Q3 2021 Affirm Holdings Inc Earnings Call
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Okay.
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Good afternoon, ladies and gentlemen, thank you for standing by what come to affirm holdings fiscal third quarter 2021 earnings conference call. At this time lines have been placed on mute to prevent any background noise. After the speaker's 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.
So Mr. Ron Clark head of Investor Relations. Thank you you may begin thanks.
Thanks, operator, before we begin I'd like to remind everyone listening to today's call may contain forward looking statements.
<unk> looking statements are subject to numerous risks and uncertainties, including those set forth in our filings with the SEC, which are available on our Investor Relations website.
Actual results may differ materially from any forward looking statements. 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 as 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 affirm its founder and Chief Executive Officer, and Michael Lindbergh, our firm's Chief Financial Officer.
With that I'd like to turn the call over to Max to begin.
Welcome everyone and thanks for joining us on today's call. We were excited to update you on the performance of our business and the progress we achieved since our call in February.
But before we go through the numbers I would like to start by sharing a few stories from the past quarter that help demonstrate the power of affirm.
As many of you know at affirm one of our core values is that people come first that means to be constantly considered our impact on people's lives and we strive to put their interest before that's why we never charge lead for hidden fees. It's also why we're always looking at what consumers have to say about us.
We're helping them get the things they want and need.
In March we celebrated firms ninth birthday, when they give away in Instagram to.
To participate we ask consumers to share their favorite experienced or purchase using affirm.
I was inspired but many of the more than 11000 personal stories that were posted.
Wonders status for the affordable monthly payments that allowed her to buy a surrogate and prime Massager, which helps sooth her aches and pains after 12 hour shifts during the pandemic.
A mother of two things for helping her take her family to Disney World Just before your baby arrived she is.
Appreciate it that she could book a special vacation without breaking the bank.
I also frequently speak with merchants.
We're seeing their needs and how we help them achieve their goals is critical to establishing long term partnerships recently and spending a lot of time with travel merchants in particular as they focus on meeting consumers pent up demand coming out of the pandemic.
Thanks to affirm companies like price line, which we started partnering with 20 team.
We have added new customers priceline shared with us their consumers are booking with greater confidence because of the firm's flexible and got your free payment solutions. They also shared that affirm helps them expand their reach among millennial and Gen Z consumers.
At the heart of the value, we deliver to consumers and merchants affirms unrivaled technology, the speed and accuracy of our technology allows us to instantly elevate consumers requests and provide them with tailored payment options within seconds.
And the quality scalability of our technology has led large scale platforms like shopify to choose us as their partner.
Today, we're excited to announce that more than 10000 merchants have gone live with sharpie installments in just April and early May and we expect this number to grow significantly when we move to general availability for new and existing merchants, which we expect to reach between now and the end of June.
I will come back to the importance of our technology in a moment, but let me share an overview of our results for the third fiscal quarter.
Affirm delivered another strong quarter that exceeded the financial outlook. We provided in February we more than doubled our active merchant count year over year to nearly 12000, we.
We accelerated year over year GMB growth to 83% from 55% in the second quarter and excluding peloton, our GMB grew 100% up from 54 in previous quarter.
We also grew active consumers by 60% over the last 12 months.
G&A growth was strong across all categories in the third quarter. This was driven primarily by consumer demand for firms offerings as well as new and expanded relationships with merchants such as Ikon pass Neiman Marcus and <unk> among others.
Categories that have fared well throughout the pandemic such as sporting goods furniture, and Homewares continued to perform.
Nearing the end of the quarter. We also began to see a sharp uptick in spending in categories that have been pressured by the pandemic travel and ticketing was particularly strong GMB for the category nearly tripled for the second quarter of fiscal 2021 and grew by more than 50% versus Q3 of last year, which was our pre COVID-19 quarter.
Hi, Mark and travel.
We're encouraged by this momentum and believe that the strengthening economy will provide another tailwind for our farm Americans have significant spending power coming out of the pandemic after paying down a record $83 billion in credit card debt and amassing one seven trillion dollars in savings in 2020.
The pandemic has also trained more shoppers to buy online growing the U S e-commerce markets to nearly 800 billion.
We expect this improved financial health, coupled with rising positive sentiment among consumers and the ongoing reopening to support our continued growth.
We look forward to being there for the consumers as they buy can you suite before returning to work or wedding dress for the reception, we put off or an airline ticket to see their miss loved ones.
Our team also made excellent progress on our strategic objectives over the last few months as I mentioned, a moment ago, we are continuing to expand our presence into higher frequency categories by activating our partnership with shopify over the last several weeks, we have accelerated merchant on boarding enabled shop pay installments by firm.
For more than 10000 shop merchants up from 100 merchants in a pilot that we shared with you back in February.
We believe that scaling our partnership with Shopify will position us to grow our business with a large and diverse set of merchants.
<unk> told us that shopping installments by affirm has enabled them to offer a solution that will scale with their rapid growth and reduced buy now pay later checkout times by as much as 30% for both new and returning users.
We also expanded our platform by acquiring returning a technology company that makes returns and exchanges seamless for both consumers and merchants.
Today, returning helps more than 1800 merchants increase returned to repurchase rates drive revenue from returns and elevate consumer satisfaction. We look forward to delivering returns like offerings to more merchants and introducing their more than 8 million users to affirm.
Before I turn the call over to Michael Let me briefly come back to my earlier point on our technology advantage.
Affirm is a technology company and we believe our technologies and paralleled among our competitors, we thrive on solving complex problems for both consumers and merchants that others can't or won't the.
The resulting technical expertise serves as an important competitive advantage.
<unk>, our proprietary machine learning, we're able to personalize offers for consumers more efficiently proven price credit and manage risk in a way that achieved better credit outcomes. As a result, we're able to offer more flexibility for consumers, allowing them to use affirm across a range of price points and loan durations.
These advantages differentiate us from buy now pay later providers and other efforts by allowing us to offer consumers much more than a short duration paid an <unk> solution, which is critical in categories, such as travel that have high transaction values.
Our technology also enables us to drive measurable growth for our merchants. They see this in the volume of purchase would generate for them increased conversion rates higher average order values and incremental consumers.
In fact in the third quarter approximately one third of transactions were driven from our firm's app and site.
Our ability to consistently deliver strong results for our merchant is why so many large enterprises, including Walmart and priceline choose to partner with the firm.
Of course, great technology is ultimately about great technologists in order to sustain and extend our advantage in technology, we're investing in the people behind it and elevating its leadership within the company.
As a part of that we announced today that Lieberman Pollock affirms president of technology has been appointed to our board of directors Lieber. He's one of the most highly regarded technology mines into Fintech industry that has played a critical role in developing a proprietary technology platform that is a key competitive advantage for our business building World class.
LNG is critical to our strategy and we're pleased to have Lieber brings significant software systems security machine learning and engineering experience to our boardroom members appointment reflects our dedication to leveraging technology and innovation as competitive advantages that allow us to better deliver exceptional solutions for consumers and merchants at scale.
Sure.
Before I conclude let me briefly turn to some additional leadership updates today.
Today, we announced that our chief legal officer Charter Cardica steel has decided to step down from her role at affirm.
Shorter letter legal team during a critical time for our company as we conducted our IPO navigated unprecedented market period and achieve tremendous growth I want to thank her for her dedication and leadership.
She has been a trusted and valued counselor to me and our whole leadership team and we wish her all the best.
Catherine Atkins will be assuming the role of Chief legal officer, Catherine has been one of charters debbie's, an integral part of our senior legal team and taken on increased responsibility, while supporting the important legal needs of the company sure.
<unk> will play a critical role as we continue to expand the ubiquity of our platform strengthening scaling and growing affirm for the long term and we're grateful to have her as part of our leadership team.
In summary.
We had a strong third quarter, we made excellent progress on our strategic goals.
We're seeing strengthening momentum in our business as consumers and merchant adoption continues to grow and we believe affirm is uniquely positioned to capture the large and growing opportunity in front of us.
None of this would be possible without the hard work of our farmers. They have delivered excellent results to the pandemic provided exceptional service to our consumers and merchants welcome pay bright and returned the teams to the affirm family and prepared us for success as a public company.
It couldnt be more proud and appreciative of our farmers focus and dedication on behalf of our consumers our merchants and our shareholders together, we have accomplished a lot, but we're really just getting started.
And with that I will turn it over to Michael to take you through the details of the third quarter and share our outlook for the fourth quarter.
Thanks, Mac and good afternoon, everyone.
As Max noted, we had a strong third quarter.
<unk> revenue exceeded our financial outlook growing 80, 367%, respectively and accelerating from the year over year growth rates, we achieved in the second quarter of 2021.
We deliver on this growth with significantly greater capital efficiency, reducing equity capital required by 10% compared to the prior year period, despite growing the balance sheet by more than 100%.
We also delivered stronger credit performance with our allowance as a percentage of loans held for investment declined to a record low of five 2%.
These trends are encouraging and we remain focused on building on this momentum as we move forward.
I'll walk you through some of the key financial highlights for the quarter and then share some color on our financial outlook.
We are leading today to reflect the strong performance of the business.
Unless otherwise stated all period to period comparative data in the first or third.
Quarter of 2021 compared to our third fiscal quarter of 2020.
Third quarter, GMB grew 83% to $2 3 billion exceeding our outlook for one eight to $1 85 billion.
The increase was driven by strong merchant and consumer adoption across all categories.
As of the end of the third quarter active merchants more than doubled to nearly 12000, while active consumers, which we measure over the prior 12 months period increased 60% to $5 4 million Transat.
Transactions per active consumer also rose from $2. One did you can't do it.
While JMP exceeded our outlook the momentum of the business with even stronger than the 82% headline growth indicators, excluding peloton third quarter G&P doubled driven by growth across all categories did affirm serves as well as from both new and existing merchant relationships.
The broad based category growth also serve to diversify merchant concentration as peloton, where fulfillment lead times improved outpacing your expectations represented 18% of third quarter <unk> compared to 25% a year ago.
As Matt indicated trouble was the real highlight among our verticals, even though its take off began late in the quarter.
Travel accounted for just 2% of September quarter, GMB, but has steadily grown to 9% in the March ending quarter and April travel growth continued to accelerate taking its proportionate DMV to 11% of the company wide total.
Given the investments and partnerships we have made in the category, we expect travel to contribute meaningfully in the fourth quarter and beyond.
Our <unk> business accounted for 43% of our total GMB.
With the third quarter of 2020.
Loans with the term length of greater than 12 months accounted for 30% down from 35% in the third quarter of 2020, reflecting our expanded merchant base and higher velocity and lower and lower average order value categories.
Accordingly, <unk> also declined slightly from $612 to $564.
The strong momentum in <unk> growth in the third quarter translate into revenue growth that also exceeded the expectations. We shared with you in February of $185 million to $195 million.
Third quarter net revenue of $231 million increased 67% driven by total network revenue, which grew 53% to $112 million in interest income, which grew 80% to $95 million.
Roughly one third of interest income was driven by the amortization of the discount on loans held for investment on the balance sheet rather than from consumer interest payments.
Of interest income related to consumer interesting grew more slowly up 42% year to year.
Revenue from gain on sale of loans of $60 million increase from $10 million in the year ago quarter. As a result of more favorable loan sale pricing terms and more volume sold.
Finally servicing income of $8 million increase from $3 million in the prior year.
As the average unpaid principal balance of loans owned by third parties grew year over year.
I'd like to call out that our Q3 results included $3 $5 million reduction that's all revenue, which we recorded in relation to the estimated financial impact to affirm our peloton has announced voluntary recalls are tried and true plus products.
Reduction is split between $3 $1 million in merchant network revenue and <unk> 4 million of interest income.
We estimate was based on projected return rates provided by telephone for the quarter ending June 32021, and its most recent quarterly filings.
We continue to improve our unit economics in Q3 growing revenue, 67%, while transaction costs, excluding the provision for credit losses grew 50%.
Transaction costs, including the provision for credit losses in the third quarter were $97 million, a 34% year over year decrease.
Third quarter results included an $83 million decrease in the provision for credit losses versus 2020.
Transaction costs, excluding the provision for credit losses were $98 million up $33 million or 50% from the third quarter of 2020 significantly slower than revenue growth.
Lots of them on purchase commitment with $62 million compared to $44 million in the prior year driven by the increased volumes zero percent APR loans.
Provision for credit losses, with a gain of $1 million compared to an expense of 82 million in the prior year, reflecting the reduction in allowance to a record low of five 2% of loans held for investment.
Last year, we took an incremental $56 million provision in anticipation of record unemployment, which has been released over time as we had been experiencing stronger than expected repayment history in the portfolio.
The reduced allowance that I mentioned reflect materially better estimates on future loan losses and is consistent with our strong credit performance.
Additionally, our loss of an emerging growth company status. We also adopted deceitful accounting standard retroactive to July one 2020, it should not have a material impact on provision for credit losses in this period.
So any cost increase from 8 million to 15 million in the third quarter of 2021, but grew slower than loans held for investment. The increase reflects the issuance of securitization trusts, which bear interest at a fixed rate as well as increased average funding debt offset by below average interest rates.
Finally processing and servicing were $21 million upfront $14 million in the year ago quarter.
Slower than total platform portfolio as we realize scale efficiencies.
The combination of strong topline performance and reduce transaction costs resulted in better than expected revenue less transaction costs of $134 million.
Compared to our third quarter outlook for $60 million to $65 million.
Looking beyond transaction costs to our investments to drive long term growth there was a meaningful impact this quarter from stock based compensation primarily related to the January IPO.
Technology and data analytics expense grew by 193% to $99 million.
Or from 24% to 43% of net revenue, primarily reflecting FCC and higher engineering headcount as we work to extend our competitive advantage technology that Matt noted previously.
Excluding SBC of $46 million technology, and data analytics expense grew 74% compared to the year ago quarter.
Sales and marketing expense increased from $7 million to $58 million or from 5% to 25% of net revenue primarily as a result of SBC and divesting of warrants granted to shopify associated with our exclusive long term partnership.
Excluding SBC of $10 million and the impact of Shopify warrants, a $17 million sales and marketing expense grew by $25 million compared to the year ago quarter.
General and administrative expense increase from $31 million last year to $147 million or from 23% to 64% of net revenue due in part to an increase in the finance legal operations and administrative head count to support the company's long term growth and public company operations.
G&A also included an $11 million sublet impairment relating to our changing real estate footprint in light of our remote first policy.
Excluding SBC of $82 million, which includes 38 million associated with the grant of multi year performance based stock options to our Chief Executive Officer, G&A expenses grew 132% compared to the year ago quarter.
Including these expenses GAAP operating loss was $169 million.
In the third quarter, 'twenty, one compared to an $82 million in the third quarter of 2020.
Adjusted operating income, which excludes depreciation and amortization of 5 million stock based compensation of $140 million, the shopify warrants, a $17 million and other nonrecurring items of $13 million was $5 million.
$6 million improvement from the adjusted operating loss of $71 million in the year ago period.
As a percentage of revenue adjusted operating margin increased 53 points from the third quarter of 2020 and was 2%.
We continue to deliver on our strategy to grow our business, while being very efficient with our equity capital.
Gross side total platform portfolio, which includes the unpaid balance of all loans facilitated through our platform, including those loans held by third parties.
From $2 4 billion as of March 31, 2020 to $4 2 billion at the end of the third quarter or $1 $8 billion a year to year growth.
This $1 $8 billion in growth was funded by $1 3 billion in securitization volume and $552 million in toward flow volume, while we were relatively flat year on year with the on balance sheet warehouse financing.
On the funding side in our third quarter, we executed the 2021, a revolving securitization. In addition to a new warehouse facility and new loan sale program.
These deals have allowed us to efficiently scale our program despite growing our loans on the balance sheet by $1 2 billion, we were able to reduce the equity capital required from the year ago quarter by 10% from $229 million to $207 million.
As a percentage of total platform portfolio equity capital required fell two 5% from approximately 10% from a year ago quarter.
Looking ahead, we are encouraged by the momentum in our business and we believe the strengthening of the overall economy will serve as a tailwind in the fourth quarter.
We are seeing <unk> growth across all categories, particularly those hardest hit by the pandemic as demand recovers.
We are also encouraged by the strong consumer and merchant adoption, we saw in the third quarter.
Reflecting these dynamics, we are raising our outlook for the balance of the fiscal year.
For our fourth quarter ending June 32021, we expect GMB of two two to two 5 billion.
Revenue of $215 million to $225 million transaction cost of $135 to $140 million.
Revenue less transaction costs of $80 million to $85 million.
Adjusted operating loss of $55 million to $50 million and a weighted average share count to $270 million.
As I noted a moment ago, we recorded a $2 $5 million reduction to revenue in Q3, which represents the estimated direct revenue impact from peloton tread and tread plus recall.
While we do not expect any additional revenue impact from the refunded merchant fees in Q4, we do expect an increase in returns starting in the near term, which will negatively impact key operating metrics like G&P.
Our financial outlook takes into account this estimated <unk> impact associated with the refunds as well as an estimated impact on lower future tread and tread plus GMB.
Additionally, our outlook includes the impact from the acquisition of returning money, which we closed on May one, but do not expect to be material in Q4.
For our fiscal year 2021, ending June 32021, we now expect GMB of $8 <unk> to $8 6 billion.
Revenue of $824 $834 million.
Transaction costs of $460 to $465 million.
Revenue less transaction costs of $364 million to $369 million adjusted.
Adjusted operating loss of $55 million to $50 million.
And our weighted average share count of approximately $160 million.
The full year guidance in the fiscal year to date financials include the impact of the adoption of Stifel retroactive to July one 2020.
This adoption resulted in a $16 million downward revisions of previously reported provision for credit losses for the first half of fiscal 'twenty, one as a result of the reduction in allowance.
In closing we had a strong third quarter consumers are adopting our product in greater numbers and our merchant partners Youre seeing real growth enabled by our product offering.
And we believe the best is yet to come.
We are delivering on our mission to improve lives Thanos financial products, while also delivering results for our shareholders.
With that we're happy to answer your questions.
At this time, we'll be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Please press star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. As a reminder, we ask that you limit yourself to one main question and one follow up and then re queue. If you have any additional questions.
Our first question comes from the line of Dan Perlin.
Hello, Perlin with RBC capital markets. Please proceed with your question.
Thanks, guys and good evening.
I just wanted to kind of make sure I understand all these dynamics that are at play here.
In particular.
The merchant take rate in the in the quarter drops and it looks like it's implied to kind of stay at these levels in the June quarter.
I'm, assuming some of that has to do with maybe peloton and also bringing on shop pay installments, but if you could maybe help with that dynamic first that would be very helpful.
Yeah.
Yes, so when looking at merchant fee revenue. The first thing is really important to sum up both the merchant network revenue and the virtual card network revenue lines in particular, the virtual card network revenue is a key way, we collect merchant fees from our travel merchants does travel continues to.
Again, an important it's an important line to look at it in combination.
And then yes, the biggest impacts around just the total take rate, which was actually in line with our expectations.
Is the mix away from longer term to your personal loans, notably peloton, which declined in concentration.
Okay. So are you implying that I know you don't want to go out to 2022 guidance at this point, but.
I feel like the models were set previously it would be closer to 500 plus basis points in the 2022 period and this is kind of suggesting that that may be.
Accelerating on the down trend here so.
All I'm trying to I guess ultimately get to.
Is your expectation that.
<unk> is going to meaningfully increase the <unk> to help offset that or.
Is this kind of a run rate that we should be thinking about even will be combined both the virtual card and merchant network as we think about jumping off into next year. Thank you.
Yeah, we're not going to give any.
Guidance into 'twenty, two right now, but the only other thing I'd add is.
There's a small impact from from obviously, the $3 $5 million number you see in peloton. This quarter and then the interest income dynamic, which definitely affects the merchant fee recognition.
So at play here.
But we wouldn't expect there to be a material change from on the merchant total merchant revenue side from from the impact of Shopify.
Okay. Thank you.
Our next question comes from the line of Ramsey El <unk> with Barclays. Please proceed with your question.
Hi, guys and thank you for taking my question. This evening I wanted to ask about the travel and ticketing vertical it really seems to be enjoying a pretty rapid recovery candidly more rapid than I would've expected given the state of the world right now.
It's up at about 9% in the quarter of total <unk> I think you said, 11% in April.
Where can we see that go you think.
This vertical will become a larger percentage of your business that presuming that there is still plenty of runway for the travel recovery to kind of play out.
Yes. So first of all you are totally right traveling ticketing is see what can only be described as a resurgence. So if you look at the.
Comparison to last year.
Fiscal Q3, which was a high pre COVID-19 quarterly market is really important to note that in general we are comparing this quarter to kind of pre COVID-19 affirm because obviously COVID-19 changed everything but the growth even versus that number was 50%. So we're coming off from a essentially collapsed base, serving zoom in and look what's happening.
Right now.
Month to month growth is nearly tripled.
So it's just an unbelievable research is very very quickly in that space and we're very excited about it we're very well positioned.
We have all kinds of partners into places like the Ikon pass verbal cost of Expedia Priceline. Some of these folks who've been with us for very long time.
I kind of get a relatively new partner and then of course Delta Vacations American Airlines are enormous partnering as well. So we're very well positioned space actually it speaks a little bit to the fact that were quite unique among RV NPL broker in a sense that we played both low and high ticket items, and obviously sort of pent up demand for just getting out of town and going somewhere nice implies higher <unk>.
The values, we have to provide our services for both multi hundred dollar tree multi thousand dollar tickets there until we do very well in all of those so I think I'll, let Michael opine on.
Exactly what we might want to guide too, but the overall economic recovery is just huge and the travel ticketing space and we're super well positioned to benefit we're starting to see all the investments that we've made over the last year just setting up for this recovery really pay off.
That's terrific that's terrific.
And I also wonder if I could ask you to give us a little more color on the return Lee acquisition and sort of how it fits into your broader this strategy, maybe a bit on revenue synergies and an annualized contribution to the P&L. Just so you can kind of figure out how to model. It next year.
I'll, let Michael speak to the modeling cognizant that certainly just headache, but.
In terms of the the value to us.
It's an amazing synergy if you think of it sort of.
From a product point of view, returning literally picks up or affirm leaves off. So if you look at we bring the consumer to the checkout counter with the confidence and certainty that they will be able to afford this there'll be no fees would be total transparency in pricing.
And they're happy to buy and what will happen if the shoe doesn't fit or it's not quite like the color.
Exchanged.
And.
Up until their trial acquisition affirms had Walgreens will be a really nice clean refund process for you, but once the merchant feedstocks and refunds and you can come back and shop and we always saw that I was just a huge opportunity for us to step in and say well what if.
What if we know one customer well enough to allow them to shop, even before they put the unwanted item in a box so that they can accelerate commerce.
Dissatisfaction that much faster and help merchants just move the inventory that much quicker and so we saw this long enough ago, because we actually invested in return rates. So this is not.
Adult front, we attracted a lot of progress for a very long time, where credit investors something to realize the synergies were too great to outlet can be too far away from us and completed the acquisition.
And you will see just an incredible amount of synergies first and foremost from point of view of going to market when we speak to merchants.
The question of what do you do about returns often Northland Art standard answer has always been about what will be your best return handling partner because consumers love US we don't charge fees there'll be no hidden gotchas.
Now of course, we can augment that actually will make it even better before they even have to put down what item in a box we will be there. They can start shopping right away and help you sell more and so that's why we're so excited about this.
Just closer where we have a ton to go on to bring to market together.
Massive network of users.
8 million people have used return less successful.
Other cross booster for our products on the affirm slide.
There is much more.
To get together.
I also want to comment on how to account for the property opportunities.
Yes, we haven't disclosed any revenue or profitability for return Lee.
We'll update you guys in September but I would note now though is they do have two different revenue streams, they do charge a SaaS.
Yes.
Model for most of the merchants, who use the product which.
Which we think adds stickiness and adds into the fight in the loyalty space.
And they also as an underwriting component of risk taking component. If you think about what the process that Mac just outlined.
We think we can add a lot of value to that both on the cost side as well as in bringing that product to our existing merchant base.
Got it sounds like a great fit I appreciate you taking my question.
Our next question comes from the line of Matt O'neill with Goldman Sachs. Please proceed with your question.
Yeah, Hi, guys. Thanks for taking my question.
I was just curious if you can help articulate a little bit better a couple of.
Sorry timelines for Rollouts I was just curious in the next couple of months, what's going to allow 100 merchants on Shopify is now at 10 10000 merchants get up to.
Much broader distribution is that on your side or buy side or both and then.
Similarly found the card announcement very exciting and understand that that'll be a later in the year.
Kind of launch, but just again kind of curious what the milestones are on that as far as getting closer to a broader launch. Thanks.
Yeah, that's a great question.
I'm afraid I have to update the shop I know before you just since the last we edited the press released the number went up to $12 5000. So this.
This is not a forward looking statements I don't know how quickly it'll grow, but obviously starting pretty quickly.
Just to give you a quick breakdown of what's happening in shopify. So first of all are obviously super excited that we are fighting over here.
For this product.
We will be available in June.
And that means that every new shopify merchant coming onto the platform would have sharp pain installments powered by firm enabled automatically and so we'll just see we think a tremendous amount of uptake on the merchant side now because shopify is not exactly a small network. In fact, there are hundreds and hundreds of thousands of merchants that are eligible for <unk>.
Our collaborative product together, we have been pre approving and inviting existing merchants onto the platform and that's where these so rapidly scaling numbers are coming from.
We're far from done there and so we expect this number to continue growing not linearly.
I have very little prediction as to how fast will go but there is a lot more to add to this 12 5000.
<unk>.
That's what's happening on the truck side of things very excited about where that's headed.
Lots and lots more to do together as well so.
We worked very long and hard one cool stat about shopify.
I wanted to make sure that we are.
We are honest when we offer this product to the merchants by way of being in fact, better as opposed to just an exclusive partner and so we had timed.
Trying to complete a transaction using trumping installment is powered by a firm versus all the other competing products that may be found in a while.
Both new and existing customers, where at least 30% faster and converting so not do we only have a private placement of this product. We also are in fact offering the very best product in the market and so I think that's a pretty powerful endorsement.
Pop up.
Card.
So yes.
Some of you have met us during up testing the waters process before we went out to actually do a up.
Initial public offering that's roughly what I wanted to do with the card announcements, it's very different and I agree that is very exciting, but it's easy to get excited about what's going on in your head without getting confirmation from consumers. So we announced the product primarily to see what would happen to a waitlist would we find ourselves surrounded by yards are people.
Actually saying Wow. This is the most exciting thing.
The news cycle and be up.
In the world are already pretty exciting fintech very happy to report that.
The waitlist.
Excellent links from my Vantage point and so we're very excited to bring this product to.
Two markets, but.
It's all linked a time where.
We're going to roll it out this year.
Okay got it thanks.
Maybe just one real quick follow up.
Would you be willing to help us at all think through the composition of next quarter's guidance, specifically with respect to the provision just because thats been a line of.
Outperformance.
<unk>.
Quarters as a public company, thanks, guys I'll jump back in.
Yes.
The best two quarters have seen pretty large releases, we do think thats behind US now if you look at the allowance as a percentage of loans held for investment at five 2%.
And the ZIP code or they have a pretty safe number, but not something we would see materially decline from here.
Got it thank you Mike.
Our next question comes from the line of Moshe Orenbuch with Credit Suisse. Please proceed with your question.
Great. Congratulations on all the solid progress, we just talked about with shopify.
Just wondering if you could kind of just help.
For us understand how those customers will kind of relate to the affirm ecosystem or are they going to be customers just have that kind of your venture with shopify or will they be part of the affirm.
Will they get and affirm account and will you be able to continue marketing to them.
Okay.
So.
I guess, the easiest thing to sort of make it extremely black and white as that you will be able to service your truckload pay pay installments loan either inside the shop app or inside they have heard about so I think that should give you quite a lot of the answer there is a lot of user interfaces details that have to be gotten rates. So if we see the customer again.
Together with shopify within the broader shop by ecosystem, which is quite a bit at this point.
Of course, it's very easy to recognize them within shopping environment, we have.
Prime placement, there and that will be the smoothness experience possible, if and when we find this customer outside of the Tri Party ecosystem.
We want to make sure we don't break them out by saying Hey, we've met you before so.
Though you're signed up but that kind of experience as well will be extremely smooth and build able to reaffirm their identity.
Could you come.
We would be able to use our services on any other merchants and so there's a slight difference between the old those paths, but they're all designed to be extremely simple and most important thing that's really worth understanding is that.
The underwriting cost with data associated with the know your customer provisions all of the things that we have to do to make sure that this customer is in fact someone we are willing to take the risk with happens in that first transaction and so there's just an enormous synergies financially as well as from either a basis point of view as we bring these customers on board.
Alright, and then clearly than you'd be able to even in some form.
Being able to kind of.
Or maybe I guess ask would you be able to reach out to them at that point.
Kind of invite them, if that's is that something thats possible.
I think depending on the circumstances I think there's probably a little bit more nuance to the answer then, yes, but particularly because we have no intention of spamming shopify customers.
The underlying question Thats not happening.
Okay. Thank you.
Our next question comes from the line of Andrew Jeffrey with please proceed with your question.
Hi, good afternoon, thanks for taking the question.
Certainly.
<unk> to see the recovery in traveling ticketing can you kind of just juxtapose that with any other changes in.
Card present behavior, you'd see from consumers in reopening in other words is there.
Is there is there any shift in consumer behavior E com that might otherwise temper, a very strong recovery in that.
Central category, where there seems to be a lot of pent up demand.
So I think I think there's a lot of different strands going so.
In general we.
See the economic recovery.
A huge tailwind for us and there's a bunch of different things that are connected to it some of it is.
In travel ticketing category, which just sort of coiled up.
It is now rapidly.
Fitting up as people are people can travel finally see their loved ones.
But also <unk>.
Heinz of subcategories that made up naturally go through immediately but they are quite large and are happening for example, 97% of all wedding, Scott postponed and only 5% of that got canceled because a lot of people that need to.
By relatively expensive bridal.
Dresses and also some other things and again playing in the high ticket items as well as both ticket items really positions us well for the sort of affordable luxury as well as everyday expenses and so we see a lot of demand in all these categories I'm just kind of took a break during 2020, if you will that said.
We are not seeing a reduction in demand in fashion and home fitness outdoor all of the different categories, where affirm has traditionally been very very strong.
Continuing strong would you actually look at the sort of the pre pandemic comparison, we have in this quarter ex Telefonica grew 100%, which is a pretty massive acceleration from the.
The quarter prior so.
Effectively not quite but almost doubled the second derivative of growth yet.
And that is already as the recovery began still from a small base, but the demand for this product is what's driving our growth, it's less sort of trade off from category to category. So we're very excited about all of these things and obviously have to.
And I believe it will be there.
Places that stimulus stimulus.
Okay. That's helpful. Thank you and with regard to card present generally.
You think about that category.
Can you update us on your thoughts.
How important.
The card is going to be two to growth in card present, and what the trajectory might look like.
Really.
I was trying to figure out what he meant by card presence now I get it.
So.
So I step back, but it could be important for us to provide.
What sometimes known as the Omnichannel solutions, especially for our largest partners we have.
A large long term partnership with Walmart that's been very successful.
A lot of our larger enterprise customers are now setting up for completely new modalities of interacting with their consumers.
By in store return on line bottom line in terms of all the different new modes of transacting.
And it's really important that we are able to meet the consumers.
Where we are in part of our card strategy.
We think this is kind of one of the best Reengagement techniques, we have to offer to our consumer if affirm is something that you love.
Our net promoter score speaks for itself. If we are in your wallet be it on a screen.
Sure.
Or in your actual physical wallet.
We'll have a chance to I'd remind you that you can use affirm pretty much everywhere you go and so we think our card strategy and overall omnichannel strategy in store.
And out of store.
Continuous landscape, just being where the customer is and making sure.
At the end consumers, making sure that we're able to meet their demands.
Thank you look forward to hearing more.
Thank you.
Our next question comes from the line of James Faucette with Morgan Stanley proceed with your question.
Great. Thank you you mentioned that some of the take rate.
Compression came from I guess peloton and <unk> zero percent.
Coming down as part of your mix did you see any pulling back from other merchants from their own zero percent promotions that may have also impacted that at all and I'm wondering as the mix changes.
Maybe a little bit more interest bearing how we should think about that impacting <unk>.
Customer acquisition et cetera.
Yes, we didn't we did not actually see a big change in terms of zero percent I mean, I think the biggest driver is the long terms of your percent program with peloton, which.
Clearly did come down in total, but otherwise I think the zero percent business.
<unk> was flat year on year.
For this for the same period, so we didn't see a pull back onto your percent programs generally.
And I think the biggest impact was from peloton specifically.
Zero percent outside of peloton accelerates.
Got it got it that's helpful. And then separately you kind of highlighted or called out what you expect the.
The revenue impact from expected returns to be associated with the the tread products.
Do you think that'll be fully captured or that program will be fully captured in the June quarter or is that do you think going to spill beyond the June quarter into the second half of the calendar year or the first half of your fiscal year.
Yes, so we use peloton guidance in their Q around the $50 million estimated return volume and we're a certain percentage of that.
And that's how we got to our $3 $5 million number that was actually in the fiscal Q3. So we don't anticipate there to be any impact in fiscal Q4 associated with for their refunds and also thought it'd be important to put in context that at peloton return number.
We will do a couple of hundred million dollars and returns in any given quarter. So for US. This is.
Much smaller impact than one might think from the outside.
Got it got it and so just to be clear on that Michael.
However.
Returns vary from their estimate what could there could be some future small adjustments to account for that then.
Yes, exactly but we don't anticipate that to be material I mean, when we take the bulk of that is the $3 $5 million number which again was recorded in Q3. So this should not be an impact in Q4.
Got it that's really helpful. Thank you.
Our next question comes from the line of Jason Kupferberg with Bank of America. Please proceed with your question.
Thanks, guys I just wanted to start with a follow up question on Shopify and I'm just wondering how much <unk> revenue within the Q4 guide there and just any color on consumer uptake of.
Affirm slash sharp pain settlement that you've seen so far among the merchants that have gone live.
Mike will speak to the to the guidance, but I don't think we're giving it.
But.
It's a little bit early.
To speak to the exact numbers just given the fact that.
Literally the 10000 number it is all about half that was the number that we quoted all of this happened in <unk>.
The last 30 days to make sure I'm not perjuring myself here.
So there is a.
It's a very very rapidly increasing merchant base.
We'll be able to speak a little bit more clearly as to what this actually means in terms of volume and in terms of.
Consumer adoption, obviously, we spent nearly a year of testing the product, making sure it's much faster than the competition much better converting.
Competitive itself and better position than the competition.
Well, we have very high hopes for what that actually means in terms of volume volume generation, but we'll seek to real numbers as we have them.
Yes.
Okay.
Very specifically for for Q4, the focus is getting to GAA. So that the impact we would expect to be more material than in fiscal 'twenty two.
Okay. So you think maybe.
Next quarter, we will get a sense on what your expectations are for 'twenty two from Shopify.
Yes.
Okay.
And then just a follow up question I'm wondering what trends you guys are seeing just in terms of both consumers and merchants adopting more than one be NPL provider and what you think the.
Implications over time might be for for industry consolidation.
Okay.
Definitely hard to speak to industry consolidation.
That's.
That doesn't include us.
We think we're the best but.
Obviously, everybody has a bias for their own.
<unk>.
Last quarter, I said, something along the lines of we expect to.
To have ultimately capacity to offer multiple providers integrated wildfire the <unk>.
Probably trends to one provider I think that's still true I would say that.
The momentum towards multiple providers at a single low near the merchant has not been quite as quick as I had anticipated while the ability to retain and ability to serve high AAV merchants has been even stronger than our thoughts I think the complexity of both technical and risk management.
On the higher side of things.
That's why we continue to be our core advantage.
They're real and it's very hard for our competitors to just incredibly in that area.
A low 80 side of things I think.
Again, I believe that ultimately.
<unk> will have one or two maybe three providers, it's a little bit early theres. So much growth available in every sub segments.
Would it be it's fundamentally fashion beauty.
Some of us are but lower.
Hard goods hardgoods and at the moment there is so much demand just looking at the numbers I just quoted on shopify, its pretty clear that there's an enormous amount of pent up demand on the merchant side. So at the moment the competitive overlap is not yet a major topic on our minds, but.
We will report back on the quarter.
Alright, well, thanks for the insights that nice quarter.
Thank you.
Our next question comes from the line of Chris <unk> with Seaport Global proceed with your question.
Hi, Thanks, good afternoon, and thanks for taking my questions.
I wanted to ask about.
Merchant adoption of final pay later look at your your firm App and all the merchants that are in there that currently don't have it.
On their checkout screens their website.
It feels like with the consumer adoption starting to gain traction can you give us a little insight on where you think we are in terms of merchant adoption, especially in the travel space. It seems like you're getting some great numbers in travel this quarter, but.
There's a lot of travel sites that don't have buy now pay later, yet so you can get your thoughts there. Thanks.
I agree that is why we have a sales team.
Very hard work.
<unk> got very problem so.
Okay.
I'll give you a more serious answer.
So.
Our app.
So there's multiple ways, we collaborate with merchants one of them obviously is.
Embedded at the point of sale sort of classic.
The buy now pay later or $6 12, whatever the merchant suite that we offer at checkout that makes sense for this particular.
Price points.
Beyond that through our App and in our App, you can be lifted whether youre integrated or not the way we get competition from merchants for driving these new and growth transactions, which are very very powerful by the way for them their impact more valuable than consumers that we help close at the point of sale. These customers actually are starting their shopping journey.
In our App and our.
Two eight point of sale and a merchant in those situations <unk> quite frequently will pay us essentially a bounty or a referral bonus for bringing this consumer to that and then within the App itself, we have quite a lot and by the way I see the App I used interchangeably with fair amount of our consumers.
As our sites, perhaps because they prefer the larger screen format, but in both of those cases those are essentially advertising opportunities for our merchant partners to bring their offers new product et cetera to be a part of ecosystem. So in all the situations. There is a financial relationship with a merchant sometimes.
The merchant doesn't have affirm integrated at the point of sale yet they may have already signed an agreement and we are waiting for the technical teams to become available part of what we pride ourselves on is this ability to delight here very quickly we have a variety of configuration modalities we have.
Thats really been leaning into cold affirm light, which allows merchants to go live literally within minutes of signing a contract.
But there's many different modalities of integration, sometimes it's a long climb subsequent sometimes you'll find us promoting our merchant in our app and yet, but she doesn't have that point of sale integration, but.
So all of those things are just ways of delivering value to our merchant partners.
That's what that's what we do all day every day.
Great that's great color and I actually have a related question speaking of delivering value to your merchant partners. It seems like the biggest bear case or pushback I get on this story is merchant pricing in the entrance of Paypal and other potential providers, who are going to give it away for free or a credit card interchange rates potentially undermined.
The pricing model that a lot of the financing later startups are.
Yes, sure pioneers have used.
My impression is that the.
Firms are little bit different given your product mix and your ability to do more of a looming loan products. So maybe just comment on.
Merchant pricing and your.
Your ability to drive.
For contract renewals that have pricing at relatively similar levels, given the value you're delivering to merchants.
Okay.
So of course, there's a lot there and I'll try to keep it short, although this may well turn into area.
So real quick.
So one way of thinking about merchants perception of merchants relationship with affirm.
Not just a payment provider, we are fundamentally a marketing device for merchants and so when you typically talk about price compression.
Are you outside the interchange boxes common payment industry flying it doesn't really apply to US we are competing for both the payments budget, but more importantly for the marketing budget. When the merchant says like discount we're going to do something else affirm stands up and says don't discount instead offer zero percent rate and maintain a price integrity.
That is not something merchants can do without our help.
What we do at peloton Thats, what we do.
Almost half of our transaction volume is your percent of transactions are being powerful converters of consumers that are on the fence theyre trying to figure out is whether they want to transact way want to transact right now.
Really important and fundamentally that doesn't really go get the payments budget and it doesn't compete with payments so much as it becomes a marketing channel and marketing accelerator, there's a lot more where that came from if you just think for a second half would be apt us so it doesn't even.
Consumers convert it helps them become excited about a product they can find out about it as they are spending time in our ecosystem.
Maybe servicing the loan maybe they are checking out with new merchants, we product, but that's another opportunity to tell our consumers that hate this new promotion just new interesting idea all while helping the merchant maintained price integrity and so I think those two endpoints really highlight that we're fundamentally not.
In the same space.
Credit card players.
We're not comparing our pricing to change.
Akshay, partly Eric.
Got it.
We entered into details Michael will keep me honest.
You want to get too detailed on this call maybe you can imagine that's awesome maybe just.
Fair to say that merchant pricing is not one of your biggest concerns near term.
And it's not and probably where it's most apparent isn't the high ticket items I think you can really see that.
Navigating that becomes a lot more about managing risk and managing the technical integration and just the overall interaction with the consumer also creates so if you think about buying a peloton thats 39 opportunities for me to tell you about all the cool exciting things that are happening in the affirm space, that's really really powerful it's very different problem really.
Chip, what Paypal, frankly, or with your credit card provider.
Awesome. Thank you so much of the color.
And our next question comes from the line of Bryan Keane with Deutsche Bank. Please proceed with your question.
Hi, guys really solid quarter I also was going to ask about that and maybe Michael just your perspective on a same store sales kind of merchant take rate because I know that does come up a lot maybe on renewals what youre seeing and is there a big difference between highway.
And low <unk>.
There's not a difference in terms of.
The trend around renewals I think frankly, we're probably still in the early innings on that and that will bear itself out over the next couple of years before you start to see meaningful.
Pressure on things like contract renewals.
So.
Not really a data point there.
What I would say, though is that we would unquestionably very competitive out there in the <unk> space, if youre only offering paying for it is increasingly.
Becoming commoditized and that's why we think it's so important to offer a wider range of average order value solutions and increase the merchant services that we offer beyond just.
The buy now pay later and hence the acquisition for internally.
Got it and just a follow up on the Shopify deal.
Are you guys.
And then converting more of the existing merchant base that 12500, you're at now is there something youre doing.
Doing to get those guys ramped up quicker and then how also do you get more checkout do you push is there a way to push the solution more.
To get them to.
To push the affirm solution.
I think the short answer is we expect to get a lot more I think this deal it really only makes sense. If this is a.
Pervasive I guess is the word I'm looking for a solution across shopify ecosystem.
I think both companies are very motivated to make sure that the refinery were ready for <unk>.
<unk> rollout.
So a lot more on top of that that was mentioned so often haphazard merchants one lives.
Primarily in just the last 30 days or so and so that this is a.
Good test upward demand looks like.
The multiple education opportunities that we have with.
In concert with Shopify.
For larger players we go to market together, we have sales teams working side by side, making sure that we educate enterprises, making sure that we figure out exactly what solutions they need customized for the big part of why trumped by chose us as well.
We're not a one trick pony, where not just to pay for and what else do you need to built very very complex very interesting systems for our partners for Priceline Walmart and some of the larger players that are on shopify really have some pretty specific requirements.
Plenty of opportunity to go there.
A long tail.
It is.
Fairly exceptional communicating with the merchants and we are very.
Very excited too.
It will be ready to tell the story too.
Hundreds of thousands of shops that are eligible for this solution.
Got it thanks for taking the questions.
And with that ladies and gentlemen. This concludes our question and answer session as well as today's conference call. You May now disconnect. Your lines at this time, we thank you for your participation and have a wonderful day.
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