2023-09-14 12:35:22 ET
Affirm Holdings, Inc. (AFRM)
UBS 2023 Fintech Leaders Conference Call
September 14, 2023 7:30 AM ET
Company Participants
Rob O’Hare - SVP, Finance
Pat Suh - SVP, Revenue
Conference Call Participants
Rayna Kumar - UBS
Presentation
Rayna Kumar
Welcome, everyone. I'm Rayna Kumar, and I lead U.S. Payment Processors and IT Services Equity Research at UBS. And today it is my pleasure to welcome Rob O’Hare, Senior VP of Finance at Affirm and Pat Suh, Senior VP of Revenue at Affirm. Thank you both for joining me today.
Rob O’Hare
Thank you so much for having us.
Pat Suh
Thank you.
Question-and-Answer Session
Operator
[Operator Instructions]
Rayna Kumar
So, Rob, if we could start with you. For audience members who are unfamiliar with you, can you please introduce yourself and tell us a little bit about your background and your role?
Rob O’Hare
Sure. So I've been with the Affirm for about three years now and I sit on our executive team internally and then work across five sub-functions within finance. So I cover strategic finance, which does all of our financial forecasting and planning. I lead corporate development, which does all of our M&A work. I lead merchant pricing, which sets our go-to-market rate cards with larger merchant partners. I lead investor relations and then also work across procurement. And before Affirm, I was CFO of a couple of smaller companies, one of which, Spark Networks is a publicly traded company. And then started my career earlier in financial planning and investor relations at Pandora and Square.
Rayna Kumar
Great. Okay. So starting at a high level, we're now nine months into the calendar year. Macro has remained fairly resilient, but there are some signs of consumer stress. Would love to just hear how you're thinking about macro and some of the key items you are looking for here.
Rob O’Hare
Yes. Obviously, we keep an eye on the macro, we are always looking at, the forward rate curve and always looking at employment figures as well. I think one of the nice things about our model and where we sit from an underwriting perspective is that we're able to re-underwrite the consumer every time they transact. So although macro is, of course, important to us. Really, we're actually driving the business based on the repayment data that we see. So we don't need to prognosticate too much out on the macro because we create a really valuable and always work to -- asset and we're able to cost work pretty quickly if we start to see signs of stress from the consumer. And so what we've seen so far is that while there's been inflationary pressures on the consumer, and that has created some stress on repayments, employment is still incredibly strong, and the repayment data on our side has been really resilient.
Rayna Kumar
And you have five core product offerings long, short interest-bearing and 0% APR, Pay-in-4, and the Affirm Card, interest-bearing products now represent about 70% of your GMV mix. Can you talk about the trends in your product mix and corresponding merchant fee rates over the past year?
Rob O’Hare
Yes. I think one of the nice things about Affirm is that we're pretty indifferent in terms of the sorts of loan products that we offer at a merchant's point of sale. We can be really flexible. We have the ability to use all parts at any of our purchase. So growth, we’ve seen in terms of the mix moving into interest-bearing, has really been driven by some of our larger partners. We also added interest-bearing loans to the Shopify program about 15 months ago now. And so that has helped drive us on the interest-bearing side as well.
Rayna Kumar
Got it. You are currently in the process of implementing a higher 36% APR cap across your merchant base, as of July, approximately 70% of interest-bearing GMV is offered at the 36% rate. Can you quantify the economic risk potential from this pricing action?
Rob O’Hare
Yes. I think it's important to remember that as we've raised the APR cap, we're going to start to see new originations benefit from that higher cap, but it'll take a couple of quarters for the entire book from that higher interest cap if that make sense, cap load that I have stated today that predate the cap at some of these larger merchants and some of these programs. So I think the rough math is that as we move from a 30% cap to the new higher 36% APR cap, we will -- you'll have to apply sort of the weighted average life of our loan which is about half a year. So it won't be a full six points if you denominate it on a GMV basis. It'll be about half of that. And then ultimately, we haven't guided to a terminal rate for how much of the portfolio we will move to the cap. But we think we have a lot of headroom still from the 70% that we were at as of June 30th.
Rayna Kumar
Got it. That's very helpful. And, Pat, let's go over to you. Maybe just like Rob, if you can just introduce yourself. Give us a brief background and I think tell us a little bit about your role.
Pat Suh
Sure. So my name is Pat Suh. And I am the SVP of Revenue at Affirm, I have been at Affirm about eight years, which in dog years has been quite a long time. But I managed the Client face and teams, so sales, client success, and market place teams, so our field teams that meet with our merchant partners today. Previously to Affirm, I was working in SaaS security and SaaS products IT, I was at Microsoft for quite a long time. Actually, in New York, so covered a lot of the banks here as well. So it's a good merger of financial services, payments and technology. So really happy to be at Affirm for a while.
Rayna Kumar
Wonderful. So, Pat, maybe just talk about some of major initiatives that you're focused on in the near term.
Pat Suh
So as Rob kind of talked about some of the products, we're very excited about the low AOV space first of all. So our bread and butter has been highly considered purchases, higher average order of values, but we've been moving over the last few years, especially during the pandemic in to the lower AOV space. These are lower price points, we’ve recently signed couple of retailers like T-Move, SHEIN, some of the top downloaded apps today. So we're very excited about really expanding into these smaller item purchases. We're also looking at expanding into categories, other categories such as healthcare, groceries, so we're already looking at expansions there and extending our reach into those broader categories.
We are also looking at in-store, so our strategy with the card and expanding into in-store properties, I mean, 85% sales is taking place in store. So we unlock that through our new products and the card, so we're excited about those expansions. And then finally, our distribution partnerships. So we continue to work with like Amazon Pay, Worldpay, where our integration become very easy. These are platform players where someone can enable our technology such with a flip of a switch, so those are all our main initiatives for the next coming years.
Rayna Kumar
Understood. Could you talk a little bit about the competitive landscape, how you view it right now?
Pat Suh
Yes, I think as we're looking at BNPL, there's probably a couple ways to segment it, but like Pay-in-4, that's probably where it's hyper-competitive, where you probably see most of the press, that's where most of our competitors are. So that continues to be competitive, mainly because there's less barrier to entry, it's less underwriting to be honest. So we're seeing a lot of competition there from those that are able to enter into that market where we've been sort of having our competitive advantage has been in our traditional higher average order value space because of our underwriting, because of our decade of experience in this, and like Rob was mentioning, repayment data, et cetera, we're able to underwrite better than anyone else, so competitively we're the leader in anything that's of a higher average order value and considered purchase. So competitively we don't see much competition there. I think lastly, like, even with the card, I think we're being kind of innovative, so competitively, we're really pushing the envelope in what we're doing.
Rayna Kumar
Could you see as your competitor card space?
Pat Suh
I think there's actually a gap we saw between, say, private-label credit cards, credit cards, and debit cards. We're a unique offering that allows a debit card user today that doesn’t get the ability to manage their cash flow, that ability to take that on to manage their cash flow. And then you have the physical card that you can take in store. So really, we don't see many competitors at all.
Rayna Kumar
Okay. And tell me little bit about your international expansion opportunity and how do some of the international markets that you're working at compared to that of US?
Pat Suh
Yes. We're still, yes, we're continuing to look to expand. I think the UK will be first on our radar as the next area that we've announced we're expanding into. And we're always looking for new regions that can extend our range. As I look at the differences, I mean, obviously, the US is the biggest market for BNPL, so we've certainly started here. So we're concentrating on expanding our footprint here. And elsewhere, it looks like much more Pay-in-4 than BNPL players, less, longer term and installments that we do. So I think as we expand into that we'll have also the same advantages we have as in the US internationally.
Rayna Kumar
Understood, okay. So Affirm recently announced partnerships with World Pay and Amazon Pay. How does Affirm think about distribution partnerships longer term?
Pat Suh
Very big part of our strategy, because if you look at the integration piece, it's almost nil. You can activate just by integrating with these partners, our integrations with these partners allows us to just within their portals be able to flip the switch to turn them on and activate different technology. So these platform plays, like you mentioned, World Pay, Amazon Pay, Shopify they are all native integration allow a merchant to just flip it on. So when we think about the long tail merchant base, very easy to activate, no integration on their part and we are able to get, really lessens our time to work with those partnerships.
Rayna Kumar
Understood. How are we bringing that in-store spending for Affirm and how does Affirm plan to win in short term?
Pat Suh
So I think, in-store is definitely a big part of our expansion, like I mentioned, the 85% of transactions being in-store. So we are continuing to invest there. I think the two main strategies, one is the card, so taking BNPL, putting that in a physical form factor that you can take in-store is just really powerful. Very limited, less friction, it's a familiar form factor. And from a merchant perspective, there's no training involved, really, in having to accept the card. And then native point of sale integration, like a Shopify in-store, allows us to expand very quickly with any point of sale systems that people provide in-store. So those are the two pieces of our in-store strategy.
Rayna Kumar
Got it, okay. And, Rob, I want to move over to you, and this is also about the Affirm Card, represents a meaningful opportunity for you, as Pat just mentioned as well. You've had a number of quarters of steady increase in Affirm Card user. What’s driving the surge in users?
Rob O’Hare
Yes, I think really, it's a decision on our side. We've got, we are fortunate to have a base of active consumers of about 16 million. Affirm is very much a second use product where we're driving that product into the base of consumers that already know and use Affirm and so it's been up to us to sort of roll that out. And we've done a lot of work behind the scene to make sure that we get the product economics right, that we get the conversion follow right when we do mail out card to a user. And so as we’ve seen positive datapoints on those two work streams, we've started to put our foot on the gaps a bit more and then grow the cohorts of new card users.
Rayna Kumar
Got it. And do you think this growth is sustainable going forward, that we saw in the previous quarter?
Rob O’Hare
Yes, we've -- it’s been pretty steady -- it was pretty steady over our fiscal fourth quarter, which ended in June. And we're really excited about the uptake that we've seen and just the usage that we've seen once people have a card in their hands.
Rayna Kumar
Understood. As of the fourth quarter, 80% of Affirm Card GMV and 50% transactions are in the form of interest-bearing loans. How do you expect the pay now, versus pay later mix to evolve over time? And how should this impact your RLTC margins?
Rob O’Hare
Sure. And maybe just to give a quick primer on the card. So, the Affirm Card sits on top of a consumer's existing bank account. And then from there, there's effectively three different ways that a consumer can use Affirm Card. So the first is the use case that we call pay now. And so these are everyday get it swipes. The economic model for Affirm there is that we collect non-regulated interchange. So a much lower take rate that we see in the rest of our business, but that's very much a new service area and a really large opportunity for Affirm. So we've found a way to make sure that those transactions are dollar accretive to Affirm overall, and we'll still make a small margin there. It just won't be at quite the same profile. But we think that adds a lot of frequency. If we're successful with that part of the card, we expect to have the card be top of wallet and drive a lot of engagement with our base.
And then for the, what we call pay later transactions, it's really a mix of two product types. It'll be some Pay-in-4 transactions and then as we posted in Q4, so far, the majority of the financing has come through interest-bearing loans. And so how we divert the financing side across Pay-in-4 and interest-bearing, we, I think we've got a really good model to optimize those transactions to make sure that economically we stay in line with the rest of the portfolio and so if we are fortunate to see more pay now volume, I think that'll drive really nice frequency within that consumer base and we think that's a real positive but it could result in slightly lower economics overall for the card but I don't think it'd be a meaningful drag on the portfolio at large.
Rayna Kumar
Got it , okay, with the exception of Affirm Card, Affirm has primarily focused on consumer lending products for some of your competitors like PayPal and Block. The buy now, pay later product offerings are just one part of a broader financial services ecosystem. Have you contemplated making a bigger push into more traditional financial services and payment solutions there?
Rob O’Hare
Certainly. I mean, I think we're still really early in the journey on the Affirm side. We haven't shared too much beyond card. So I think card is really the next product initiative that we want to drive in fiscal ‘24. And I think card shows that we want to mean something to all of our consumers transactions, whether it's finance transaction or everyday spend. And so I think we still got an incredible opportunity to optimize that product next and we got some interesting things going on the international side down the road. And so yes, that's what we're focused right now.
Rayna Kumar
Understood. The direct-to-consumer business represented about 25% of your GMV in FY23. Can you talk about the importance of your direct-to-consumer business and spend some time discussing the economics versus your partnership business?
Rob O’Hare
Sure. Yes, I mean, I think the great thing about the direct- to-consumer business is that it shows where Affirm sits in the shopping journey for a consumer base, right. The majority of the transactions on the direct-to-consumer side are really starting on an Affirm surface. And I think that's really compelling when we're out talking to merchants and talking about the incrementality that we can bring to merchants large and small. The nice thing about direct-to-consumer also is that it is a second use product, most consumers don't start their journey with Affirm on our direct- to-consumer services. It's something that they find after they've discovered Affirm at a point of sale with an integrated merchant.
And so because we're working with the base of consumers that have proven themselves to be good borrowers and who have paid us back, there's inherently less risk in direct-to-consumer transactions. We've sort of taken out some of the risks that come with the first transaction that we extend to a consumer. So that really helps a lot on the economics of the direct-to-consumer side. That's been true with our Affirm anywhere product, which runs on a virtual card. And that'll be true again with Affirm Card as well. So we really like that cohort of users. It's a way to drive a lot of engagement with a base of users that really trusts Affirm and loves the ease of use that Affirm brings.
Rayna Kumar
Understood. Enterprise partnerships are obviously a key component of Affirm’s growth strategy. Looking specifically at Amazon and Shopify, you've now been with these platforms for a few years. Can you talk about how these relationships are progressing and what is the remaining opportunities you see with both Amazon and Shopify?
Rob O’Hare
Yes, thanks. I think there's still tremendous potential at both platforms. When you look at BNPL and the US at large, I think it’s roughly at 6% penetration of e-commerce, and we're nowhere near that penetration rate yet at either of those platforms. So we think that there's an opportunity just to sort of catch up with the rest of e-commerce as we continue to optimize and scale those programs. At Shopify, in particular, we extended that relationship early last summer, and with that extension, we also expanded into interest-bearing loans.
And so I think that's a really good model for how we think about the opportunity with all of our large partners. If you remember, Shopify started as a Pay-in-4 only offering, and then we added interest-bearing to complement Pay-in-4 about a year into the relationship. And so we would love to bring that model to all of our large partners, where oftentimes a large partner is starting with a single loan product, and then we can expand into Pay-in-4 or add interest-bearing if it’s Pay-in-4 only product. So that's really the playbook that we are trying to run is to make sure that we bring the entire product set to a merchant that we are able to optimize it to fit within the context of their business.
Rayna Kumar
Are there other large partnerships that we can expect to hear about in the near future that replicate some of the work you've done with Amazon and Shopify?
Rob O’Hare
I mean, I don't think there's anything quite at Amazon scale or even Shopify's, but we always have, Pat's always talking to merchants, and we always have a pipeline that we're really excited about, so more to come there but nothing to announce today.
Rayna Kumar
Understood. Sticking with Enterprise, can you talk about how the economics and product offerings differ with these large e-commerce platforms compared to some of the smaller individual merchants?
Rob O’Hare
Yes, I think because we have such a wide breadth of product offerings, we can really meet the merchant where they are, right. Some merchants are very cost sensitive, in which case they want a lower cost operating for us that probably means an interest-bearing offering, interest bearing tends to have our lowest merchants discount rates. Other merchants are more focused on driving incrementality or they may be selling a higher ticket item or a higher margin item and they're more open to partnering on things like 0% APR, which in that transaction we're only monetizing the merchant side of things. So the merchant will pay us higher MDRs in that situation. So yes, I think we've been able to, like I said, sort of expand the offering with Shopify. We've done that in a profitable way and then similarly with Amazon, Amazon historically has been an interest bearing only product, but we don't think that’s end state for the relationship.
Rayna Kumar
Okay. We can now open the floor for questions from the audience. We have a mic going around. If anyone has any questions, raise your hand. And we'll bring over the mic. Okay, and if you don't, I have plenty of more questions. So that's fine as well. More time for me. Rob, your 2024 GMV guide implies a deceleration in growth, sustained low approval rates are likely a factor. Are there any macro indicators that would potential make you more constructive on your approval rates? For example, the Fed pivoting its interest rate policy. We think investors are looking for catalysts that would drive GMV acceleration here.
Rob O’Hare
Yes, as I mentioned, I think while we're obviously tracking all of the macro indicators, we really start our underwriting decisions with the repayment performance of recent cohorts, and that for us is oftentimes the best signal of stress or strength in the consumer base. So that's going to dictate how tight or loose that so we set the credit box and how we underwrite various programs. Really, the data, I think, is going to dictate.
Rayna Kumar
I know you have an upcoming Investor Day. Could you talk a little bit about what we should expect to hear?
Rob O’Hare
I'm going to be a little coy there. I mean, I think we're really excited to obviously share a bit more about card, which has been very top of mind for investors since we've announced earnings. In the last Investor Day, we did give an update on some of the economics in the business and how we expect to operate from a growth and profitability perspective. So I would expect that those are some tent poles for the event, but don't want to front run event too much.
Rayna Kumar
Okay. And both of you have spoken about some of the issues that are important to Affirm. Do you, could both of you maybe answer on how this M&A potentially play into some of your strategies?
Rob O’Hare
Sure, I'll start there and Pat can fill in. And I think if you look at the M&A that we’ve done historically at Affirm, and we've been relatively positive over the last three years, I think the most successful deal that we've done was really PayBright, which was a market leading BNPL provider in Canada, and Affirm is playing in such a large space being a US market leader that oftentimes it can be hard to prioritize the work needed to launch in a country, and with PayBright, we were able to buy entry into what is a really important market in Canada, and I think if we were to do future M&A, it would certainly, we would consider a buy versus build approach in some of the international markets that we think are interesting.
So I think that's maybe the easiest one to point to. Within corporate development, we also view our role as being an extension of the product roadmap. And so we can only get to so many things within product in the given year and so we are always partnering with product to understand what are some of the interesting areas that are maybe below the line for that team and out talking to the potential targets as a way to augment the in-house product resources?
Rayna Kumar
It’s probably most of it. Okay. Fair enough. I'm going to go back to the competitive landscape, and you both explained really well just the advantages that Affirm has in the market. Could you talk a little bit about who you actually view as your main competitors here and the different segments of your market, and how often do you run into Block after pay.
Pat Suh
So, I mean, I can start there. Well, I think what we submitted earlier, I think for Pay-in-4, it's the traditional folks that you've seen Pay-in-4, like you mentioned, Block where we, those are -- from our perspective, we differentiate in a way where we offer the Pay-in-4 offering, but we also offer installments, and so it's almost like paying for with these added extension and features. So what Rob kind of mentioned with Shopify, how we launched with Pay-in-4 initially, but then expanded into interest-bearing installment loans and longer-term loans. That's where we're really differentiated. So when we look at the competitors, no one has that offering. So we might compete on the Pay-in-4 space initially, but then we always look to kind of expand and broaden our offering. That really resonates with a lot of merchants where they want to have the broader spectrum of offerings. So even when you look at a team that we launched recently, their average order values are probably less than $50 today. We're seeing pretty healthy margins where I mean basket sizes where people are bundling these lower price item so for us, we feel like Pay-in-4 just one piece of BNPL and we're able to offer a broader offering to our merchants, so that's been helpful.
Rob O’Hare
Yes. And I would just add and when you think about the breadth of our product offering if that's interesting in of itself but it also means that we can profit by monetizing into an interest on the one hand and we're not dependent on purely monetizing the merchant side of the equation like the Pay-in-4 model would be. And so I think that's really interesting that allows people to be flexible in some of the enterprise discussions that we're part of. It also means that we have I think a pretty differentiated consumer base which compare us to an Afterpay or [inaudible] because they're playing predominantly in Pay-in-4, we bring a base that may have a different consumer type and so that gives us the ability to be incremental to either of those platforms. And some of the opportunities that we see in the market today, there is a side-by-side approach where the merchants may be looking to bring on an incremental, a second or third provider, and I think our network of consumers is really unique in that fair.
Rayna Kumar
And, Rob, you alluded to this before. As we both mentioned, some of your competitors were offering more consumer facing financial products, and you said in FY24, that was a key initiative. Should we expect announcements of newer consumer products throughout the coming months?
Rob O’Hare
I think we're really heads down on card and making sure that we maximize the card opportunity and then get it right, get it right with our consumers and then continue to invite new consumers to enter into that product set. So I think you should expect to see continued progress on the card front. But that's what I expect to share in the coming quarters.
Rayna Kumar
Okay, fair. All right. I know we only have a few minutes left, so I just want to ask both of you a final question. This is and actually, maybe it’s two questions. What are you both most excited about in the comings for Affirm? What keeps you both up at night?
Pat Suh
Oh, let me say, well not to beat a dead horse. I mean, I'm very excited about the card. I think, as I mentioned, it just unlocks, just a world of different. Channel stress is something that's very exciting in our merchant base, looks really asking about how they can leverage the power of the card within their stores and within their marketing so. For me being at Affirm eight years, it's exciting to have such an innovative product. And so that keeps me going, especially after eight years, just being excited about new product offerings and what's coming. I really do think we're changing the way people are shopping with buy now, pay later with our products. So that's what keeps me going.
I'm certainly worried about the macro pieces. I mean, less worried in sort of the sense that Rob's talking about for our business, with the consumer is pressured today, merchants are pressured, there's a lot of these external forces. So how that affects, trying to understand how that affects our merchants and being able to tailor our solutions for that. We've seen -- we've been able to kind of navigate that, but, yes, it is always overarching concern.
Rob O’Hare
Yes. And on my side, I would echo Pat's excitement about Card and then would also point to the fact that we delivered adjusted operating income profitability in Q4 and then gave guidance for fiscal ’24 that will do the same on a full-year basis. So I'm really excited to execute against that plan and to deliver results in the coming quarters. Yes, and I think in terms of worries, I mean really, it's such a tremendous opportunity, right? Like making sure that we prioritize the right things at the right time to make sure that we maximize the BNPL opportunity here in the US and then also in new markets. I think that’s half of the way, keeps me up at night.
Rayna Kumar
Great. Well, it's wonderful having both of you. Very insightful, thank you.
Rob O’Hare
Thank you.
Pat Suh
Thank you, Rayna.
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Affirm Holdings, Inc. (AFRM) Management presents at UBS 2023 Fintech Leaders Conference Call (Transcript)