Affirm : AFRM JPM TMC Conference Transcript 05.13.25

Published: 2025-05-20 12:40:07 ET AFRM

Published on 05/20/2025 at 12:40

53rd Annual J.P. Morgan Global Technology, Media and Communications Conference

May 13, 2025

Call Participants

Michael Linford, Chief Operating Officer

Reginald Smith, Equity Research Analyst

Presentation

Good afternoon. I'm Reggie Smith, I lead our fintech research effort here at J.P. Morgan, and I am pleased to interview Michael Linford, COO of Affirm, this afternoon. We're just joking about this is our first time in the big room with the big lights. And so bear with us as we kind of work through the kinks.

Michael, good to see you. How are you?

I'm well. Thanks for having me.

Good. Good. Good. I guess I'll jump right in. You just reported results last week, another strong quarter of GMV growth, revenue growth. Maybe talk about some of the highlights from the quarter, the things that stood out to you that may or may not be appreciated by the Street.

Yes, I think it was an incredibly strong set of results. GMV accelerated for the third straight quarter. And within the quarter, we saw acceleration towards the back end of the quarter, actually through the first month in this quarter. And so we're coming up now on a year of sustained acceleration, which is just pretty remarkable for our scale point, and that came in at 36% growth, revenue in line with that. Our measure of unit economics came in at 53% year-on-year growth, above the 3% to 4% range we talk a lot about.

So really strong units, really strong GMV growth and operating margin. We were right in line with where we thought we needed to be on our adjusted operating margin. We also reiterated our commitment to getting to profitability on a GAAP operating basis in Q4, and began to give investors a range to expect there. And so really doing everything we could ask of the team, we're delivering the top line, the top of the funnel and GMV, sustaining really strong unit economics at GMV, and driving operating leverage out of that.

Meanwhile, if you peel it back a little bit underneath the surface, you had 20% growth in users, 20% growth in frequency, the strength here isn't coming from small pockets. It's coming from broad-based, really healthy network dynamics that are being reinforced with the kind of offers we can give consumers and what we can do for merchants. That's a lot of really healthy indicators for the business. And yes, we feel pretty front-footed about how we're operating in this market right now and really feel like it's very differentiated versus competition and versus people adjacent.

You gave me a lot to dig into there. The first thing you said that caught my ear was that things, I guess, got stronger as the quarter went on and even into, I guess, April. Maybe talk about that because the stock, obviously, since you guys reported 4Q results or calendar 4Q results, had sold off, there were concerns about consumer. What do you think is behind the strength?

Yes. We always think about the consumer on both the credit side and the demand side, and the demand side is clearly very high right now. I think there are a number of factors there. If consumers are out

shopping and it does look like they are, then of course, we have more at-bats to offer our products, that's a good thing. But also when consumers feel the need to be thoughtful about how they pay for things, we serve that really, really well.

I really believe that we offer certainty in uncertain times. And I think if there's one word we can all agree that describes the current macro environment, it's uncertain, and that uncertainty is felt by consumers. You've seen a lot of people talk about pull forward of demand. And I certainly think there was -- there's some of that going on in our business but again, the acceleration started 3 quarters ago and is really sustained. And so there's something else going on as well, which is the longer-term trend intersecting with really good distribution of our product, really great progress on things like the card that result in meaningful growth.

In terms of the consumer sentiment, which I think you're kind of getting at, it's -- I read the same things everyone else does. It certainly looks like sentiment is pretty low, and it's inconsistent with what we see in wage and employment data that suggests there's just -- there's a lot going on in the mind of the consumers. You look at credit results, you look at demand, and both those two things are really in line, and that gives us permission to continue to be very much aggressive at taking market share.

I guess thinking about that, you guys sit in a very unique place in that you see a lot of consumer you see demand on the purchase side, you see credit quality. I guess, as we kind of roll through this year, what are some of the things you may look for that would give you a sign that maybe things are changing credit-wise or on the spending side? What do you have at your disposal to kind of think about and look at those things?

Yes. I mean we obviously look at credit and volume data daily. And we get a really good read of consumers, both new loans that we originated, what the first payment looks like and whether or not that's on time and consistent on a cohort basis with their expectations. And we also look at the back book. So loans that are maybe 2 or 3 payments in, how likely they are to be current or to go from current to not.

And whether you're looking at back book flow rates or front book first payment, everything is still very much in line with where we thought it would be, and that is the best indicator for consumer stress.

To be clear, unless you think we're cavalier here, we are absolutely obsessed with monitoring right now. The level of readiness that we have is very, very high because there's a number of scenarios that could play out and we don't want to be late to react. One of the things that gives us real license to continue to take risk and not be afraid of where the future may take us is the fact that our assets are really short in duration. And that gives us the ability to be really agile, but agility doesn't do you any good if you don't use it and so we have to be hyperactive in monitoring in times like this, and we are. So we would see signs of consumer stress if there were any, we think very, very quickly.

We would also see it potentially in the demand side, but the demand side is a bit of a more complicated piece because there is the first order effect of consumers spending less that would result to people not being engaged in the economy. The second order effect, though, is that more people will look for credit in those times. And so it's a bit of a mixed signal and harder to figure out exactly what the demand says about the state of the consumer. But generally speaking, if a consumer is out and they're able to be current in obligations and they're spending money like they are right now, we're able to serve them and grow our business pretty aggressively.

That makes sense. You talked about both new account acquisition and I guess engagement for existing accounts. I wanted to kind of dig into that. Thinking about the existing accounts, would love to hear -- and

this is a metric that has been increasing like almost every quarter. How are people kind of reengaging with Affirm, like after they take out that first loan? Like what does that look like? Maybe talk about it both off Affirm Card and on Affirm Card, so we can see how people are interacting and whether there's a difference in the types of people that look at either?

Yes. So a typical journey for an Affirm user is that they find us at the point of sale. They see us on one of our merchant partner sites. They're buying something that has enough of an order value where it makes sense to pay for that over time. They go through the application process, which is really quick and easy and convenient. And the loan gets approved, they get the things that they want and the loan is created.

The primary place those loans are serviced is our app. And the vast majority of Affirm users to complete a transaction download the app. And they do their servicing, you can check on the loan status inside the app, and that gives us a great chance to begin to have a conversation with the consumer. That conversation can be, "Here are other offers or merchants that we're available at." But it can also be, "Do you want to have an Affirm Money Account? Do you want to get the Affirm Card?" And those are all chances for us to continue to engage that consumer after they've acquired and successfully paid back a loan. And again, buoyed by really strong activation of the app, consumers definitely are biased towards beginning their relationship with us in the app.

And then you can -- that could be the end of it. You could no longer use the app for shopping and just use it for servicing and then find us in other merchants online. And again, it's super convenient when you're a repeat user, we already know who you are, we of course authenticate you and then the application process is quite quick on future loans and you could just repeat that way. And certainly, some of our users do.

More active users tend to find something that they want and originate transactions actually in our app. And it's a material part of our business and something that really gave us confidence to launch the Affirm Card because we saw a lot of users willing to start their purchase journey with us. And we then did a thing that we're not super proud of, but it's real, which is we injected a lot of friction. If you wanted to use our app, we generate a virtual card, and you can still do this today. It's still on our app. You generate a virtual card and then you've got to transfer the card number and the security code and the expiration date over to your checkout flow, and it's a one-time use thing. And so you're not memorizing it, you're not putting it in a wallet, you're just literally copying numbers over.

That's a lot of extra steps for consumers and yet, it's a material part of our business. And so we know that if we give folks a card, they could still do the same application for a loan every time they wanted to use the card and have this really killer form factor that just kind of works. And that was the impetus behind the card, and that's why the card houses some of our most active, engaged and valuable cohorts.

Speaking of card, I guess -- and we've talked about this in the past, but maybe an update on how people are using it, whether it's pay now, pay later, financing? Are you seeing any patterns there? And then maybe talk about the economics of each to you and how you guys think about it?

Yes. So there's a number of different modes in the Affirm Card. Most of the GMV today sits in pay over time and that can be both Pay-in-4 as well as monthly installments, 0% or interest-bearing. And those transactions make up most of the GMV because as you can imagine, it's the bigger dollar amounts that sit there. And those look, behave and perform like the rest of our lending products with the only difference being it's almost, if not entirely, repeat users.

So those users have had a successful transaction at Affirm. We know them. We've underwritten them based upon that engagement that we had. And so we have a real advantage, right? You're not having to factor in some of that first time, new-to-Affirm-loss estimate that you get when you're bringing new users on. And so as a result, those transactions are profitable for us and really rich, and we absolutely love them.

You also have pay now, as we call it, or more debit transaction types that can exist if you use Affirm Money Account or if you link your bank account. And those transactions are smaller in GMV, but do drive some level of regular use and frequency for the business. Although I would definitely say that the majority of what we're up to is about serving the more intentional purchases right now, with a lot of work yet to do on the pay now side.

Got it. There -- to this past quarter, we almost don't even ask you about it because we asked 100 times on your earnings report. There was a lot of concern, I'd say, about interest-free financing. It was a blurb in the shareholder letter, and we analysts just kind of attached to it. Talk us -- tell me about that, why are we overestimating the impact of that or overly concerned about that? Are you concerned about that at all? Should we be concerned about that?

I think you should absolutely care, and you should be really excited about it. I can't think of a better indication of the health of our network, our consumer and our company that we're able to extend and partner with merchants to enable 0% offers while we're operating above our long-term margin guidance, in a high-rate environment. I mean people forget this because rates aren't moving anymore. We don't talk about it, but rates are still elevated from where the company has been historically. And there's nothing more powerful than a 0% loan for consumers. It's sings.

I was sharing with you the story -- I'll paraphrase it for everybody. One of the things that we have done recently, it was a merchant and they were with one of our competitors. And we tried to convince them to turn us on because they're in a category that Max cares a lot about. You should read that as cycling related. And that's the thing, if there's bikes involved, Max gets into it. And he called that merchant CEO, and they said, "No we have this other competitor of yours, it doesn't really do anything, so we're not interested in spending more time on this." And so Max then said, "What if I could show you and demonstrate for you what would happen if you turn zeros on for the product?" He's like, "Yes, that sounds great, but I'm not going to integrate you on my site. It's too much work."

And so we said, "Well, forget it. We'll just do it in our app." And so we took over our app for about a 48-hour period in which we prominently displayed this merchant and showed the 0% offers for this category. And the lift was enormous. And we walked to that merchant and said, "Look at the data," and it was within weeks, we were signing a deal to boot the competitor off and get on that site. And that's because zero is a really powerful concept, and it really does convert really well.

And we have a big enough surface now, we can build a meaningfully large enough test where merchants can see that. Now, look, I think you have to have a margin profile to support it, you have to have a willingness to spend money on conversion and growth. And this merchant did, not every merchant does. And for a lot of time in the past 2 years, merchants have been in a mode of, I call it, see cost, shoot cost.

Anything they can do to reduce costs in their enterprise, they were doing because they were digesting a ton of change in the cost structure and dealing with uncertain times. But over the past couple of quarters, we've been able to have real meaningful progress in getting these programs in place, and this quarter saw a lot of that.

It's an incredibly positive thing, which is why we are talking about it. The only trade-off that exists is it is slightly lower on a take rate basis, but still very much in line with our long-term guidance and very much

Disclaimer

Affirm Holdings Inc. published this content on May 20, 2025, and is solely responsible for the information contained herein. Distributed via Public Technologies (PUBT), unedited and unaltered, on May 20, 2025 at 16:39 UTC.