEx, excuse me, we're doing this live. We're going to manage our OpEx carefully, while investing in our highest conviction product opportunities. We're building deep connections with consumers and merchants who need us now more than ever before.
Both sides of our network navigate economic uncertainty and we see this as an opportunity to solidify our position as a trusted and reliable partner. Back to you, Zane.
Thank you, Max. With that, we will now begin our question and answer session. Operator, please open the line for our first question.
Thank
Our first question comes from the line of James Faucette with Morgan Stanley. Please proceed.
Thank you very much. I want to talk first about this path to profits in 2020 3, obviously, you reiterated that, but nevertheless, you're looking for a little bit lower GMV and And associated performance on the top line. How are you thinking about like the evolution of that timing and And what you need to do to make sure you get to breakeven or profitability in 2023?
Hey, James. Thanks for the question. Yes, we are still very much on time and on pace to achieve the profitability goal that we outlined, Which just to recap for everybody, we talked about getting to profitability starting in the 1st day of our fiscal 2024. We said on a sustainable basis, meaning that we'll tend to do it repeatedly most of the time and looking at adjusted operating income. And so for us, the challenge is some pretty simple math.
We need our revenue less transaction costs to be greater than The adjusted operating expenses that we have below the transaction cost line. The key things for us then are making sure we're doing everything we can to So my the unit economics in the business, and if you look at our back half of the year roadmap, we have a lot of focus on Making sure we're doing all that we can and should do there as Max outlined in the letter. And we're going to be mindful about controlling our operating expenses. And for that, that means being very careful, in particular, on hiring, but also making sure that we're not having any pockets of waste in the business As we continue to scale the business and make the right investments, we also don't want to have dollars wasted in the system. If you look at our kind of guidance in the back half of the year and the adjusted operating expenses that are implied by that, We feel like we put this in a really fit shape so that we'd be exiting right where we want to be to achieve that goal for next year.
Thanks for that, Michael. And then on a lot of places we could go, but let's start with starting with delinquencies. You mentioned in the Prepared remarks that you're still a bit below where you were pre pandemic. However, directionally, you're starting to get pretty close to those And just wondering how you're thinking about like managing that, especially since I would think that There would be an increasing number of repeat customers in that 2023 versus pre pandemic, which If they repeat, you would think that they would tend to be better behaving in terms of at least delinquency, etcetera. Where should we think that you would that you'll try to top those out at?
How are you going to manage that? And what's the, I guess the prognosis for when you would do that and under what conditions?
I'll start and I think Michael can probably help quantify I'm going to answer the question. So just to set the stage, the most important thing to take away from us, we are Not just managing credit outcomes, we set them. The whole point of these ultra short term, 4.6 months weighted average life of every loan, Every transaction is underwritten. We have full control of transactions requiring down payment or not. We control the amount of the down payment, etcetera, etcetera.
So We have lots of levers we use to control risk. We've said about we've talked about this many, many times, but never gets old. And that gives us a lot of Very nimble controls over the actual credit outcomes. So we set a number we want to hit. Obviously, every week, we get a Stack full of new information going back to all the cohorts that are still active and we adjust credit and we have been now managing it quite actively To make sure that we get to the numbers that we require, because the back book runs off very quickly, we have a lot of control.
This compares pretty favorably with the rest of the industry that does things like credit card consolidation loans or personal loans that go back years and there's nothing you can do about it. So that's just a really important thing to understand. And I apologize for to those who for whom this sounds like a just an old repeat, but this really is how this business works. And the reason our numbers are strong as they are today, You can see this in the letter. It's not an accident.
It's not us. No, the world hasn't changed. There's plenty of Trust in the consumer in the lower income brackets, lower credit quality, we're just good at managing and we do underwrite every transaction and therefore we have a lot of control. So that's sort of the backdrop. The counterpoint to this is the demand for BNPL It's increasing.
We survey our consumers. We see demand in this application side of things. Generally speaking, people are turning to and not just the NPL by the way. If you look at credit cards, People are turning to have more than they used to during the pandemic. People are not done in the higher income bracket spending through the pandemic stimulus, but they're getting Closer, probably sometime mid next year is when we'll see the exhaustion, those savings.
But today, the lower income groups Are already done and they're trying to turn to various forms of debt. We believe pretty firmly represent the best alternative out there. We have 85 And so you have enough demand and we do have a lot. We have enough diversity of merchants, whereas folks shipped out of Connected Fitness and Fancy HomeWear as
you go for big box,
more Quantity versus we are there to help them with all those things and so demand is still quite strong. If we have control as We view all of our credit outcomes, we can manage to the number that we need and want. That's sort of How we're doing it? Michael can give you a little bit more data on exactly where we intend to run it. But again, this is a choice we have as opposed to a I think we have
to contend with. That's right. And it varies by product and it varies by merchant that we're at. And I think your point is very well taken that we do see substantial improvements in credit quality as we see more repeat usage. And I'll note that we're still acquiring new users at a pretty good clip and thinking about the business, it's still feeling that we're We're not done with the acquisition side of the equation, certainly not on a gross basis.
The additional disclosures that we've got now in the shareholder letter, We really encourage folks to spend some time with them, both looking at the delinquency trends, which we now show 30, 60, 90 as well as we've got the covertized Net charge off curves, for our monthly loans and then we've given you some trending that you can see on split pay. And I think the biggest takeaway for all of those Is that where we are dialing in where these things are. It's going to be a week or a month that varies up or down, but we get to dial in Where those losses set and that's such an important strategic piece of this business that we can pick that loss and we can have confidence in how we think about The credit losses with respect to our capital partners, we can have confidence in how it affects our P and L and allows us to confidently go approved to a very deep level. I think if you put us up against most of the people in the traditional financial institution world or most people who do unsecured consumer Lending, our results are really good and we feel like that is a real strength for us and we're not going to To treat it lightly, that's something we're to continue to do 1st and foremost as it's an important aspect in everything that we do.
Thank you. And while we're waiting, just for what it's worth, I'm not the only person who looks at credit at this company. I'm one of the very significant number of people who does that. But when
I look at our
Credit outcomes, I look at corporatized data, basically performance by vintage. Strong plus one to Michael's. Please have a look at We put out in the letter, we really wanted to communicate very clearly to our investors that this is the one piece of the business that matters to us, should matter to our investors and we are in full control and we look at
Thank you. Our next question comes from the line of Masha Orenbuch with Credit Suisse. Please proceed.
Great. Thanks. In the past couple of quarters, we've talked about the potential to change price to consumers. Does the fiscal 2023 guide for revenue less transaction costs assume any pricing changes? And if not, what would it take To get you to start that process.
Excellent question. So The short answer is there's a number of mitigants across merchant, consumer pricing and the rest of our transaction cost Line items that are not reflected in our guide, those remain as upside. And a little bit, if you will, So how we think about the guidance, we want to be really careful to put in the guidance things that we are certain about as opposed to things that we hope will Deliver and help close the gap. And that's why we, for example, look at the current forward curve. We don't have a proprietary house view of rates.
And we try to look at the current shift in live features of the product. And so There is some aspect of higher APR, but the majority of the opportunity for higher APRs to consumers is not reflected in the guide as is the opportunity we have On the merchant side, from a pricing perspective.
Great. Thanks. And as a follow-up, Given the funding stresses that you and others in the industry have seen this quarter, could you And maybe Michael talk a little bit about what your plans are, obviously, given going into a quarter where you're going to generate a lot of bearing loans, do you have an outlet for them? And you mentioned in some of the Text here about the potential for lower gain on sale. Could you maybe put some numbers around that?
How much lower? How should we think about it? Thank you.
Yes. The thing we're pointing out in the letter is that we think we'll be slightly above the 5% equity capital required, which as you know, we've been running Substantially lower than that over the past several quarters. That does reflect what we think will be a higher usage of balance sheet, in Particular warehouse financing into this quarter. But let me answer the broader question first, assuming all the way out. We have a lot of conviction and confidence in our ability to fund the business.
Don't think we're worried about that at all. The question for us is going to be the shape of the P and L, as it goes through the various funding models that we have. And it is the case that we will have slightly more on balance sheet, which means that as you see in the Q2 guide for that revenue less transaction cost, You have two factors that are really affecting that number in the quarter and the reason for the back half of the year acceleration. They are the late in the quarter origination, late November into December origination of interest bearing loans that end up on the balance sheet. That creates a lot of vertical pressure, meaning the in period Q2 results will be depressed on a percentage of GMV.
When you look out through the back half of the year, we're implying acceleration, a pretty meaningful one in revenue less transaction costs. That isn't An assumption of a material change in the economics of business is simply the stuff that we originate in Q2 flowing through the P and L in the back half of
the year. The opportunities and that again that you alluded to at
the very top, those are actually just being on top of or in addition to the acceleration that we're currently guiding to.
Thank you.
Our next question comes from the line of Ramsey El Assal with Barclays. Please proceed.
Hi, thanks for taking my question this evening. I was wondering on the changes to guidance, If you could disaggregate the impact from Peloton, I think that you called out in the shareholder letter versus other factors.
Yes. So I think there's 2 drivers and then there's some math we can do. The biggest drivers are Peloton, both and most acutely in our Q2. So to give you some context, in our Q2, we talk about A GMV growth rate that would be 40% instead of the guided to 31% in the second quarter. And we'd estimate that On a revenue basis, we would be up 29% in the 2nd quarter instead of 16%.
Obviously, that's a very material headwind with respect to the top line Top line measures in the business, back half of the year that starts to attenuate quite a bit. But in the back half of the year, we are modeling the impact of the movement in rates. And we talked a lot about there being roughly 30 basis points of headwind, of which we're mitigating roughly half of that In our guidance in terms of the RLTC take rate. And so those are the 2 biggest drivers. It's important to talk about The cause those are the effects and the root causes.
But one of the important things as we're Talking about is as we use the balance sheet a little bit more in Q2, you're going to again change the shape a little bit of that Margin, and that will continue on throughout the course of the year. But we think it's more of a one time change in terms of the warehouse usage that we'll see next quarter and we'll run And that trend will show up as you'd expect.
Okay. And one follow-up from me. You also mentioned in the shareholder letter That your sensitivity to additional interest rate increases has decreased since you initially gave us a look at that in February.
What are the drivers there?
What is helping that number come down?
Honestly, I think it's as much anything Actually observing the impact that our counterparties are flowing through rates. When we gave that initial framework back In February of this year, we were taking into account a lot of the potential first and second order effects. And obviously, we were doing it We gave you a framework to think about it as every 100 basis points. There's a second or third order effect too because the steepness of the curve begins to affect decisions. And I I think it's more just as we've observed and seen the impact, we're just updating the range for everybody.
Got it. All right. Thanks so much. Appreciate it.
Our next question comes from the line of Mike Ng with Goldman Sachs. Please proceed.
Hey, good afternoon. Thank you very much for the question. I just have 2. First, Max, I was just wondering if you could give us an update New product development for things like brand sponsored promotions and whether or not the CFPB report And things like that change the product roadmap strategy at all. And then second for Michael, I was just wondering if you could talk about What GMV may have looked like excluding Amazon and I hear you loud and clear on the RLTC and AOI margin path for the rest of the year, as we go into the back half, Is that improvement in margin really driven by, I guess, like gross take rates on interest income and then Servicing income because of that late fiscal second quarter originations?
Thank you.
So
probably the most important thing to respond to the CFPB point. I don't know if you had a chance to read it. From my point of view, it's a great document describing The state of the industry, I think they did a pretty thorough job both interviewing and summarizing what the industry is doing. Gratifying to have my S-one letter quoted in the CFPB report. That was an interesting highlight.
No, I don't think our roadmap has changed at all. In fact, I feel like in many ways, the letter essentially Highlights that there's lots of companies in this BNPL space and there's one that's very different and they didn't go as far as naming us, but we're the only ones who doesn't charge late fees, And have all sorts of other shenanigans that regulators really dislike. And so I feel pretty great about what I said there. Probably the most interesting sort of material thing in their note is calling in the industry essentially to help consumers build their credit history and Scores through BNPL loans and we've been working pretty closely with the credit reporting agencies and various other participants in the industry to I'll further that along. And so we'll definitely continue listening to what the regulators have to say in the matter and propose our own ideas, But generally speaking, I felt that it was a very positive thing for the industry and certainly for Affirm.
So our roadmap is not impacted. Brand sponsored promotions are, I would say, you'll see more of them going forward. It has Two components. 1 is the build out of the engineering what takes engineering, the product has to be actually fully built and we are making pretty great progress
there. I don't
quite have all the bells and whistles that I want, but it's a thing, it's live in a bunch of places. And then it becomes a matter of sales where you actually have to bring it to merchants and Manufacturers and brands. So we're executing on that. Like everything else we do, these things will take time to build. We'll at some point break them out to show off just how cool they are and how margin rich they become, but that's probably a conversation for another time.
I feel like I maybe answered the question. Was there more today? No, Thank you. I think I covered it,
but I'm happy to say more. And then in terms of the kind of back half of the year and I understand that question correctly, you're talking about that RLTC as a percentage D and C improving pretty meaningfully in the back half of the year. It's really just Really simple math. As you put more interest bearing loans on the balance sheet, you defer or you earn the revenue as those interest payments So if you take a 12 month loan that's originated on in December, for example, most of that income happens in the back half of the year. What's important though is the provision for credit losses for those loans will happen upfront.
And so that means as you get less revenue, less transaction costs In the period, even though those loans are very good and profitable for us throughout the year. But then more broadly, I think it's just really important to remember how early we are With these large partners and with, the program overall, we talked about some mitigants earlier that That are things that we're working on right now, but don't yet have reflected in the forecast. That's on top of the very long list of projects that we have That focus on the unit economics as Max talked about in the letter and that's ordinary course of business. There's nothing special about that. That's something that we would And we'll continue to do regardless.
And those can range from subtle optimizations that we have on a product display page, Tweaks that we can make to how our app search features work to really drive better affiliate revenue take in the period, And the list goes on. And those optimizations and those opportunities represent for us a lot of the upside here. But the primary driver in the guidance is the flow through of the larger balance sheet and Experian loans.
Excellent. Thanks, Max. Thanks, Michael.
Our next question comes from the line of Andrew Jeffrey with True Securities. Please proceed.
Hey, thanks for taking the questions. This is Julian on for Andrew. Just want to talk go back to the credit side. I know you Just mentioned that the provisioning would kind of, I guess, be more front half weighted and then We'll see kind of it come down in the back half. Is that the right way to think about that?
Yes. So we always provision at the time of Perfect. Yes. Well, when we own it, strictly speaking. And so that's always the case.
The difference is that we on the margin, we'll have less marginal growth dollars being sold versus placing the balance sheet. You'll just you'll actually carry the provision So getting the gain on sale and no provision. And so I think the income profile just changes a little bit, as you think about Those loans being on the balance sheet versus all.
Got it. Okay.
Thank you. And if I
can just get one more in. Can you Kind of quantify maybe the non Amazon growth versus Amazon growth embedded in GMV this quarter. And then also it seems like it's pretty good 2Q Got it. All things considered, so just kind of maybe quantify that a little bit.
Thank you. We can't quantify we're not disclosing GMV by partner here. What I would point you to is we do disclose the near 500% or over 500% growth in the general merchandise category It does pick up a number of merchants, including Amazon, Walmart and Target. Those are big, All of which had growth and strong growth, but we're not breaking out GMV by part of it.
Got it. Okay. Thank you. That's it.
And our next question comes from the line of Reggie Smith with JPMorgan. Please proceed.
Hey, guys. Thanks for taking my questions. You have a slide in your presentation that shows 30 day delinquencies. And I guess, wanted some help kind of interpreting the data. So when I look at kind of pre pandemic, it appears that DQs kind of decline as the year progresses.
But when I look at 2022, it increased as the year progressed. And What conclusions should we draw from this charge? Should we expect things to kind of follow the arc of pre pandemic? Is that what you're suggesting? Or Our DQ is going to continue to kind of increase.
And I have a follow-up. Thanks.
Yes. So
There is a seasonal pattern to credit performance in our experience that relates to both the purchasing patterns consumers have as well as Certain key cash flow milestones like for example, the tax refund timelines. What you saw during the pandemic was a pretty big surge of available monetary supply And liquidity given to consumers, which really did affect pretty substantially what was the ordinary pattern that you'd expect to see. And so as we're kind of shedding all of that excess consumer liquidity, I think you're going to see a more normal pattern for consumer Credit trends in terms of the seasonality, and that's why we're referencing back to the pre pandemic periods. And if you see On Page 10 of our letter, you'll see us sitting around top of the FY 2020 pre pandemic trends, which We feel like it's again right where we'd like the business to be.
Got it. That makes sense. There is another slide. I think you guys hinted at the potential of raising kind of merchant fees. Obviously, interest rates have gone up a lot This year, but you've held your 0 interest take rates relatively constant.
Can you talk about, I guess, the process For raising those, is it kind of like a bolt and it goes out? Do you have a sense that there may be some Merchant pushback, I mean, everybody obviously recognizes that rates are higher, but how mechanically like how would that actually play out? And again, sensitivity, how sensitive you think merchants are to higher zero interest rates? Thanks.
So you're right. We have not generally speaking moved prices on either consumers or merchants to date. I think everyone but everyone understands that our largest supplier Increase their price 3 fold, as Michael put it the other day. And at some point, one does pass the cost on to their customers. The process with merchants is a little bit different based on the type Of the partnership.
So obviously, some of our largest merchant GMV segments come from Platform partnerships like Shopify, others are individual platform like entities, e. G. Walmart and Amazon, and then there's a whole list of directly integrated folks that are Either on the platform or not, but we have a indirect relationship, there's no third party platform involved. Those are probably In the case of fully directly integrated folks, it's a notification and there's different contractual Time lines that we've committed to giving them notice change of price. Obviously, they have some ways of reacting, for example, liquid virus In some cases and other cases, they can try to negotiate, etcetera.
In the platform And they're really large sort of quality platform merchants. Obviously, it's a little bit more of a conversation because they are responsible for a whole host of Underlying merchants that have and have other financial relationships with those folks. So a lot of times it depends a little bit on their schedule of raising their own prices, which They may or may not be thinking about. And so the merchant side of the equation is a little bit slower moving. The consumer side, we Obviously, we have quite a lot more control because obviously every transaction is underwritten and the price can and does change based on credit quality and what we're seeing, etcetera.
And We have to follow a fair lending law, so we can't change on one person or the other. So there's a fair amount of consideration there. All that said, We've done this before. At the very beginning of the pandemic, we went to our merchants Ann told them that we have no idea what's going to happen next, but we expect our risk to go up very substantially, and therefore we will price it in with them. At that time, I think exactly 0 merchants fired us or did anything but say, we get it.
We're going to work with you because it's important for us Continue selling. So feel pretty strongly about our ability to command fair price for our products and include the fluctuations that we see in our supply. But it's not an instant switch, but it's something that we've done before. We're very confident we're able to execute on if we should decide to do so.
And I would say that the tone from a lot of merchants right now, there's 2 pieces that are tugging around this conversation. One is, it's a lot of focus on margin And all of our merchant partners and clearly anything that's perceived as an additional cost is under a lot of scrutiny. On the other hand, I think a lot of are looking at their own outlook for the holiday season into early part of next year and are looking for ways they can get back Some of that growth in volume they had before. Those two things always net out to a good deal that Allows us to give the economics we need and drive the volume that we need to them, but it isn't unconstrained because markets do have real margin constraints that is right now.
Got it. Can I sneak one more in real quick?
Yes, go ahead.
Got it. Perfect. Obviously, you guys report your reserve rate and it was down sequentially. I'm thinking about like how am I going to explain that to investors and the things that come to my mind are, you've got more repeat customers, you've got a better view of the customer. And then also your average life of your portfolio is only 9 months now.
Is there anything else I'm missing there? What else can we add to maybe address concerns about a declining reserve rate?
Yes. Again, I would start with first just how we think about the reserve. I think some financial institutions have a team of economists who are thinking about the state of the consumer and trying to make a forecast with the reserve. If we did that by the time we got the answers from the ivory tower, The loans would have paid back. Instead, what we do is we look at the actual performance of the loans and we look at the ITAC score, the credit score that we get loans when they're originated And use those two things to indicate how those loans will perform.
And then we look at whether or not those predictions of performance are holding up. And that's very math driven. We're not sitting here with a lot of judgment up and down or prognostication about Future trends and deterioration in credit, it's very math and model driven. And if you look at, for example, again on Slide 11, or Page 11 of Page 11 of the letter, take our paying for loan performance. You see pretty material reductions in the credit losses that we have for our paying for product.
While it does turn over very fast, it isn't the biggest part of our allowance, it is all on the balance sheet and will continue to be and therefore has As you improve the quality of losses in that product, you're obviously going to see less allowance needed for it. And Similarly, I think a lot of the stress that we talked about starting to see in the end of our last fiscal year, the mitigates that we took resulted in us Originating a higher quality asset going into this quarter and into the back half of this year and that higher quality asset, Matt, who suggests it has a lower loss content. It's a good thing. It's not a bad thing. It's a very good thing that we estimate less losses And the loans that we're
originating. That's helpful. Thank you.
Our next question comes from the line of Chris Brendler with D. A. Davidson. Please proceed.
Hi, thanks and thanks for my questions. Let's start with another one on the credit side. Can you Quantify it all, obviously, it's a more difficult environment across a number of issues. But for consumer credit and through the tightening You've done these delinquency trends are really impressive just given all the concerns we hear about the consumer. But how much of an impact does that have on your Growth forecast maybe for this year, I don't think you really changed your guidance that much on GMV.
So is that a factor or is there enough demand that that's offsetting
There's definitely an impact of credit on our volume. It's just Nowhere near as substantial as I think some folks might think. The far bigger impact in the update in our guidance is the impact that we saw from Peloton. When you You take a business that has a lot of headwind like that, we thought we were being pretty conservative in our outlook for This year, I think that it's underperformed even where we had set that bar. And that's the biggest driver of the reduction In the guidance for the year, we haven't given a way to quantify it, but we don't take that, for example, The movement in the guidance is because we sequentially have tightened our view on credit.
Okay, great. Super helpful. A follow-up on That areas of demand and on the other side competition, I have to believe and I think we've certainly heard some competitors are struggling a lot more than Affirm is. So are you seeing any benefits Yes, as you talk to merchants of the froth coming off in an improved competitive environment and I'd love to hear sort of like Your I guess, take your temperature on your ability your sort of the thinking as you talk to merchants, is that going to be a conversation that you've already started? Is that still on the come?
Thanks.
I'm going to try really hard not to sound glib and spike the football and the victory laps, etcetera. The short answer is yes.
I've been saying this
for a long time, the Warren Buffett quote about Tide coming out and noticing that some people are swimming without trunks on. I wouldn't exactly classify our state of affairs as struggling, but I do believe some of our competitors are. And it is accretive to us. We have merchants coming in and saying, hey, would you guys consider side by side with a competitor? And we're in the past, we would come in and Ask them, would they consider it?
And they said, they were fine. The approvals are good. And now approvals are not. And ours are still doing quite well. So that just makes it that much easier to take share.
Sometimes side by side, sometimes, and I probably could rattle off a handful of brands that are turning us on Either instead of or alongside some of our esteemed competitors because they feel the need to continue driving their top line and the competition no longer can Approve as well as they used to. So yes, it's been quite helpful to us. So long as we continue hitting our numbers on credit, which we absolutely tend to do and keep approvals high, which should give you a sense that all these Quarters, I've been promising that the curve is really steep. We need to move our GMV just a little bit to reduce our prospective losses by a lot. Yes, it seems to be working out the way we promised it.
So unless it keeps going, we'll continue taking share. Awesome.
Thanks so much and congrats on a tough environment and also thanks for all the disclosure on the credit. It's really helpful. Thanks.
Thank you.
Our next question comes from the line of Kevin Barker with Piper Sandler. Please proceed.
Thanks. Thanks for taking my questions. I just wanted to follow-up Considering your guidance, you've tightened underwriting, further slow to pay, but obviously a lot due to Peloton. But when you look at 2023, are you assuming what the base case is for Unemployment and whether it's slowing in spending or are you starting to put in place additional measures To assume that unemployment is going to spike or there's going to be something worse than what we expect beyond what most economists have in their forecast or the Forward curve indicates there's just something there that you're anticipating and managing for?
I'll start on the credit side and Michael probably has comments on the rate side of things. So We are anticipating some degree of worsening on the credit side of things. That said, We really concern ourselves with the next 4.5 months Volume. That's just really, really important to communicate. Our ability to manage credit to the numbers that we choose Is a consequence of our ability to underwrite.
We get the data sources that we need and make it do it very quickly, but But probably the single most important structural part of how we're different from everyone else in the market is we have very short term product. We're not granting lines, which means that a credit decision we made today, even if it's erroneous, will be the last time we made that mistake. And we're able to deal with a lot more demand that we choose to let. And so as consumers Feel more stretched. They come to us more often.
That does not change that we apply the same level of diligence And care to every loan that we underwrite. And so we are primarily focusing on making sure that our data sources are fresh, that our models react Correctly to the change in consumer behavior, which we have absolutely seen given just over the last 5, 6 years of operating, including the last 6 months of the current Macroeconomic volatility. So all of that is fed into how we underwrite, but our ability to weather the whatever incoming storm might be headed our way Is deeply rooted in the fact that we make very, very short term, relatively speaking, current decisions and we have no shortage The demand for our product. I'll pause there. I just wanted to add another point to make, but Michael has a few.
No, I just look, the way we approach it is always to take the current consensus or take the forward curve or a rate assumption. We don't try to cook our own. There's a number of scenarios that could play out very differently. As you point out, we could enter into a recession And have more employment. Of course, that would probably have come with less pressure on rates than we're probably currently modeling.
And the flip side is the rate environment could get worse and Employment could continue to be very, very robust. And I think we're trying to just be middle of the road here and be very explicit around. We're assuming that the current macro That's just where the business is what will play out, understanding that those forecasts are always wrong, but we have to base it off of something. And so Just like we did when we gave our guidance at the beginning of the year, we're going to peg it to the rate curve and as rates move, you should expect that to Our business is with the framework that we give in you.
That's really helpful. And then I appreciate the short duration of the product, obviously very
One last thing, Sorry, on that point, the point that I was going to make, I blanked on. So one of the other things we have because of the Adaptive Checkout, which we had the presence of mine to launch about a year ago, The menu of terms the consumer will see is programmatically determined by us. And so we have enormous amount of control over this 4.6 Average, the product isn't just in and of itself short. We also get to decide whether a particular credit quality applicant Seize the longest or longer durations versus the shorter ones. And so one of the things that you could say we're Preparing to do, although we don't have to activate right now, if we felt that the unemployment is about to spike or starting to go up really rapidly, we wouldn't necessarily pull in terms make the 4.6 average go down just to make sure there are fewer opportunities for our borrowers to default.
So that's another level of control That we have and that typically corresponds very nicely just from research and past lives with the shift from laundry buying to general merchandise People don't need to borrow quite as much and therefore shorter terms make
more sense than their cash flow.
And so this actually should not have the real impact on our take rate on Super sized, but we'll reduce our risk.
Sorry, Max, go ahead. Yes, I was just saying there's certainly quite a bit of advantage to having rapid velocity on your lending, and being able to shift. When you think about the RTLC guide for the back half of the year implying quite a bit of improvement, Do you feel like you could continue to hit that if things get worse? I mean, obviously, maybe there's a little bit of slowing growth and tightening underwriting, But you're going to focus more on profitability or does that get pushed out a little further, but still remains something that you can see in the future, at least in the near term on hitting some of those guidance.
I'm tempted to make some sort of read my lips joke, but I will not. We will hit profitability on schedule. We are not pushing off profitability. The product we're focusing on are about Creating more ROTCE, creating mitigating some of the rate volatility, but ultimately we feel very good about Our schedule, we are not suffering from any need to postpone our The equal destiny. I think I'm not supposed to say that, but I like the alliteration.
And the last thing is we take our guidance really seriously. We've put a lot of thought into it. And If our guidance move, it's because we think something has changed. And I think what we saw on the GMV outlook here is we talked about a pretty big impact Of Peloton and then obviously we're digesting a pretty big headwind in rate. There are certainly macro conditions that could make that goal and objective not come through, but we feel very confident as we sit here today.
Acts of God are not included in our guidance.
And our next question comes from the line of Bryan Keane with Deutsche Bank. Please proceed.
Hi, guys. Just want to ask on 2 popular questions we get. Just on approval rates, sounds like they stayed high, but maybe they were down a little bit In the quarter, maybe you can just clarify that and then the outlook on approval rates, what do you expect?
The approval rates actually stayed relatively flat throughout the quarter. In fact, they basically stayed flat for the last 9 months, if memory serves, with a slight uptick in the interim in the 3 months in between. The first three and the last three, we actually increased the real rate a little bit. And so maybe this quarter it went down a tiny bit. But this is sort of back to the products that we offer consumers.
So we have enormous amount of control over the actual shape of the risk we're going to take on. We generally speaking have a way of finding a way to say yes to a consumer or somebody comes in and says, hey, I want to borrow X $100 over Y months or weeks. In some situations, the answer is no, that's not going to happen because we just don't think we can carry this much Cash flow burden on a monthly basis. However, we're very happy to help you with the lower monthly number if you're willing to prepay The delta basically and that have dozen other levers that allow us to shape the risk we take and Make sure we meet the consumers where they are without adding unnecessary burden to our provision. So we We have been certainly very active in using those levers.
We do this at the merchant by merchant level, sometimes SKU by SKU level because we can infer Which products are getting prioritized, how in repayments and things like that. But to date, we have not needed to slam the brakes on approvals. And again, And I said it before, credit is job number 1. We will always prioritize managing to numbers that we feel we must hit to ensure Capital Markets partners See us as the best yield, most predictable yield generator for them, but that does not mean for us We have to turn people away at the door. It does mean that some people will have a slightly larger down payment request.
In some cases, if We will ask for more information. In some cases, this means that we need to see their cash flow data, which is somewhat burdensome, It's better than being told now. And so we have a lot of confidence in our ability to maintain rates. And while we don't generally speaking contractually agree To guarantee approval with our merchants, the reason they keep us hired, if you will, and the reason they like to hire us over our competitors because we always deliver On approval rates, 1st and foremost, and that helps them drive their top line and sales that wouldn't have happened without Affirm
Got it. No, that's helpful. And then maybe just an update, Max, on the Debit Plus product and the rollout there. Thanks so much.
Thank you for asking. I was wondering, somebody might remember. So actually, Again, I'm trying not to be glib. So one of the things that I could do a year ago as the Product in Chief And don't feel like I can now is for a lot of product with economics that I don't feel are fundamentally accretive to the business. So sometime I think in the beginning of last quarter or right around that time, we basically taken The wait list that we generated and given pretty meaningful number of people, so tens of thousands of active cards type level Cards to observe the usage.
As with every new credit product, you end up with economics you don't particularly like. And we spent the last 3 months just really chiseling away at all the various fraud vectors and loss possibilities and there's Whole bunch of new kind of losses that happen in DevOpus. There's obviously pre transaction, which is very similar to a Firm Anywhere product that we have inside the super app. There's the post one, which is where you swipe and then you choose to split, have a sort of 24 hour limbo where the transaction might turn into PayNow or could become PayLater. And then there's also insufficient funds, which is the pay now can become a default and right on.
So there's a bunch of new vectors, both intentional and unintentional losses. It's been the last 3 months just really making sure that we feel good about the economics of this product. We're almost there. I feel very good about it. And probably January 1 is kind of a realistic timeline when we're going to start pushing this forward.
Again, it's a product that It's brand new. We're not going to given today's reality of the question about our term profitability, Nothing will be more frustrating than saying everything is awesome. We're hitting every number except debit plus turned out to be lossier than I thought. So sorry about that. Profitability is postponed.
That will not happen. That said, I feel quite good about where the possibility of that product is today. I'll feel a
lot better in January. We have
a whole bunch more planned. And that's when we expect to start actually delivering these cards. And you will notice pretty easily right now to get To Debit Plus, you have to either be in the selected group where we promoted it or you kind of have to in a way. I mean, you can go in if you want it, but It's a little bit of work. The day you see your Affirm app feature a tile saying, hey, get yourself a Dettler Plus, you'll know that the first time to promote the product quite aggressively.
And Again, we're not including anything in our guide about what the cost will do for us in the volume or revenue on ROTC basis just because it's a little bit too hard to model that right now. But we'll probably be able to talk about it quite more quite a lot more in terms of the actual expectations starting next calendar year. Hopefully, at least the point about we will not risk our unit economics just to launch a cooling product Sooner than we're ready, gives people a good view to how we think about the economy today.
Our next question comes from the line of Mihir Bhatia with Bank of America. Please proceed.
Hi. Thank you. I'm on for Jason Kupferberg. I did want to ask just a couple of questions. First was in your If Q1 results in the Q1, I think you mentioned higher interest rates impacting gain on sale with pricing with certain forward flow Piyush, can you talk about that a little more?
Obviously, I mean, I understand interest rates are up. But just trying to understand how often does that pricing get Adjusted and is the lower pricing like going to stay until I think these agreements tend to be 2, 3 years. So just trying to understand, does the lower gain on sale now, You're kind of locked into those lower gain on sales for the next couple of years or what how does that exactly work?
That's a good question. Yes, The commentary is really about the year on year comparisons. The agreements vary. Some agreements are locked in for the duration of the contract. Some have regular repricing triggers and it varies from 6 months to even Floating arrangements, so we kind of have lots of different flavors, but I wouldn't we're not worried about being locked in At the worst rates, I think a decline in rates would be good for us and then.
Okay. Thank you. And then just wanted to ask about adjusted operating margin. The Q1 came in better than your guidance, But you've got and you I mean, obviously, the top line guidance is coming in a little bit, but you've also You're also slowing down hiring. Just trying to understand, was there something unusual about the Q1, like some expenses got pushed to the Q2 or something?
Just what's happening there? Anything to call out?
No. We did have a little bit of a benefit associated with some Some items that aren't repeatable throughout the course of the year, but the strength in the revenue less transaction cost is Combined with slightly below hiring plan, were the biggest drivers for us in the Q1. The reduction hiring plan is as much about managing the fiscal 2024 number as it is about Just think about the timing of the hiring that we have in the plan. Obviously, an employee we hire the last day of the fiscal year Doesn't really affect the profitability in the year, but it's extra cost that we take into next year. And I think the focus for us is to get our units As healthy as possible and to get the operating expenses as rightsized as we can going into next fiscal year when we feel like, we want to be as fit and lean
Our next question comes from the line of Eugene Simonian with MoffettNathanson. Please proceed.
Hi, guys. Thanks for squeezing me in. Just got one question on the consumer engagement with the platform. So your transactions per active users keep going up, which is great to see a great sign of better engagement. But even do the math of sort of dollars And per active consumer that keeps going down.
And I understand that there might be some mix factors in here, perhaps Peloton Influencing that, but can you talk about that trend a little bit? And do you see a path to getting consumers to Spend more dollars with your platform over time and how what are the levers you might be able to use to encourage them to do that?
So I think the there are kind of 2 competing vectors here. And to be completely honest, I track slightly different metrics. I care about average ticket size for every transaction And number of transactions per active user. Those are kind of my contours of our consumers engaging. And it is in fact the case that if you ask someone to spend more money Through you with you.
Sorry, if you're trying to convince consumers to use you more often, more transactions, You are absolutely signing up for smaller tickets, right? People aren't going to buy an exercise bike every quarter. They're going to buy maybe a couch once a year or so, but then you're really trying to get High frequency, which is certainly what we're chasing here. You're looking at things like apparel, maybe tickets, travel. And so we're very active in all those industries.
General merchandise umbrella name for everything you buy that kind of happens all the time. So, AUV is not just expected to continue coming down. It's an important measure of our success frankly. I think the growth of transaction Frequency per user is an indication of increasing spend in the pain for category, which is uniquely Suitable for these shorter term lower AOV transactions. And so that's where a lot of the growth is coming from.
As you might expect, we've dominated high AOV Longer periods for a very long time in the U. S. Markets. We're still very rapidly expanding into the short term lower AMV transactions. So I think in the long term, I care about trying to get to all transactions possible And I think that will naturally result in the most possible number of dollars spent with Affirm approved by any one active consumer.
But For now, we're just very focused on making sure that we're there for the consumer in paying for, in monthly payments. If the average Ticket size goes down, that's frankly a sign of success.
And I think that's really important on the math. I think the average maybe I'm not quite sure what math you're doing and how you're looking at it, but the averages can really lie here. Dollars 1 $2,300 purchase And look like a lot longer share of wallet even if it's not repeatable as opposed to those consumers who maybe would never entertain a $20,000,000 purchase. I I think for the consumers that are engaging on our platform today, we definitely believe we have a higher share of percent.
Thank you. And our final question comes from the line of Andrew Bausch with SMBC Nikko Securities. Please proceed.
Hey, guys. Thanks for taking my question. Just looking at the Affirm share of U. S. E commerce spend and this kind of dovetails with the prior question.
Is Growing above the 2% in fiscal 'twenty three and beyond and the trajectory of that, is it More of a function of you making progress on the consumer side or is it more around The continued expansion of wallet within merchants, I know they likely go hand in hand, but any other color you
could provide would be great.
We are building a network, and
that one begets the other and back. I guess the
I was doing pretty good earlier today about Olga getting 2% of e commerce and now I feel I got to shop with more soon. The good news is that we are currently integrated at about 60% of all U. S. ECommerce. So We can increase that 2% penetration by getting more share of wallet with the merchants.
Our merchants really depend on us In these inflationary times because consumers need to stretch their dollar and where they're for them and we have a really healthy business that is generated from our own services in Our app, that some of it is merchant integrated, but a lot of it is not. Still, very excited about what DovGlass will do for us. It sends us into things like daily purchases where we don't play today and importantly gets us to offline, which is not included by 60% number And for us is a nicely growing, but still very, very trivial amount of volume. So we have lots of ways of getting above that too. When we get there, we'll I'll spike the football again at that point.
And just
looking at the industry mix,
I mean, one
that 3 mix. I mean one that kind
of sticks out to us is
a pretty sizable opportunity that could grow over time would be the travel and ticketing segment. Thinking about getting further into airline purchases or hotels, maybe you could just speak about that, the vertical inside that opportunity and What obstacles or potential like roads to taking that 12% up over the next couple of years could be?
I agree. It's a great opportunity. I think it's a wonderful place to apply what we have to offer. We have a handful of really good partnerships in the travel industry today, both in airlines and Those are probably least penetrated from our point of view. We have a bunch of online travel agency integrations that
we've had for years years and
have done extraordinarily good work with them. Direct integrations with airlines is a little bit newer and there's more to do there as well. The cool thing about Travel in general, it's kind of a sweet spot for what we know how
to do. It's a sort
of thing that others teams really do it very well. All these things including I'll start far, but I'll get her in a second. But if you look at the work we've done with some of the largest big box retailers And with the platforms and now we're looking to do with hotels
and expanding our work with
OTAs, It is inevitably a thing you do not as much in credit and underwriting and understanding the consumer use case as you do in product. I'll give you a very precise example. Hotels, you sort of think back to the last time you checked out, you can check out, except a lot of times you don't check out. You leave the key in the room and you walk. So the actual exact mechanics of this transaction is now real.
We know the total amount and now you're going to turn into a loan and you'll pay it over time. Just very, very different between hotels and buying a couch. And so inevitably to do this right To do it well, to convert a lot of consumers to really deliver the value that our merchants expect us to, we have to build a product that is fine tuned to That particular industry and all of our long term growth opportunities are built around our ability to create products that are unique And are very hard for others to replicate. So I feel very strongly about it. Obviously, for a long time, I used to say Affirm is a machine engineers in Our LPC out was being very careful with hiring.
So maybe some of these opportunities to get even bigger and faster We'll apply the right amount of discipline to it, but definitely very sad about travel and there's probably 5 other industries that can rattle off immediately where Just the
right product and we'll break through and become bigger