Q2 2021 Affirm Holdings Inc Earnings Call

February 11, 2021

[music].

Good afternoon, ladies and gentlemen, thank you for standing by welcome to the affirm holdings fiscal second quarter 'twenty 'twenty One earnings conference call. At this time all lines have been placed on mute to prevent any background noise.

Following the speakers remarks, we will open the lines for your questions. As a reminder, this conference call is being recorded I would now like to turn the call over to Rob Ohare Senior Vice President of finance to begin.

Thank you operator before we begin I would like to remind everyone 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 Web site, including our prospectus filed on January 14th 2021.

Actual results may differ materially from any forward looking statements we make today.

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, todays call may include non-GAAP financial measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures.

Reconciliation to the most directly comparable GAAP measures can be found in today's earnings press release, which is available on our Investor Relations website.

Hosting todays call are Max Levchin, affirms founder and Chief Executive Officer, and Michael Winter, It affirms Chief financial officer with that I'd like to turn the call over to Mark to begin.

Thanks, Rob. Thank you all for joining us for our first earnings call as a public company.

We are pleased with our results for the quarter, which included revenue growth of 57% year over year, and a 55% year over year increase in quarterly gross merchandise volume to a record $2 1 billion as our product offerings continue to resonate with consumers and merchants alike.

In the second quarter. We also grew active consumers by 52% and our merchant base by 90% from the prior year.

Michael will provide more details on our second quarter performance in a few minutes, but since this is our first earnings call I'd like to spend some time, providing a brief overview affirm the industry tailwind is driving our growth and our strategic initiatives.

The firm was founded almost a decade ago with a mission to build on its financial products that improve lives we.

We knew that consumers were tired of the constant penalties like late fee that deferred interest from credit cards.

And we knew that merchants needed new payment solutions that could help them attract and retain customers, while avoiding discounted promotional gimmicks, which can dilute their brands and their bottom lines.

Since the beginning we focused on building a new kind of payment network. The first to align its own success with the success of both consumers and merchants.

Wins for our consumers and our merger partners weighted.

Last 12 months, we've empowered four and a half million consumers to take control of their finances, enabling them to pay for the things they want and need overtime almost anywhere in the U S. We've also help merchants drive growth by adding new customers accelerating sales and increasing conversion we've enabled over $12 7 billion.

In the past four and a half years and we've never charged a late fee or a penny of deferred interest.

Our approach has led to trusted relationships on both sides of the commerce ecosystem. Our payment platform has enabled us to advance our mission and enhance the role we play at the center of Commerce for both consumers and merchants.

Before I go into the details of what we have built so far and where we're headed I wanted to give you a sense for how consumers feel about affirm in their own words for.

For example, a military months, who otherwise would not have been able to attend the graduation of her kids told us to make it to the graduations I was able to get tickets to affirm and make payments and such extensive plane tickets that I would not normally be able to get it's been so nice payments are reasonable and the app is an easy to use.

Another satisfied consumer.

For a company to be completely honest about no late fees and working with you on timing of payments is a godsend I couldnt think affirm enough for being such a great company.

We have received many more testimonials such as these which validate our founding mission and empower us to deliver on that mission every single day.

Our platform consists of three core solutions, a point of sale payment solution for consumers and merchants commerce technology solution and our firm.

Our point of sale payment solution gives consumers controlling flexibility at merchant checkout after selecting affirm as a payment option.

Up to five pieces of information and then choose how they wish to pay.

Payment schedules include biweekly and monthly auctions in terms range from as little as six weeks to as long as 48 months.

Our merchant technology solutions help merchants from small businesses to the world's largest retailers more efficiently reach new consumers and drive incremental sales.

Not only do we enable merchants to address affordability and increase their customers purchasing power. We also provide them with valuable high quality data that they cannot get elsewhere.

This includes item level data prepayment data consumer behavior data and repeat purchase data.

These insights can be used to more efficiently target customers tailor promotions and achieve a greater return on marketing expense.

And third the affirm App also known as our marketplace is where consumers can discover relevant merchants and get exclusive offers tailored to their spending and shopping habits. In addition to being a great tool for consumers. Its also valued by merchants merchants love that their outreach can be highly targeted through placement on our app you can have a great vehicle for <unk>.

Customer acquisition.

<unk> also offers consumers and affirm virtual card that can be used almost anywhere in the U S. A simple interface, where they can manage their payments and a place to open a high yield savings accounts in the December quarter, approximately $1 2 million transactions originated from affirm properties twice as many as we saw in the same period last year and approximately one third.

Third of our overall transaction volume.

As we look to expand our current network. There are several strong tailwind powering our business and combining to create a massive durable opportunity for our firm.

Consumers, particularly millennials and Gen Z have lost trusted financial institutions and increasingly prefer a more flexible and innovative digital payment solutions in lieu of traditional credit payment options. In 2020. These younger generations represented over 160 million U S consumers with more than $2 five trillion in estimated spending power.

Additionally, every element of commerce is moving online.

Even as total worldwide retail sales declined by 3% in 2020 retail E commerce food, increasing by 27, 6% the significant change in consumer behavior, coupled with the fact that the cost to acquire a customer and convert a sale are two of the biggest challenges facing merchants are fueling demand for our firm.

By continuing to leverage our core strengths and competitive advantages. We believe we can capture an even larger portion of the ecosystem, we've set out to read that our proprietary.

Technology is custom built from the ground up so we don't have the constraints of legacy systems. This means we can efficiently respond to changes in the world scale quickly and innovate new products.

And we've maximized the value of our data to benefit our consumers and merchants leveraging item level data repayment data consumer behavior data and repeat purchase data to more finely priced transactions and personalized experiences all while managing risk.

Further our ability to service all transactions from low <unk> to high <unk> online and offline are flexible payment terms and a breadth and depth of our merchant and partner networks set us apart as a result, we see strong consumer satisfaction in calendar year 2020, approximately 67% of purchases were made by repeat affirm users.

And we're proud to have earned a net promoter score of 78 score that is unpark with some of the most admired tech brands is significantly higher than the scores of traditional financial institutions.

We can accommodate and partner with merchants, regardless of industry size AAV, our customer profile during the quarter, we generated significant traction with new merchants growing our affiliate merchant base to over 650 paying merchants are merchant wins range from Alison Olivia Tong forward International to Neiman, Marcus and Williams Sonoma.

To some of the largest brands in the World. We recently signed an agreement with American Airlines and expect to be available on <unk> Dot com and the American Airlines absolute most excited about the new three new agreements with Walmart that we signed in January.

This wide range of marquee brands demonstrates our broad merchant appeal.

We also added new strategic partnerships in the quarter to increase our access to millions more consumers and hundreds of thousands of merchants. For example, we recently launched with <unk>, a global Omnichannel payment platform for many of the world's leading businesses as well as in Topeka positioning affirm as a leader in the ski resort in ticketing Space addition.

Ali we continued to make progress on our partnership with Shopify first announced last summer. We are currently in beta with nearly 100 merchants and have been very pleased with our results. So far our partnership with Shopify is enabled through our point of sale epi products, which I'll ask partner platforms to deliver buy now pay later with a customized user experience to the merchants and consumers that are on their platform.

The deeper integration for external commerce platforms enables us to offer affirm as a service to any partner.

Similarly in December <unk>, a leading cashback shopping platform debuted with us as the launch partner for our marketplace, API, which allows consumer shopping platforms to offer their customers affirm financing via virtual cards, we're excited to augment our strong merchant and consumer networks through these large high growth partners like Shopify, <unk> and many others.

Just a few weeks ago, we made our first strategic acquisition purchasing pay bright one of Canada's leading buy now pay later providers, we expect <unk> complementary merchant relationships and first mover advantage in Canada to enable us to expand our scale and reach across North America.

We're very pleased with the results and the acquisition so far with <unk> performance in Canada exceeding our expectations quarter to date with growth in both split pay and pay monthly offerings.

Key merchants driving this growth include Samsung both online and in store as well as Hudson's Bay, Canada's largest department store retailer.

As we look ahead, we believe we can address not only the $600 billion of E commerce spend in the U S. But the seven six trillion dollars of card spend processed online and offline at merchants in the United States.

Are there more by continuing to bring merchants new high quality of loyal customers. We believe we can address a large portion of the estimated one trillion.

They spend on customer acquisition.

We have successfully demonstrated how our solutions can enable and accelerate commerce for larger more considered purchases.

Key principle of our next phase of growth is to expand into higher frequency purchases by investing in our split pay product ramping up our partnership with shopify and making strategic investments in marketing.

We also made our first foray into brand marketing in the second quarter with a holiday campaign that featured Kicky Palmer and focused on the benefits of affirm or traditional credit cards.

The campaign was amplified by Jimmy Kimmel live the late show with James Corden Hudson Minaj Whitney companies Ashley Park and other prominent personalities.

During the holiday season affirm is prominently featured in more than 100 merchants marketing and advertising. The response to these marketing efforts has been very positive and we've seen a 10 point increase in brand awareness quarter over quarter.

We believe these actions combine to position us well to increase engagement with both consumers and merchants leading to increased transaction volume on our platform.

We also see significant opportunity to develop new products that can define the future of commerce and plan to continue making investments to drive growth.

Take our savings product for example, we've seen an interesting halo effect for our savings account growth has benefited from marketing and communications to our customer base that are focused on other products and while our cities product isn't a large part of our business right. Now it is great to see our existing consumers use savings accounts to deepen their engagement with affirm and to see how new consumers start their home.

Our relationship with non lending products. In addition, we've introduced split across our point of sale merchant platforms and in our App.

That's a product which is suited to higher frequency lower AB purchases showed approximately 71% higher repeat transaction rate that our core installment loan product over the November December holiday period.

And while we got our start in the high <unk> segment that have expanded into the lower <unk> more frequent purchase area. We believe there is ample opportunity to further expand our use cases eventually even addressing the largest category of all daily spend.

We expect all of this and more to further our ability to expand our consumer and merchant base helped our merchants grow their revenue on our platform.

And develop new innovative solutions to establish the ubiquity of our network and breadth of our platform.

Finally, I want to thank all of our farmers for their incredible dedication to our mission over the last nine years.

Each day is try to put consumers back in control of their finances and to be a powerful revenue accelerator for merchants.

I'm, so grateful for you and so proud of how we're transforming commerce.

With that I'd now like to turn the call over to Michael to discuss our second quarter financial results.

Thanks, Max and good afternoon, everyone.

Before we get into our fiscal second quarter of 2020 results at.

First I want to talk about our business model and capital funding model.

We measure our success across a number of merchant and consumer kpis, including gross merchandise value or <unk>.

The total dollar amount of all transactions on our platform in the period that a refund.

Active consumers defined as a consumer who engages in at least one transaction on our platform in the previous 12 months.

And transactions per active consumer the average number of transactions at an active consumer has conducted on the platform in the previous 12 months.

As Max mentioned, our business model is aligned with the interest of both consumers and merchants.

We've proven that aligning incentives can result in great outcomes for our consumers our merchants and affirm.

We generate revenue in several different ways.

First merchant partners are charged a fee on each transaction process to the affirm platform.

We refer to this as the merchant discount rate or MTR.

We also generate revenue through interest earned on consumer loans, we hold on our balance sheet purchase from originating bank partners.

In recent quarters, roughly 54% of our loans by GMB.

Carried an interest rate borne by the consumer.

A smaller portion of our revenue comes from interchange fees earned when consumers use our virtual card for purchases on or offline.

While virtual card revenue has contributed roughly 5% of our total revenue in recent period. It represents an important product capability that allows consumers to use the firm's products that any U S merchant that accepts credit cards.

Additionally, we sell a portion of the loans originating our platform to third party investors and recognize a gain or loss on the sale of these loans.

Lastly, we earn a fee for providing loan services on behalf of third party investors that have purchased consumer loans from us.

Our.

<unk> costs are made up of <unk>.

Loss on loan purchase commitment.

Loss incurred on a subset of loans, which we purchased from origin bank partner at a price that is above the loan fair market value.

This mainly occurs with zero percent APR loans and loans with below market interest rates.

Provision for credit losses, which consists of amounts charged against income during the period to maintain an allowance for all future expected credit losses.

Funding costs, which consist of the interest expense, we incur on our borrowings and the amortization of fees and other costs incurred in connection with our funding facilities and consolidated securitization.

And lastly processing and servicing expense, which consists primarily of payment processing fees third party customer support and collection expenses salaries and personnel related costs of our customer care team and allocated overhead.

We fund our business through three primary channels warehouse credit facilities, where we borrow against loans retained on our balance sheet fourth flow relationships, where we sell loans to third party investors and securitization vehicles, where we bundled consumer loans infrastructure debt offerings.

In January 2021, we entered into our first revolving credit agreement with a syndicate of commercial banks for an unsecured revolving credit facility to further enhance our corporate liquidity build that facility remains undrawn today.

We currently have no other drawn corporate debt on our balance sheet.

Our funding model is built to be durable and resilient as demonstrated during the pandemic.

Not only were we able to retain our existing funding, but we added over $2 billion of additional committed capital and introduced two securitization programs into our ecosystem in calendar year 2020.

We were able to do this in large part because of the high quality assets, we produce which generate predictable servicing and interest income.

Additionally, the assets we hold on our balance sheet are short in duration, and thus do not need to withstand multiple credit cycles.

Our performance during COVID-19 highlighted the quality of our assets and the capabilities of our proprietary risk management and underwriting approach.

As of December 31, 2020, our delinquency rates as a percentage of our loan portfolio.

And excluding the impact of our payment deferral program were approximately 41% lower as compared to June 32020, and 63% lower as compared to December 31 2019.

In addition, as of December 31, 2020, our trailing three month gross charge offs as a percentage of loan portfolio and excluding the impact of our payment deferral program were approximately 53% lower as compared to June 32020, and 67% lower as compared to December 31 2019.

As a result of our consistent loan performance and strong investor demand for our assets, we have been able to expand our platform at scale, while decreasing the equity capital requirement of our loan business.

While we added $1 $5 billion to our total platform loan portfolio in calendar year 2020.

Relative equity capital required to service the portfolio decreased from 10% as of December 31, 2019% to 8% as of December 31 2020.

Turning now to our fiscal second quarter results for the three month period, ending December 31 2020.

<unk> increased 55% year on year to $2 1 billion.

The increase in <unk> was driven primarily by the 90% expansion of our active merchant base to approximately 7890 at the end of the quarter from approximately 4148 active merchants in the same time last year and.

And organic growth in active consumers.

Which grew approximately 52% year on year to $4 5 million.

Providing a little more color on the composition of GMP.

We typically assess our GMT mix across a few different dimensions.

First zero percent versus interest bearing GMB.

For the quarter ended December 31, 2020 Euro percent APR loans accounted for 46% of our total GMB compared to 40% for the three months ended December 31 2019.

Firm versus not affirm initiate transactions.

We track the portion of transactions originated on our owned properties to the strength of our consumer networks.

For the three months ended December 31, 2020, 32% of our transactions occurred on the firm's property.

Compared to 26% in the same quarter last fiscal year.

Industry diversification.

We believe the diversity of our merchant partners provides our business with a unique competitive offering as we are not tied to any one sector of the economy.

During the three months ended December 31, 2020, no one segment accounted for more than 31% of our volume.

Over the last 12 months, the largest and fastest growing segments were sporting goods and outdoors, which includes merchants such as peloton mirror and red power bike in home and lifestyle, which includes merchants such as purple weight there in west Elm.

Both of these segments have pandemic tailwind.

Conversely, our small segment over the last 12 months was travel and ticketing, which declined 47% year on year and fell from 11% of our volume in calendar year 2019 to only 3% in calendar year 2020.

Notable merchants in this space include marquee brands such as <unk>.

Priceline and documentation.

The strong GMB growth drove an increase in total revenue of $74 1 million or 57% compared to the same period last year.

Total revenue as a percentage of DMT with 10% in.

An increase of approximately 14 basis points compared to the same period last year.

Total transaction costs increased 23% year on year significantly less than the 57% annual growth in revenue to $114 1 million.

Transaction cost as a percentage of the GMT with five 5%.

A decrease of approximately 141 basis points compared to the same period last year.

The increase was primarily driven by a 59% increase in loss on loan purchase commitment.

To a significant increase in the proportion of Deo percent loans purchased from our originated bank partners during the period.

And a 48% increase in funding costs, primarily due to a 99% increase in our average debt balances corresponding to our 81% increase in average loans held for investments and partially offset by significantly lower average market interest rates.

Our debt balances include only funded debt in fiscal year Q2 2020.

Now also include our fixed rate notes held by securitization trusts issued during the current fiscal year.

And a 44% increase in processing and servicing expenses, primarily due to an increase in third party loan servicing and collection costs and an increase in payment processing fees due to an increase in servicing activity in payments volume.

These increases were partially offset by a 42% decrease in provision for credit losses, due to lower credit losses and improved credit quality.

We're all loans with which we retain our balance sheet, we are required to hold an allowance for credit losses.

The provision for credit losses are generally determined by the change in estimate for future losses, and net charge offs that occur in the period.

During the three months ended December 31 2020.

The stronger than expected credit performance of the existing portfolio and an improved credit outlook resulted in a decrease in the allowance for credit losses.

This decrease was offset by allowances recorded on loans retained during the period with higher credit quality and is similarly improved credit outlook as the balances of loans held for investment continued to increase resulting in provision expense of $17 5 million for the.

Three months ended December 31, 2020.

The combination of the decrease in allowance for credit losses in the three months ended December 31, 2020, and the overall credit quality improvement relative to the three months ended December 31 2019.

The provision for credit losses decreased by $12 7 million or 42%.

Paid to the three months ending December 31, 2019, despite the growth in the balance of loans held for investment.

Total revenue less transaction costs was $89 $9 million in the second quarter up 141% year on year.

As a percentage of total revenues total revenue less transaction costs was 44% as compared to 29% in the prior year period.

Total revenue less transaction costs as a percentage of GMB with 4% an increase of approximately 155 basis points compared to the same period last year.

This increase was driven by a release of allowance for credit losses due to strong credit performance of our loan portfolio, which resulted in lower provision expense.

Technology and data analytics, <unk> increased by $10 million or 32% year on year. It's.

This increase was primarily due to an increase in engineering product and data science personnel costs as well as to an increase in the data infrastructure and hosting costs.

These increases were partially offset by a decrease in underwriting data provider costs.

Sales and marketing expense increased by $31 5 million or 411% year on year.

This increase was primarily due to $17 million of noncash expense associated with the amortization of an asset associated with a commercial agreement with shopify.

Which was executed in July 2020.

Additionally, there was a $10 $7 million increase in brand and consumer marketing.

Given by our holiday shopping and brand activation marketing campaign, which resulted in meaningful inclusion in over 100 merchants marketing and advertising over the holidays.

Furthermore, we incurred <unk> $8 million onetime marketing costs and professional fees, resulting from our initial public offering.

General and administrative expenses increased by $10 2 million or 33% year on year.

This increase was primarily due to an increase of $4 5 million in personnel cost as we grew head count in our finance legal operations and administrative organizations.

Additionally, professional fees increased by $4 $3 million during the period to support the <unk> acquisition.

Our initial public offering and regulatory and compliance programs.

G&A expenses included $2 million of onetime costs associated with our initial public offering and the acquisition of <unk>.

Operating loss in the second quarter was $31 $7 million as compared to $32 6 million in the prior year period.

Excluding our noncash shopify expenses.

Appreciation and amortization stock based compensation expenses.

And one time costs associated with our initial public offering and the acquisition of <unk>.

Adjusted operating loss was $1 8 million as compared to $21 1 million in the year ago period.

And our second quarter net loss increased to $31 6 million from $31 million in the same.

<unk> last year.

Subsequent to the end of the quarter on January 15, 2021, we closed our initial public offering of $28 3 million shares of our class a common stock at an offering price of $49 per share.

The proceeds before expenses to us from the IPO were approximately $1 3 billion.

A couple of things to keep in mind, when thinking about our fiscal third quarter.

In December peloton began delaying the capture of transactions based on shipment data, which is a change from the previous approach of capturing fund the checkout.

This change resulted in approximately $83 $9 million at GMB not captured in the current period shifting a significant amount of revenue from our fiscal second quarter into future fiscal quarters.

The effects of this are reflected in our guidance as well.

Additionally, our third quarter results will be the first to include the financial impact of the <unk> acquisition.

We are providing the following guidance for our fiscal third quarter and fiscal year 'twenty one based upon our current assumptions.

For our fiscal third quarter, ending March 31, 2021, we expect.

<unk> of one eight to $1 85 billion.

Revenue of $185 million to $195 million.

Transaction costs of $125 million to $130 million.

Revenue less transaction costs of $60 million to $65 million.

Adjusted operating loss of 47, five to $52 5 million.

And a share count of $226 million.

For our fiscal year 2021, ending June 32021, we expect <unk> of seven to five to 735 billion.

Revenue of $760 million to $780 million.

Transaction costs of $500 million to $510 million.

Revenue less transaction costs of $260 million to $270 million.

Adjusted operating loss of $120 million to $130 million and a share count of $155 million.

Thank you again for joining the call today, we are now happy to answer any questions you may have.

Operator, please open the line for questions.

Thank you we will now be conducting a question and answer session in the interest of time, we ask that you limit yourself to one question and one follow up if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue.

You May press Star two if you would like to remove your question from the queue.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing with Barclays.

One moment, please while we poll for questions.

Thank you. Our first question comes from James Faucette with Morgan Stanley. Please proceed with your question.

Thank you very much.

I wanted to ask just on <unk>.

Consumer behavior, Maxim and kind of what youre seeing there in terms of engagement and.

People are kind of moving between originating or finding things to the affirm platform versus through merchants, where you already have acceptance I'm just trying to see where there is some cross benefits there from from your perspective on what you can track and then quickly Michael you've made some you highlighted some of the improvements.

Loan performance et cetera on various metrics can you maybe give a little bit of color as to what you think the key drivers of those improvements are thank you very much.

Alright, Thank you for the question.

Okay.

So I think we.

We said it in the prepared remarks, which I'm sure.

One could use towards paint dry.

On the order of about a third of our.

Transactions are now originate unconfirmed properties and the vast majority of that are existing users coming back and using a firm as a starting point and the shopping journey.

So.

I think that sort of speaks for itself.

Part of our value proposition to the end customer isn't just.

Hey, you find us at the checkout counter and we are a better more transparent.

Perhaps even lower price, we paid was a great way to discover merchants that offer.

Some times zero interest in our case with the <unk>.

Transactions and also just have really interesting things to share with our customers. So the affirm platform.

Some of our App marketplace is growing very nicely, we are investing in that very very heavily.

Sure.

I think youre still needed Michael.

James Yes.

Yeah, sorry, Yeah in response to your second question James.

Yes.

Quantifiable is all around the <unk> and the gross charge off both of which are down materially last year.

The key drivers are a function of credit posture that we took with <unk>.

Number so even though our book turns over fast we are we still had a meaningful portion of the portfolio through the period from.

From originations for Q1.

Credit posture, with obviously tighter than where we were in the prior period.

We also of course.

Continue to make improvements to our underwriting model and what Youre seeing there is just really good performance I wouldn't expect us to continue at these levels.

We're we're certainly.

Having taken a more loose credit posture coming out of the summer.

I think thats the biggest driver for the results in the period.

Thank you.

Okay.

I'm, sorry, I interrupted you Max right.

I just wanted to.

Love to get answers about numbers and so the one thing that I can tell you about the transactions originated on our platform a year on year growth. There was north of 100%. So not only is the affirm.

Originated transactions are growing we are.

A triple digit growth not right now.

Got it got it.

Alright back to Michael when you said.

We wouldn't expect.

Those to be at this remain at this level, where you're meaning in reference to.

Kind of your credit.

Box or the.

The performance in delinquency you just trying to clarify what you meant by we would we shouldn't expect them to remain at this level.

Our delinquency and charge off rates are really at historic lows.

That's not how we intend to run the business.

Okay, great. Thank you.

Thank you. Our next question comes from Ramsey El <unk> with Barclays Investment Bank. Please proceed with your question.

Hi, Thanks for taking my questions. This evening.

I was wondering if you could give us.

Some additional color on your expectations for the Shopify agreement in terms of.

The pace of the rollout the magnitude of the eventual P&L impact or any other any other commentary there would be helpful.

We're going to keep doing this anyway, sorry about that there are two different things.

Mike.

Yes, sorry, sorry, sorry.

It's entirely me in.

Impacts my first Rodeo August one.

Complement with my mute button, but just wondering can it.

So to back Mark to Shopify.

The.

The long and short of it is.

Is an enormous platform.

And the reason we were picked as their exclusive partner was because we are.

If I do say, so myself with exceptional engineering team and we build things well and we take care of that take the time necessary. So we'll continue testing systems.

We improved our thinking.

We added another third all the way up to almost 100 merchants to our beta program.

Since we saw each other.

And the roadshow.

And we're very happy with how these tests are going we are quite pleased with the conversion rates. We are getting the integration tightness. The uptime on all the metrics that we care about are doing well.

I think it's foolish to over promising to deliver so when we turn on fully we expect it to be massive.

It will definitely only turn on when do we feel like it is ready for prime time, including the scalability of it takes to take home centric social endorsement of volume so.

I would.

I would not expect to.

Overnight, but we will absolutely take our time and we.

We have tried to be conservative in our internal forecast as well as liquids, we talked publicly about what do you expect this to happen.

Okay.

And then I wanted to ask also in the quarter.

The yields the GMP performance was amazing the yield on the merchant network revenue came in a little bit below our model and I'm just curious about what the drivers there are I'm thinking primarily.

Merrily mix, but was just curious if there were any other callouts.

It's probably Michael Cartwright mute button.

Yes, it's a good question.

There is two things to think about what is the seasonality.

And our encounter Q4, our fiscal Q2, the holiday shopping season tends to have a little bit of lower average order values and lower revenue yield is actually up I think about 10 basis points year on year same period.

So I think the seasonality is probably the biggest driver which is really the mix that you see during the season. There is nothing material with respect to.

Any sort of merchant pricing or mix shift around.

The end merchants to report there it's more around the square the transactions tend to be the time of year.

Got it alright, thanks, so much.

Thank you. Our next question comes from Matt O'neill with Goldman Sachs. Please proceed with your question.

Yeah, Hi, good evening Max Michael Thanks for taking my question. This evening I guess, Max I wanted to touch on the sort of long term strategic so understanding where the business is starting today and the sort.

Higher <unk>, a clear glide path moving into the low <unk> is starting to build out your own properties vis vis.

Sort of customer acquisition channel and sort of purchasing through through the App and website. Youll also built a savings account. So just curious what else is on the roadmap.

Any kind of hint or guidepost to what we can be thinking about what may come next for a more.

Comprehensive suite of sort of consumer services, and then I'll just ask my follow up now.

For Michael just going back to James's question around the credit is is the outperformance on the.

The provision here, a byproduct of mix as far as.

Getting maybe more.

Growth from partners like peloton, which may be skewed more affluent higher FICO and thats part of what we'll add back or was it the conservatism at the onset of the pandemic and now kind of working back out of that as we've got some more clarity around the hopeful recovery here. Thanks a lot.

Two great questions.

So if you're wondering why the dual mute thing Thats happening is because we're also on a zoom call and my General Counsel Chief legal officer staring directly by phasing if I disclose any forward looking statements I'm going to get in trouble. So I can't really tell you anything about our.

Okay.

I will try to say a few things without breaking in euros.

<unk>.

So.

One of the things that we're very excited about and I think that that is no.

Warmus unaddressed opportunity in the world of.

The NPL going up my favorite kind of glacier, but the idea of transparent easy to understand cash.

Cash denominated or enumerated peanuts, where consumer really understand what's going on is something thats ubiquitous and it has a purpose in the transactions, which obviously were very very strong in that low <unk>, which is where we are now growing.

Well there is an enormous other category at the daily spend and right now people are still using their tired old financial instruments.

They're over draw and insufficient funds being thrown all over it and I think someone and minus will be us, we'll bring some light to that part of the terminal as well. So we are really interesting.

Okay.

Ideas in that domain.

The.

A lot of what Youre seeing in our products and our services today.

Will improve markedly wanted to think that's really important to understand is that what we think.

Royalties today as it's really the combined the Npls set of products is very much versions, maybe five to $8 seven but there's a lot of improvement. There. So you should expect us to iterate on existing products.

Very actively.

One of the things that is sort of in the context content that we.

Brad before which I don't want to overlook.

One of the things we have to do for Shopify that we take a lot of pride in.

Basically rebuilt major parts of the firm to accurately service. So this idea of offering a product and a service to plugged in to existing platforms in a organic way, where the partner can offer and finance related transactions.

I'll flip a switch and all of their platinum participants benefit.

We intend to bring to market and really really big ways, we're doing it already built.

Something like <unk> or shopify, but there is also one that we launched with rocket 10, which is quite different platform and so on and so forth and this is something that we're.

We are very excited about us technologists and also just by way of growing the business in a very different kind of way.

<unk>.

I'll I'll stop before I start speculating look, which crypto currencies, we're going to work with.

Michael probably has more substantive answers again.

Yes, just on the credit side just to be really clear.

Clearly as you do mix towards.

Loans held loans outstanding for peloton, you do see a credit improvement we see the same trend kind of peloton and peloton. So.

That is less or less of an effect than the credit posture that we took this summer.

The thing that will always do is.

Do our best to look at with the macro environment is and we will try to take our credit posture that ensures that we will run the business Safeway.

Can do the things that we need to do in the capital markets, while still servicing our consumers and merchants.

And so the summer that look like us being very careful and cautious.

The provision release that you see this quarter. This reflects the fact that the reality is.

Consistent trend here on <unk> and charge offs point towards this portfolio being quite healthy and Thats also borne out by the kind of active participation we have going on in the capital markets right now.

Thank you very much.

Thank you. Our next question comes from Dan Perlin with RBC. Thank you.

Okay.

Thanks, Good evening, guys and congratulations on the first quarter out of the box.

Got it.

I wanted to jump back in on on shopping for a second I know you are in beta.

I think you said 100 merchants today I'm just wondering what are.

Can you talk about maybe some of the early stage kind of attribute that youre seeing from those merchants.

Yes.

Here, we are thinking about how that can influence this lower A&P channel acceleration.

Repeat usage those types of metrics there is anything I guess in the early stages there would be helpful.

Okay.

Probably a little too early to say.

Too much.

I guess, the the metrics that I am most concerned with.

The product CEO, probably more than anything else.

And so our conversion would we want to make sure is that when a consumer comes up for a transaction in shopping installments powered by firm.

We don't have an experience that makes you think maybe I'll pull up my debit card instead nexon it because.

Was not smooth upward wasn't.

Thank you.

Simple are simple as I thought it would be and so we're very very focused and this is also why it will take time and I don't want to over promise here.

The experience of using something installments to be ideally the highest converting smooth experience for customers like we have a lot of work to do there that said entering conversion numbers are.

Looking very good.

Looking into like chat box to make sure.

Disclosing anything that I'm not allowed to say out loud.

But we're feeling very very good about those metrics. The other one obviously that really matters is share cards. Ultimately we are a valuable commercial <unk> as a percentage of transactions we cover for that.

And then the conversion is a.

Driving metric there, but over time as consumer repeat rates and acceptance.

Sure Carter, so I will I will.

Given the qualitative numbers for now hopefully next quarter, we can come back with some.

Numbers that we will be actually grounded in more than 100 years.

Chocolate cases really handful.

Perfect.

It's a little too early to declare it.

I understand that's helpful, though and Michael can you just maybe speak to.

Funding capacity available relative to the GMB growth that you guys are expecting we seem to get that question a lot just making sure everyone understands.

And the velocity of the balance sheet and how you are able to fund significant growth at these levels. Thank you.

Michael on mute.

That's a really good question and you saw during this most recent quarter is a pretty healthy amount of securitization volume and for those who are who are attracting yet we actually did just priced a securitization deal earlier this week.

For another $500 million in capacity and we're doing that at pretty significantly enhanced capital efficiency and that really attractive funding costs.

Capital markets remain kind of wide open to US right now and we intend to take advantage of that while they do remain open we don't see any real constraint on funding and feel like we're in a really strong position there.

We are both adding new partners doing the securitizations and expanding existing ones.

We felt we feel really confident in the coverage we have.

Thank you Bob.

Thank you. Our next question comes from Timothy Chiodo with Credit Suisse. Please proceed with your question.

Thanks, a lot Max Michael and Rob taking the question on Shopify as well third one on this sorry to go there, but on the longer term opportunity. Maybe you can talk a little bit about the potential to expand that to higher.

Or perhaps other markets or regions with Shopify, and then more tactically if you could just recap for everyone.

Onboard mechanics.

It's different for the new merchants existing merchants concepts around default on opt in opt out and really the heart of the question that I think investors are trying to get to is how much of the shopify volume could ultimately become addressable.

It's a great question.

It definitely should not cannot speculate about.

Other geographies just because it is something that.

So I think we're very focused in our home market.

That includes both U S and Canada.

But.

Okay.

That's one one aspect in terms of <unk>.

Overall possible reach.

On shop.

The.

Again, I think it's probably.

Irresponsible to speculate exactly what.

That number is.

But a big part of what we're testing.

With with our partners in Ottawa is exactly how easy will it be for a merchant to Shanghai in other words the tent.

This partnership is to make it.

Credibly smooth.

Essentially continuous experience for a merchant to say Oh, yes shopping someone's harbaugh firm of course, I'm going to do it.

And so the intent is to get.

As much of the overall volume as possible.

That of course, not everybody on Shopify, <unk> low 80 items.

Also includes higher the items as well so.

Sure.

That is where we're headed but for the moment, we need to make sure that both the sign up experience merchant underwriting merchant acceptance and ultimately go lives.

The conversion share card car.

The sort of Covid, where all products.

Excellent alright. Thank you so much for taking the question.

Thank you. Our next question comes from Bryan Keane with Deutsche Bank. Please proceed with your question.

Hi, guys and congrats on the first quarter as a public company.

Wanted to ask about that travel area. The volumes, obviously came off significantly.

You said it was only 3% in 2020.

When do you guys think or when do you have your model or any kind of.

The spring back in that by even Q4 or is that going to be more of a fiscal year 'twenty two phenomenon and when does American airlines start ramping up into there that also help I'm sure.

Okay.

So I'll answer qualitatively and let Michael answer to the modeling.

Modeling parts of its Mike ill start from the beginning yourself now.

So American obviously, it's a very recent deal and so we're super excited about it we think it can.

Would be incredibly valuable for us not to in any way disparage here just to diminish our existing.

<unk> Awesome partnership with Delta, which has been with us for quite some time.

Very happy with them the entirety of the travel industry.

Quite a quite a hit in 2020, we actually invested very heavily in 2019 in building up both our feature set and our partnership sites in travel in 2020 was going to be the year of travel for our firm accepted with the euro not travel segments.

We expect that.

At some point it will be quite a quite a nice tailwind for us.

Obviously, our attention to the airline industry.

Archon deal speaks to our intent.

I am probably not the right person to speculate about things like vaccine Rollouts and so what that really means that said I think within bounds. When I say that we are seeing increase in travel volume in other words, we are seeing first signs of recovery I'm not sure. If this is Eddie.

Great quantitative answer in the sense that we're not prepared to say here's what I think it's going to get back to normal or go back to what we all wanted it to be.

But I think the world is starting to wake up a little bit to the idea of getting on a plane.

Some places in the cycle will probably tell you how we're thinking about it in terms of planning and forecast.

Yes, just in terms of outlook, we don't have a particular moment in this fiscal year for it to turn on were pretty cautious here.

We talked about it being more of a fiscal year 'twenty two things after the summer into the fall.

Obviously, we'll keep you up today, if that if that starts to change in the volume starts to take off right now, where we're being pretty cautious here.

Got it and just as a follow up thinking about MD ours. There is some concern that maybe MTR will have to kind of go lower than the industry as the MPL.

Penetration increases and obviously Paypal.

Pushing ourselves and talking a lot more about the npls that get into this space. So I guess the question is Max on an overall <unk> is it sustainable at these levels or will it be a natural phenomenon well as more volume comes on maybe we will see rates drop a little bit. Thanks.

I think it's very difficult to prognosticate about what do we expect.

In the future.

Obviously, we think ourselves very special and.

We provide a service control because of the unique even in a highly competitive industry like the NPL.

A huge portion of what we do that others can't or don't meet our ability to address the entirety of the transaction.

Values and so low EV space.

It's a little bit less of a risk management and more of a marketing centric.

Components, and therefore is more competitive it's a little bit easier to be successful there versus a more complicated more.

Time time century, hi, Adp's and so.

I think we've proven over the years that we're very good at the wholesale segment and we've done well there.

<unk>.

As a technology and data centric company, we provide a lot of value to merchants that goes well beyond.

We will help them close the transactions data services. We now have this really rich collection of affirming the service offerings that we're bringing to market.

Ultimately, we don't love competing on price, we love competing on value added.

So I think we can build that others cannot so I can't prognosticate about where the prices go but I can tell you we'll continue investing things that others don't have.

Got it Super Thanks, guys.

Thank you. Our next question comes from Andrew Jeffrey with Truth Securities. Please proceed with your question.

Hi, Good afternoon I appreciate you taking the question.

Max maybe I'll build a little bit off Brian's question.

From a competitive perspective.

There are a number of players in the market can you.

Labrie on why you think.

Wins in particularly what differentiates differentiates affirm from peers.

Not really doing.

<unk> four per se today, it's a much more complex model and I Wonder if you could just speak a little bit about why you think you have a competitive advantage and maybe why affirm is uniquely positioned to take big share.

Exclusivity with platforms like Shopify notwithstanding.

Yeah.

Yes.

So.

Im not sure what you meant but we're not doing pain tore I think before maybe a trademark he calls at this point. So we're not quite way of knowing that even someone else's trademark, but we very much have a for interest rates all those products that we happen to market under the name of split.

Which competes in that very space, how does better because we don't charge late fees and we are much more transparent and simpler but that said the sort of idea of taking a $80 item and splitting into for the payments of 20 Bucks is something that we do.

It's performing quite nicely.

<unk>.

I do agree that there are plenty of players in the space that do this particular product.

The.

Air becomes a little bit of a rare if you start saying well what happens when you get to let's say $800 and that product.

$800 is too much to just.

Put in a single transaction probably $200 every two weeks is also a little bit.

Comfortable from a cash flow perspective, and that's where you end up having to do things that take.

Six months 12 months et cetera, and we have products that span.

All of it from.

Six weeks to.

248 months, so in that sense, we offer consumers a choice and merchants and opportunity to offer a payment plan that is quite short for low 80 items and potentially as long as four years for higher Ed.

Yes.

That's sort of one of the key advantages.

Especially enterprise merchants, where platforms, which are in fact, the enterprise versions.

Aggregators.

Tends to want to partner with a provider that has excellent and technology, which will certainly bring sage and someone who can service.

Quality of their customers and the totality of the product.

We are able to do all of that and we are quite good and scalable infrastructure. So those are the two endpoints of why we've been selected by Shopify wide reconciling what other.

Partners in the states have consistently chosen us the other one which.

A little.

I feel that never gets enough airplanes, so I'll just keep on repeating it.

Are the only ones in the space that actually speaks to the end consumer.

Truthfully, we don't charge late fees, we don't do deferred interest we don't do any of the things that ultimately dispersed.

Somewhere between rolling their eyes, and just get very very angry about consumer brand love.

Important to us and it's very important to merchants, we fundamentally what drives repeat transactions. So b R.

Very keen on continuing down.

That line as well, because ultimately merchants and virtual platforms.

To partner with brands.

That adds to their own brand love as opposed to potential embarrassment.

That's something that we feel very strongly about and we continue to wish the industry would change and follow our lead but for the moment. We are unique in that sense. If we can take great pride in that to continue winning deals because of that point.

Okay.

Helpful. Helpful Distinction for me and then Michael just just on the guidance.

Yes.

Offer color Pierre <unk>.

<unk>.

Great project.

And then reaccelerate.

Thanks.

Hi, Matt.

Sure.

Yes, I think the biggest thing to think about in Q3 is the.

With peloton capture issue, we talked about in the prepared remarks, where we are seeing.

We're seeing that take root.

<unk> peloton, we're seeing material acceleration that we saw a material acceleration in Q2, and we're projecting even even more acceleration ex peloton in Q3. So overall very good consumer demand with peloton extremely strong, but the timing of the recognition of that <unk> is going to be a function of when those those order ship.

Thanks Alicia.

Thank you our last question comes from Chris <unk> with key Port Global. Please proceed with your question.

Alright, Thanks, and good afternoon, and congratulations again.

Let's talk about the.

The regulatory sorry, the competitive environment.

Perspective.

Can you give us a little bit of a land grab right now.

Buy now pay later really kicking off here in the U S and around the world.

So my two questions on that front.

Do you see any impact or do you see any instances, where theres more than one provider and how does affirm.

Your market share at the point of sale.

Hold up when there is more than one provider and then my second question is more of a strategic question.

Shopify deal it seems it's super exciting.

It has a lot of potential.

We expect to do more of these sort of mega deals, where you're providing a little bit of equity incentives or is this kind of the one youre going to stake a claim in near term. How are you thinking about in this large marketplace transactions, where there is a.

A lot of volume, but essentially some equity costs as well thanks.

Great questions. So.

On the former I think history is always a good predictor of the path and the.

You will first round.

Payment network creation ultimately settled with.

Three or four brands that are universally recognized depending on whether you include discover it helps with visa Mastercard Amex are certainly.

More or less on every check out at this point, so I think the expectation.

Should be that there will be more than one BNP are brands that winds and the reality is world.

With me.

Okay.

Yes land grab is.

Especially positive, but I'd like to believe we're all peaking over parts of the credit card volume and that is an enormous.

<unk>.

Well transaction volume and there's quite a lot of growth for everyone. Obviously revise their behavior, but holdings that we call I do expect to have multiple players at least some of the check out some of the deals that we signed exclusive some of the deals are not in some cases.

We are added to an existing provider that we have to work to demonstrate our.

Art work, but by doing better there.

Overall, we are happy with the with.

How that is developing.

The.

Question.

Another shopify sort of.

I'm sorry.

We'll go through my notes.

So the the Shopify question is a good one.

Two part answer and very short form as we would love to do more mega deals.

I think the structure of those deals are by definition unique.

Special and so any forward.

Speculation of what exactly what it would take to signed eight.

Another shopify is probably probably beyond the scope of this conversation, but that said we are yes.

Again, if I may say, so myself the perfect provider for these very very large platforms, specifically because we have this enormous advantage in data and technology and a proven scalable and robust and so.

Fundamentally I don't think offerings. So one chunk of your company if the Mega partner doesn't believe you will be able to withstand the mega volume you're going to do it so the equity piece.

It is not the reason somebody selects our partners because we're actually good at what we do and we can take $1 billion adoptable.

Great. Thanks, so much I appreciate it.

Thank you.

There are no further questions at this time I would like to turn the floor back over to Michael Lynford for any closing comments.

Thanks, everybody for joining on our call and we'll look forward to seeing you guys next quarter. Thank you.

This concludes tonight's call you may disconnect. Your lines at this time. Thank you for your participation have a wonderful evening.

[music].

Good afternoon, ladies and gentlemen, thank you for standing by welcome to the affirm holdings fiscal second quarter 2021 earnings Conference call. At this time all lines have been placed on mute to prevent any background noise.

Thanks, operator, before we begin I would like to remind everyone that today's call may contain forward looking statements.

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 Web site, including our prospectus filed on January 14th 2021.

Actual results may differ materially from any forward looking statements we make today.

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, todays call may include non-GAAP financial measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures.

Conciliation to the most directly comparable GAAP measures can be found in today's earnings press release, which is available on our Investor Relations website.

Hosting todays call are Max Levchin, affirms founder and Chief Executive Officer, and Michael Winters firm's Chief financial officer with that I'd like to turn the call over to Mark to begin.

Thanks, Rob. Thank you all for joining us for our first earnings call as a public company.

We are pleased with the results for the quarter, which included revenue growth of 57% year over year, and a 55% year over year increase in quarterly gross merchandise volume to a record $2 1 billion as our product offerings continue to resonate with consumers and merchants alike.

The second quarter. We also grew active consumers by 52% and our merchant base by 90% from the prior year.

Michael will provide more details at our second quarter performance in a few minutes, but since this is our first earnings call I'd like to spend some time, providing a brief overview affirm the industry tailwind is driving our growth and our strategic initiatives.

The FERC was founded almost a decade ago with a mission to build on its financial products that improve lives.

We knew that consumers were tired of the constant penalties like late fee that deferred interest for credit cards, and we knew that merchants needed new payment solutions that could help them attract and retain customers, while avoiding discounted promotional gimmicks, which can dilute their brands and their bottom lines.

Since the beginning we focused on building a new kind of payment network.

To align its own success with the success of both consumers and merchants affirmed wins for our consumers and our merger partners.

In the last 12 months, we've empowered four and a half million consumers to take control of their finances, enabling them to pay for the things they want and need overtime almost anywhere in the U S. We've also help merchants drive growth by adding new customers accelerating sales and increasing conversion we've enabled over $12 $7 billion of tranche.

The actions in the past four and a half years and we've never charged a late fee or a penny of deferred interest.

Before I go into the details of what we have built so far and whoever headed I wanted to give you a sense for how consumers feel about affirm in their own words.

For example, a military months, who otherwise would not have been able to attend the graduation of her kids told us to make it to the graduations I was able to get tickets to affirm and make payments and such extensive plane tickets that I would not normally be able to get it consolidates payments are reasonable and the app is an easy to use.

Another satisfied consumer.

For a company to be completely honest about no late fees and working with you on timing of payments is a godsend I couldnt take affirm enough for being such a great company.

We have received many more testimonials such as these which validate our founding mission and empower us to deliver on that mission every single day.

Our platform consists of three core solutions, a point of sale payment solution for consumers and merchants commerce technology solution and our firm.

Our point of sale payment solution gives consumers controlling flexibility at merchant checkout after selecting affirm as a payment option consumers editor up to five pieces of information and then choose how they wish to pay.

Payment schedules include biweekly and monthly auctions in terms range from as little as six weeks to as long as 48 months.

Our merchant technology solutions help merchants from small businesses to the world's largest retailers more efficiently reach new consumers and drive incremental sales.

Not only do we enable merchants to address affordability and increase their customers purchasing power. We also provide them with valuable high quality data that they cannot get elsewhere.

This includes item level data prepayment data consumer behavior data and repeat purchase data.

These insights can be used to more efficiently target customers tailor promotions and achieve a greater return on marketing spend.

Customer acquisition. The App also offers consumers and affirm virtual card that can be used almost anywhere in the U S. A simple interface, where they can manage their payments and a place to open a high yield savings accounts.

December quarter, approximately $1 2 million transactions originated from affirm property twice as many as we saw in the same period last year and approximately one third of our overall transaction volume.

As we look to expand our current network. There are several strong tailwind powering our business and combining to create a massive and durable opportunity for our firm.

Additionally, every element of commerce is moving online.

As total worldwide retail sales declined by 3% in 2020 retail E commerce food, increasing by 27, 6% the significant change in consumer behavior, coupled with the fact that the cost to acquire a customer and convert a sale are two of the biggest challenges facing merchants are fueling demand for our firm.

By continuing to leverage our core strengths and competitive advantages. We believe we can capture an even larger portion of the ecosystem, we've set out to read that.

Our proprietary technology is custom built from the ground up so we don't have the constraints of legacy systems. This means we can efficiently respond to changes in the world scale quickly and innovate new products.

And we've maximized the value of our data to benefit our consumers and merchants are leveraging item level data repayment data consumer behavior data and repeat purchase data to more finely priced transactions and personalized experiences all while managing risk.

Further our ability to service all transactions from low AAV, two high AAV online and offline are flexible payment terms and a breadth and depth of our merchant and partner networks set us apart as a result, we see strong consumer satisfaction in calendar year 2020, approximately 67% of purchases were made by repeat affirm users.

And we're proud to have earned a net promoter score of 78 score that is unpark with some of the most admired tech brands is significantly higher than the scores of traditional financial institutions.

The World, We recently signed an agreement with American Airlines and expect to be available on <unk> Dot com and the American Airlines absolute most excited about the new three year agreement with Walmart that we signed in January.

This wide range of marquee brands demonstrates our broad merchant appeal.

We also added new strategic partnerships in the quarter that increase our access to millions of our consumers and hundreds of thousands of merchant for example, we recently launched with <unk>, a global Omnichannel payment platform for many of the world's leading businesses as well as in Tokyo positioning affirm as a leader in the ski resort in ticketing Space addition.

The deeper integration for external commerce platforms enable us to offer affirm as a service to any partner.

We're very pleased with the results on the acreage and so far with <unk> performance in Canada exceeding our expectations quarter to date with growth in both split pace and pay monthly offerings.

Key merchants driving this growth include Samsung both online and in store as well as Hudson's Bay, Canada's largest department store retailer.

As we look ahead, we believe we can address not only the $600 billion of E commerce spend in the U S. But the seven six trillion dollars of card spend process online and offline at merchants in the United States.

Are there more by continuing to bring merchants new high quality as loyal customers. We believe we can address a large portion of the estimated one trillion.

They spend on customer acquisition.

We have successfully demonstrated how our solutions can enable and accelerate commerce for larger more considered purchases.

We also made our first foray into brand marketing in the second quarter with a holiday campaign that featured key Palmer and focused on the benefits of affirm or traditional credit cards.

The campaign was amplified by Jimmy came alive. The late show with James Corden hasn't been us with economies Ashley Park and other prominent personalities.

During the holiday season affirm is prominently featured in more than 100 merchants marketing and advertising. The response to these marketing efforts have been very positive and we have seen a 10 point increase in brand awareness quarter over quarter.

We believe these actions combine to position us well to increase engagement with both consumers and merchants leading to increased transaction volume on our platform.

We also see significant opportunity to develop new products that can define the future of commerce and plan to continue making investments to drive growth take.

Take our savings product for example, we've seen an interesting halo effect for our savings account growth has benefited from marketing and communications to our customer base that are focused on other products and while our cities product isn't a large part of our business right now it is great to see our existing consumers use savings accounts to deepen the engagement of the firm and to see how new consumers start their <unk>.

Patients with a non lending product.

In addition, we've introduced split paid across our point of sale merchant platforms and in our App. The split pay product, which is suited to higher frequency lower AB purchases showed approximately 71% higher repeat transaction rate that our core installment loan product over the November December holiday period.

We expect all of this and more to further our ability to expand our consumer and merchant base helped our merchants grow their revenue on our platform and develop new innovative solutions to establish the ubiquity of our network and breadth of our platform.

Finally, I want to thank all of our farmers for their incredible dedication to our mission over the last nine years. Each day is try to put consumers back in control of their finances.

And to be a powerful revenue accelerator for merchants.

I am so grateful for you and so proud of how we're transforming commerce.

With that I'd now like to turn the call over to Michael to discuss our second quarter financial results.

Thanks, Max and good afternoon, everyone.

Before we get into our fiscal second quarter of 2012 results I first want to talk about our business model and capital funding model.

We measure our success across a number of merchant and consumer kpis, including gross merchandise value or <unk>. The total dollar amount of all transactions on our platform in the period that a refund.

Active consumers defined as a consumer who engages in at least one transaction on our platform in the previous 12 months.

And transactions per active consumer the average number of transactions at an active consumer has conducted on the platform in the previous 12 months.

As Max mentioned, our business model is aligned with the interest of both consumers and merchants.

We've proven that aligning incentives can result in great outcomes for our consumers our merchants and affirm.

We generate revenue in several different ways.

<unk> merchant partners are charged fee on each transaction process to the affirm platform.

We refer to this as the merchant discount rate or MTR.

We also generate revenue through interest earned on consumer loans, we hold on our balance sheet purchase from originating bank partners.

In recent quarters, roughly 54% of our loans by GMB.

Carried an interest rate borne by the consumer.

A smaller portion of our revenue comes from interchange fees earned when consumers use our virtual card for purchases on or offline.

Well virtual card revenue has contributed roughly 5% of our total revenue in recent period. It represents an important product capability that allows consumers to use the firm's product that any U S merchant that accepts credit cards.

Additionally, we sell a portion of the loans originally in our platform to third party investors and recognize a gain or loss on the sale of these loans.

Lastly, we earn a fee for providing loan services on behalf of third party investors that have purchased consumer loans from us.

Our transaction costs are made up of <unk>.

<unk> online purchase commitment.

Loss incurred on a subset of loans, which we purchased from origin bank partner at a price that is above the loan fair market value.

This mainly occurs with zero percent APR loans and loans with below market interest rates.

Provision for credit losses, which consists of announced charged against income during the period to maintain an allowance for all future expected credit losses.

Funding costs, which consist of the interest expense, we incur on our borrowing and the amortization of fees and other costs incurred in connection with our funding facilities and consolidated securitization.

We fund our business through three primary channels warehouse credit facilities, where we borrow against loans retained on our balance sheet for flow relationships, where we sell loans to third party investors and securitization vehicles, where we bundled consumer loans infrastructure debt offerings.