Affirm CEO Max Levchin opened the company’s earnings call with positivity and pride – a far cry from six months ago.
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In a letter sent to investors prior to the call, Levchin took stock of the past year, reiterating the company’s commitment to reaching profitability. In May 2022, when rates were still under 1%, the outlook had been clear to reach the goal.
“In retrospect, we probably couldn’t have picked a more challenging moment to make this commitment,” Levchin wrote. Almost a year of job cuts followed May’s profitability promise, and in February 2023, the market wasn’t pleased.
However, on Thursday, August 25, it was apparent that this approach may be paying off. “Our disciplined performance over the last several quarters has earned us the right to return to a more aggressive pace of network growth while maintaining discipline,” said Levchin, opening the earnings call.
Growth was seen in almost all the primary metrics for the last quarter. Revenue had risen by 22% year over year, as well as gross merchandise volume (25%). Direct-to-customer business was at an all-time high, and transaction volume had grown 46% YoY, 90% of which were repeat customers. Active consumers using Affirm had continued to rise, and delinquency rates dropped during 2023 following 2022’s consistent increase.
Operating costs represented another positive outcome for the company. While general and technology expenses had increased since early 2022, their percentage of revenue had remained flat. In the past three quarters, all operating expenses for the company have dropped.
“We have been more productive than perhaps ever in our history over the last six months or so, certainly, last three,” said Levchin, commenting on the result. “We’ve really just built a lot of great stuff, and we have no intention of slowing down.”
Affirm Card Shows an Uptick
The Affirm card, launched in 2021, added to the positive outcome. The card, dubbed a “debit+” card, allows users to “pay now” like a standard debit card or offset purchases with similar terms to Affirm’s BNPL loans.
Levchin explained that in-store commerce is the “next frontier” for BNPL. “Frequency is the single most important thing we can focus on in terms of just building out the network. And most people still shop in stores at least as much as online or more, more like four times more. And so being offline is really important.”
While previous quarters had not shown significant growth, Q3 marked a change. In the last quarter, active consumers using the card jumped by just over 150,000. While 42% of transactions were “pay now” in Q3, 51% were interest-bearing, and the company found Affirm card users made transactions three times more often than average for Affirm products.
“(Our goal) is to make Affirm card, the top of wallet device, which means that whatever your percentage of paying out transactions is, I want them all,” said Levchin. “And whatever it is you might usually put on your credit card, I want you to put it on the debit+ Affirm card.”
He explained that the rollout for the card was only in its early stages, and the company would continue to launch developments that he felt would bring them on track to reach this goal.
“We are working on all sorts of great reasons to make Affirm Card our consumers’ primary card: special deals from our vast merchant network, exclusive 0% programs, new payment plans, and rewards,” Levchin wrote. “Frequency is being there for all purchases, not just a handful per year, and the Affirm Card is a big leap toward that vision.”
“Modest headwinds”
Both Levchin and Affirm CFO Michael Linford conveyed confidence in Affirm’s future profitability, a welcome change from previous quarters. Linford wrote in Affirm’s investor letter that the company was on track to “be profitable on an adjusted operating income basis for the full year FY’24.”
Analysts, however, turned to the wider landscape for BNPL, questioning its effects on Affirm’s future success.
The pause on federal student loan repayments is set to lift in September and is considered likely to affect consumer spending. During the earnings call, an analyst from Barclays asked how Levchin expected it to impact the credit environment. Levchin explained that the recommencement of student loan repayment posed only “modest headwinds” to Affirm’s growth.
“It’s priced in, if you will, to our numbers,” he said. “We don’t think it’s nothing, but we don’t think it’s very significant either.”
The CFPB has also increased scrutiny of the BNPL market, in March publishing a report on the characteristics of BNPL consumers. Globally, the sector has been hit with new regulations, and some expect the US to follow suit, particularly for credit reporting. Analysts questioned Levchin about how increased reporting would affect Affirm’s outlook for increasing the frequency of use of their products.
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“Credit reporting is a really important piece of the puzzle,” said Levchin, commenting on the prospect of increased regulation. “We want to make sure that consumers benefit, those that pay us back on time anyway, from their timely repayment in their credit reporting.”
He explained that Affirm was working with the CFPB to ensure regulations could account for credit reporting standards while preserving the benefits of BNPL.
“Part of the work we have done…is actually making sure that the way this is reported is reflective of the factual usage of the product, but also does not unduly punish or reward consumers through outcomes of the scores,” he said.
While Levchin acknowledged the challenges of the macroeconomic landscape were far from over, he felt confident in the company’s ability to grow during the coming year.
Forecasted revenue for the coming quarter was set between $430 to $455 million, and transaction costs between $255 to $265 million. Both provisions remain in line with the last quarter.
“Macroeconomic headwinds persist, and more challenges are certain to come, but I think we have proven that Affirm has the talent and the grit to take them on,” concluded Levchin.
