Q3 2022 Affirm Holdings Inc Earnings Call
Sure.
Good afternoon, ladies and gentlemen, thank you for standing by welcome to the firm Holdings' fiscal year 2022 third quarter 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.
Of the call will be available on our Investor Relations website for a reasonable period of time after the call I'd now like to turn the call over to Rob Ohare Senior Vice President of Finance. Thank you you may begin.
Thanks, operator.
Before we begin I would like to remind everyone listening that todays 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 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 intend 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.
For historical non-GAAP financial measures reconciliations 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, firm's founder and Chief Executive Officer, and Michael Linford affirms Chief Financial Officer.
With that I'd like to turn the call over to Max to begin.
Thanks, Rob and thank you everyone for listening in we.
We delivered excellent results in fiscal Q3.
Accident merchants grew by more than 60 fold year over year.
Active consumers grew by 137% year over year with greater frequency and engagement our <unk>.
Transactions increased by 162% year over year.
Highlighting the trust we are building with consumers, 81% of all transactions were from repeat affirmed users. This is the highest repeat rate that we've ever reported we accomplished this while another one 5 million consumers joined our movement to replace confusing outdated financial product was new honest once our GMB was up to <unk>.
$3 $9 billion.
Growing 73% year over year, almost doubling excluding peloton total.
Total revenue was $355 million, a 54% increase year over year and revenue less transaction costs key measure of our unit economics, It was 182 million or four 7% of GMP.
We continue to grow with our existing partners and add new ones. Just a couple of operating highlights since the beginning of Q3.
The travel with ticketing segment has been outperforming expectations and volume more than doubled year over year, our longtime partners Expedia verb and price line.
In the top 10 by volume in Q3.
Quarter also marked the general availability of our firm on American Airlines and the launch of our very first Canadian travel merchant. We're excited to continue growing our network of relationships in this segment.
Our firm continues to be the strategic partner of choice for enterprises and platforms, adding to existing collaborations with Verifone and adient, we partnered with Pfizer and global payments to make signing and launching new merchants frictionless.
We're also excited to announce a new agreement with stripes unlocking streamline distribution of a firm's honest financial products to millions of merchants.
Since the launch of our partnership with Shopify, just a year ago, we have seen significant uptake of split PE or biweekly paying for product. We have expanded our agreement with shopify to bring affirms monthly offering to the platform. We plan to start rolling out adaptive checkout and simple interest bearing installments by the end of our 22 fiscal year.
As part of this expansion I'm also pleased to report that we have extended our exclusive relationship with Shopify lots more details in the press release that we have just filed.
This marks our fifth straight quarter and proud we are of all of them that said, we operate a firm.
Longer horizon in mind, our goals are to deliver value for our customers and improve the lives of consumers and ultimately in doing so generate cash flow to reinvest in our business and create value for our shareholders. As you will see in a Michaels report we have already delivered profits on adjusted operating income basis, and this quarter makes it three out of the loss.
Five youll.
Youll see in our guide that we still expect to invest in the next quarter, but let me make something very clear.
Our plan is to achieve a sustained profitability run rate on an adjusted basis by the end of the next fiscal year that is to say, we expect it to generate revenue that consistently exceeds our adjusted operating expense starting July one 2023.
We do not expect our planned for reaching profitability to compromise growth just as we demonstrated this quarter. We also do not plan to raise any new equity capital because we believe our firm has fully funded to profitability.
We will share our full fiscal year 'twenty three outlook and full year guidance in our next earnings report.
But to see a little more here, we do not see network and revenue growth and margin as quantities in conflict with each other indeed, our growth combined with strong unit economics is what propels us towards profitability consumer demand for our products is significant and we only expect it to increase in the.
Value, we create for our customers goes directly to their bottom line.
Meanwhile, the market penetration in the US is still in the low single digits.
And at the gross scale, we've already achieved the increasing rate of repeat transactions at 81% today affords us several advantages most importantly economies of scale in fixed and transactional cost meaningful underwriting improvements and opportunities to deliver new products to our consumers and merchant partners at a very low marginal cost.
This is why the bookends of this quarter's results are so important we nearly doubled our network volume ex peloton, while managing our unit economics to four 7% of GMT. This is well ahead of our long term model of 3% to 4%, we grow our network GMB responsibly and deliberately with the unit economics.
Always firmly in mind.
This is especially so because as a vertically integrated network, we manage the risk embedded in our transactions, we covered our approach to credit underwriting in the past, but I still like to speak briefly about our credit risk management.
Every time, you want to use our firm to buy something you have to apply to be approved for that specific transaction, we make it easy and convenient for you to apply but we will still look at the state of your finances at that very moment, including among other things you've recent credit usage and then decide if.
If we believe you won't be able to pay off your loan we will in fact decline your application with compassion and transparency without fail.
As a reminder, we do not charge late fees or allowed revolving in other words, we have a structural incentive to decline a transaction that we believe to be a bad financial decision for you because of proving it is guaranteed to be bad financial decision for us.
And as our scale of transactions over 10 million last quarter alone. The dials, we get to turn to control credit risk are highly find great.
Another key structural advantage is the very short weighted average life of our loans, which is about five months as.
As the economic cycle changes the loans, we made in the past, we'll have a rapidly diminishing impact on our firm's future financial performance.
Given our structural incentives to engage and responsible lending deep commitment to strong network unit economics, and a high degree of control of our risk. We strongly believe we are well positioned for success in a downturn.
During the very brief recession of 2020, we saw applications nearly quadruple at many of our merchants, we believe paying overtime without late fees and Gotchas, who will be in greater demand during a downturn. It is our mission to improve People's lives and we will be prepared to meet this demand, but again our approach is only to extend credit that we <unk>.
Aleve can and will be repaid.
The multibillion dollar business. We have today is the result of years of trial and error ideation and execution one of the many attractive properties of operating a network at scale is that it can be very cost effective to deliver new products and services to a large active audience.
Not all of our new offerings will result in our next billion dollar revenue line.
But we are committed to finding the ones that do.
Last September we shared some of our product plans with you. We've continued to execute on this roadmap. So let me briefly run through some of was shipped in Q3.
Throughout the quarter, we delivered several iterations of the affirmed Super App the single platform for the growing family of a firm consumer offerings.
Each such iteration delivered results improving user engagement by about 3% and adding over 1% to our in App transaction volume. These numbers may seem truly small in comparison to some of our headline growth metrics, but obsessing over user experience of compounds.
And we have many more iterations plant.
We also rolled out a chrome browser extension, a convenient way to pay with affirm and online stores, where we're not yet directly integrated using a single use visa card while shopping in your desktop browser.
We brought adaptive checkout to many new transactional surfaces, including our own affirm any of our product chrome browser extension and as I mentioned it will be available on Shopify. We also added bitcoin interest to the popular affirm savings account a super simple way for our savings account holders to hold crypto currency by choosing to receive their savings yield in bitcoin.
Debit plus by now I suspect some of you might actually have the debit plus app and the companion card that comes with it. So you have already seen what's the first version can do you can split lower value transactions into for payment after the swipe and use the automagically preapproval button to plan larger transactions and feel confident in your spend.
<unk> power there are many more features coming over the summer and beyond most importantly longer term interest bearing loans and a firm rewards, but the V. One of debit plus is here and ready.
We Otis because even with this minimalist version, we are seeing an order of magnitude higher engagement among debit plus users as compared to non debit plaza firm users an average of more than two transactions per week and the debit plus experience will continue to improve as we release regular updates to our growing user base.
We are inviting tens of thousands of users per day to get their cards and expect to exhaust our now sizable waiting list. We appreciate your patience and open debit plus to all eligible affirmed users in fiscal Q4 <unk>.
Eligible here means a certain level of usage history in good standing with the firm.
It is super early and I'm still neck, deepen UX optimizations, but I am truly thrilled to begin with we think will be euro of debit plus the simplicity of debit and a flexibility to pay at your own pace with no late or hidden fees.
Our firm continues to succeed because of our exceptional team I've said, it before and I'll say it again it is a privilege to lead this company and I would like to thank all of farmers for marking another way point in our journey.
Thank you our shareholders for your continued support.
As you can see.
We remain focused on what ultimately matters results.
Now over to Michael to review those in detail.
Thanks, Max and good afternoon, everyone.
Our Q3 results and really our performance over the last several quarters demonstrate our ability to deliver impressive growth and attractive unit economics, despite a volatile market environment.
Once again, we outperformed our outlook for both growth and profitability and our unit economics were strong.
We continue to grow both sides of our network active consumers increased 137% year over year, while active merchants increased to nearly 210000.
Total transactions grew 162% year over year and more than 80% from repeat users.
Transactions per user are key frequency metric increased 19% year over year, we're more than doubling our active user base.
And along with that growth, we achieved profitability on a non-GAAP basis, delivering $4 million and adjusted operating income.
We grew <unk>, 73% and nearly double GMB when excluding peloton are.
Our revenue increased by 54% and our measure of unit economics revenue less transaction costs reached four 7% the GMB.
This was a particularly strong result, and well above our long term targeted range of 3% to 4% of GMB.
Our outperformance was driven by strong revenue growth.
Excellent capital markets execution.
And better than expected credit performance.
While the provision for credit losses increased year over year as a reminder, last year's provision with net negative given the release of excess COVID-19 related loan allowance.
We also continued to drive greater capital efficiency gains across our funding program.
As equity capital, we used to fund our loans decreased to two 4% of our platform portfolio versus four 9% last year.
With the strong growth of our business and continued momentum we are raising our outlook for fiscal year, 'twenty, two which I'll discuss more in a moment before I do that let me walk you through our third quarter results in greater detail.
Unless stated otherwise all comparisons refer to our third fiscal quarter of 2002 versus Q3 of fiscal 'twenty one.
We had another great quarter for consumer growth active consumers increased 137% to $12 7 million and increased nearly $1 5 million sequentially from fiscal Q2.
This growth helped drive $10 5 million transactions in the quarter, a 162% year over year increase.
Despite adding users at this aggressive pace. We also saw frequency increase as transactions per active consumer grew to $2 seven up 19% year over year.
In the third quarter active merchants grew to nearly 210000 from this 11500 last year. Thanks to the continued scaling of our partnership with Shopify on us.
Sequential basis active merchants, which we calculate over a trailing trailing 12 month timeframe.
Grew by 39000 or 23% from the December ending quarter.
Turning to GMP.
<unk>, 73% to $3 9 billion and our <unk>.
Third quarter, a $1 7 billion increase from last year.
As a testament to the increasing depth and breadth of our network no single merchant accounted for more than 10% of either revenue or <unk> for both the three and nine months ending March 31.
This demonstrates the continued diversification of our business, which we believe is a key area of strength and resilience for our firm.
Shifting to dnb by vertical.
And ticketing increased to $390 million up 122% from last year topping last quarter's high Mark.
With the recent easing of mass mandates and travel restrictions, we see extraordinary demand to book travel now and pay over time with the firm.
We also remain enthusiastic about consumer demand for live events.
General merchandise grew to over $670 million, 448% above last year, driven by our deepening relationships with the world's largest retailers, which also increases the seasonality of our business.
We saw roughly a $200 million sequential decline in <unk> within the category, which was in line with our expectations given the seasonally strong holiday shopping season and the December quarter.
Sporting goods and outdoor has declined to $425 million.
Down 21% from last year or 20% sequentially from fiscal Q2, driven by a roughly 40% decline in peloton offset by growth with other connected fitness merchants.
Hey, Brian , which we acquired on January one 2021, nearly tripled GMB posting annual growth of 198%.
We're excited about our prospects and the success, we are driving in Canada as well as other expansion opportunities currently on our roadmap.
Now turning to the financials.
Total net revenue grew 54% to $355 million well above our outlook of at least $335 million.
Network revenue grew 29% while interest income increased 42% in gain on loan sale increased 221%.
Revenue as a percentage of Dnb contracted 116 basis points to nine 1% driven by product mix away from longer durations youre presenting.
<unk> short term split payloads.
<unk> grew over 215% year on year and accounted for roughly 20% of <unk> in the third quarter compared to just over 10% last year.
In our earnings supplement posted to our IR website.
You will see that merchant revenue take rates have remained relatively constant for each of our offerings. Despite our hyper growth.
Our strong top line growth and the leverage we achieved on non provision transaction costs drove a 37% increase in revenue less transaction costs to $180 million.
Or four 7% at GMB, well above our 3% to 4% long term target.
Total transaction cost of $172 million grew 78% year over year compared to revenue growth of 54%.
Excluding provision for credit losses, which was negative in the prior year period.
<unk> costs as a percentage of <unk> declined one six points to two 7%.
Shift away from longer duration zero percent APR loan loss on loan purchase commitments declined 24% while improvements in our capital programs helped limit the growth and funding cost to just 8%.
<unk> costs were an area of considerable leverage in the quarter declining to 0.4% JV down from <unk>, 6% in the prior year period.
Provision for credit losses grew from negative $1 million, a year ago to $66 million at.
As the year ago figure included a significant release of excess COVID-19 related loan allowance. While this year's figure reflects the intentional normalization of credit that we've discussed over the past several quarters.
Credit performance was better than expected across all credit segments.
Small optimizations across our split pay in large enterprise programs yielded very favorable outcomes.
Led to lower allowance rates on new originations across a large percentage of our G&P.
Allowance for losses as a percentage of loans held for investment declined for the second consecutive quarter to six 4%.
The outperformance in revenue less transaction costs, and greater operating leverage allowed us to drive better than expected adjusted operating income in the period.
Our non-GAAP technology and data analytics expense reflects lower than expected personnel costs.
Our firm has a robust pipeline that call for more talented engineers and we have the ability to hire in the period.
However, we were able to partially address this need from technical talent in early Q4 with the hiring of over 100 engineers for referrals, primarily from fast in early April .
We also continued building our brand through sales and marketing investments, but the majority of these expenses were noncash in nature.
Excluding these noncash expenses that are fully outlined in our GAAP reconciliation tables posted on our IR website.
Our sales and marketing expense decreased by $1 7 million or 5% year over year, which represents an annual decrease of five points as a percentage of revenue.
Excluding transaction costs non-GAAP operating expense grew by $48 9 million or 38%.
Adjusted operating income was <unk> 4 million in the quarter or one 1% of revenue, which was significantly above our outlook.
GAAP total operating expenses, excluding transaction cost grew by $66 million or 19% driven by $102 million increase in warrant expense, partially offset by $80 million reduction in stock based compensation.
GAAP operating loss was $227 million, which compares to a loss of $209 million last year.
$227 million operating loss number includes $217 million of equity related costs stemming from our previously granted warrants to enterprise partners and stock based compensation.
Before I move to a raised outlook I'd like to discuss our funding program.
We fund the business to optimize for stable consistent access to deep and diverse pools of capital.
We ended the quarter with nearly $9 billion in funding capacity across our three main channels warehouse lines.
Flow agreements with whole loan buyers and ABS securitizations.
3% of the capacity is off balance sheet and all of our bilateral relationships are fully committed and generally in a multiyear agreement with only 31% as capacity maturing in the next 12 months.
Since the beginning of the fiscal year, we have brought on $2 5 billion in new funding capacity from new and existing capital partners and.
In addition to that $2 5 billion subsequent to the quarter end, we closed our $500 million 2022, a revolving ABS transaction and.
And last week, we also added a new multi year $500 million forward flow partnership with a large Midwest based insurance company.
We expect to continue to add capital to both scheduled committed increases from existing partners and Onboarding New partners.
Our capital program is structured to be resilient flexible and generate increased velocity as we scale.
Let me quickly recap each of our channels.
Our warehouse lines, our on balance sheet facilities with spreads ranging from 165% to 4% and we were able to advance up to nearly 90% against the loans we pledge.
These bankruptcy remote facilities are nonrecourse to our parent company and generally used to fund shorter duration collateral.
They also serve as a loan aggregation mechanism for our ABS securitization program.
We generally maintain these facilities at low utilization rates stood at 37% at the end of the quarter, providing a significant excess capacity.
Our forward flow program represented close to half of the overall capacity across a range of diverse partners and provides highly efficient off balance sheet funding.
These programs allow us to earn most revenue upfront and additional revenue overtime via servicing income.
Further loans sold to third parties at the forward flow program do not require an allowance for credit losses on the balance sheet or any related provision expense on the income statement.
Finally in terms of our ABS securitization program, we've closed nine securitization transactions that represent roughly $8 billion of volumes since launching the program in mid 2020.
Our deals have performed really well and we just achieved our first AAA rating as part of our most recent transaction.
Just as we've attracted many leading e-commerce merchants and platforms to affirm. We also attracted a diverse set of blue chip investors to our capital program.
This is a real competitive advantage for our firm.
We believe our scale and asset quality, where ensure that disadvantage continues into the future.
Our firm is strongly positioned to continue to drive outsized growth in the ABS market, which is highly liquid with over one five trillion dollars outstanding across all asset classes.
Now, let me share some color on our outlook, which you can see on slide 26 of our earnings supplement.
We expect the progress we've made thus far in fiscal year 'twenty two to continue to drive strong growth in our fourth quarter.
Consistent with the public guidance issued earlier this week, we expect the trends observed in peloton GMP in fiscal Q3 to continue through Q4.
We now expect our split they offering to contribute at least 20% of fiscal year 2002, <unk> with the largest contributor of this volume coming from sharp pains helmets.
We expect a sequential increase in total operating expenses outside of transaction costs driven by the recent hiring of the engineering team for fast in April .
And marketing campaigns currently plan to latter half of the quarter.
As always our outlook assumes the current forward.
Interest rate curve.
Finally, our outlook does not assume a material impact from the rollout of debit plus.
For our fourth quarter ending June 32022, we expect <unk> of $3 95 to $4 <unk> 5 billion revenue of $345 million to $355 million transaction cost of $185 million to $190 million.
Revenue of that transaction cost of $160 million to $165 million adjusted operating margin of negative 15% to negative, 11% and a weighted average share count of $290 million.
For our fiscal year ending June 32022, we now expect GMB of 15.04 to $15, one 4 billion revs.
Revenue of $1 33 to $1 34 billion transaction costs of $692 million to $697 million.
Revenue less transaction costs of $638 million to $643 million.
Adjusted operating margin of negative seven six to negative six 6%.
On a weighted average share count of approximately $283 million.
Now I'll turn it over to Matt for some closing remarks.
Before we open for Q&A I thought it would be helpful to quickly recap the steeply and our plans for our firm.
First we're laser focused on scaling the network, increasing our consumer reach and frequency going deeper with our existing partners and adding new ones are opportunities remain vast with significant underpenetrated markets to reach second we will continue investing in our technology people and brand and doing so with discipline, we have roughly 3 billion.
And dry powder and we firmly believe that we are among the most efficient allocators of capital in the industry third as I already mentioned with excellent unit economics, consistent focus on risk management and a diversified capital axis strategy. Our plan is to achieve a sustained profitability run rate on an adjusted basis by the end of the next fiscal year.
And finally at our core we are builders excited by the prospect of solving problems and improving lives, we will leverage our scale and reach to introduce brand new concept to our merchants and consumers like debit plus as we continuously expand our product and revenue lines while.
While the macro environment is uncertain at a firm picture has never been clearer. We are a category leader with massive growth in a rapidly expanding market opportunities as the secular trend towards honest transparent financial products continues our firm is in an enviable position given the depth and breadth of our partner network and our unwavering commitment to <unk>.
Actual responsibility.
As the category begins to go mainstream the opportunities. We can capture are only expanding we have an incredible team and an inspiring mission. We will continue to scale drive attractive unit economics and deliver on our mission to improve lives and focus on our results. We will now open the line for questions.
At this time, we'll be conducting a question and answer session. Please 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 your line is in the question queue. You May press star two to remove your question from the queue for parts.
Disappoints using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment, while we poll for questions.
Our first question comes from the line of Moshe Orenbuch with Credit Suisse. You May proceed with your question.
Great Thanks and.
I think that the.
The comments that you made about the success with respect to.
With respect.
The large merchants and the impact that that Chad, maybe you could kind of expand on that because obviously you've got.
Things that are going on that.
Potentially be able to add others and yet you've also got things like what you mentioned with respect to the chrome browser that.
It could allow for for situations where.
We're affirm is not it doesn't have a kind of dedicated relationship with the merchant. So I guess as we look out over the next several years, how should we think about that.
The biggest areas for growth for the company.
So the cool thing about building a network first of all thank you for it for the question sorry.
We've been listening to ourselves for a while.
So great great question.
So the thing mobility and network is you have to continuously balance the consumer side of the merchant side. So if we are signing on more and more consumers.
We are.
Implicitly, adding more places where they might want to go shopping and so it is essential for us to continue launching direct to consumer payment products, because if someone says hey, I'm, a big fan of brand X.
And I came from a store and BG peloton, where I'm not likely to repeat over and over we have to offer them coverage otherwise they will turn.
Okay, so back to the consumer and so the browser extension and the App, which has a marketplace feature in it.
The card itself all the things were building.
They're all fundamentally about retaining consumers and meeting them, where they want to go where they want to shop and so that that will continue happening and we see that as both an engagement driver and a revenue driver obviously.
It's a little bit different where we don't have a direct integration with the merchant, but it does not in any way reduce our commitment and just.
Attention the innovation on the merchant side, we have a whole bunch of stuff I purposely kept remarks will be shorter this time around but there's a long list of things that we shipped that have to do with merchants and I really did not give any credit to those teams just because we wanted to keep it quick.
We are continuously rolling out really interesting stuff like I'd have to check out is it really good example of it.
Just a very very fundamental piece of tech that we put together. It is the future of this buy now pay later industry consumers do not need to go through many different funnels. They just need to pick the right product for the better yet we should be there helping them pick the right product and that's what I'd have to check on does it literally figures out what is the best way of paying for something that will continue happening.
Part of why we need to continue hiring engineers.
You only maintained strong unit economics, if you are able to offer something that no. One else can itself competition on price stocks. If you have a commodity that everybody else as you're building stuff that no. One else Scott you can actually sell it at a good price and not worry about some of the undercutting you.
Got it thanks, and then as a follow up question, Michael one of the questions that we get most often from investors.
Investors as the face of a rising rate environment.
Obviously you have some.
Some products, where the consumer is the primary one that had been charged to the other that's merchant.
Charged to the merchant, particularly now the zero percent category could you talk a little bit about your plans as to how to.
Kind of manage that.
Rising interest rate environment for each of those products, maybe what you've also done to date if anything.
Yeah, we really havent had to take any action today.
If you look at the merchant fee rates slide in our supplement Youll see again relatively constant.
Merchant fees, we view that as a real marker of success in the face of pretty heavy competition, we're able to maintain and even grow in some cases the merchant fee side.
And of course, as we've talked a lot about on the APR side on the consumer side. Those those rates are are strong enough to allow us to deliver really compelling unit economics, and that's the lens through which we look at this question.
It is true that as rates go up there is pressure on the funding side of our business, but it is a mistake to think about that as a full flow through on a linear basis, we have many different funding channels with staggered maturities and very different structures and as I mentioned for example, we just on boarded a new forward flow partner.
It was an insurance company has a very different view of rates and how they think about that versus.
So say access to quality assets over time.
It allows us to manage it in the near term I think in the very long run so going out more than a year you would expect us to need to start to take action, but that's more of a long term thing than anything we would do it.
Tactically in the near term.
Got it thanks very much.
Our next question comes from the line of.
Dan Perlin with RBC capital markets. You May proceed with your question.
Good evening and lots of good stuff here.
I wanted to just touch on I suspect youre going to kind of tread lightly on a little bit, but I wanted to touch on this path to profitability.
On an adjusted operating income basis My question is.
When you think about it but when you kind of latest playing out how much of this is.
It's really a function of.
Scale, driven benefits that you've been able to accrue over the past several years versus really management's desire to kind of reach profitability sooner and then the <unk>.
Piece of that is.
Is there anything in the macro environment, that's compelling you to want to pull that forward or is this really in line with your long term plan that we may or may not have been.
Really aware of thanks.
Good question.
So first of all the most important thing to take away is that it really is the scale, that's allowing us to get there and if you look back a few quarters youll see that were sort of dangerously.
Flirting with profitability.
We're seeing it out loud.
I think it was useful and intelligent thing to do to tell the market hate we know exactly what it is going to happen here as the date.
But it's not the same thing I've seen or how should we got to get there fast so let's pull some tricks and do unnatural things not at all.
So in that sense, it really is a function.
Good thing was to build a product that commands a price and maintains a good margin.
And to be disciplined about credits you can grow faster.
Faster, if you're just to prove everyone.
Our competitors do that.
It's a lot easier, but you then have to deal with losses, we are not okay with bad losses or losses that we can't control. So those are all.
Things that we've always done and that's the scale advantage that we have today is the variable.
Revenue or adjusted.
Couple on my accounting terms, Michael Correct me later, but.
Certain scale your fixed cost get overwhelmed by variable revenue is basically.
What's happening here.
Yes.
The statement about profitability is fundamentally about telling the market. We've always had a plan, we know where we're going.
Here's a save the date.
We will continue to invest we're not doing unnatural things to get there.
Yes.
That's fantastic.
Just a quick follow up on the engagement here again very impressive.
It's a $2 seven.
In the current quarter last quarter was $2 five so that's all happening at the time.
It's massive.
Massive.
Active customer increase.
I have here is.
Are you finding that in that.
Usage that 81% versus seven 5% last quarter are the consumers using the same product again then.
Commented to split per user and there always are split paying user or are they finding that within that 81%. There are some diversification and they may even mature into other products.
Not steer them, but they'll incentivize them I guess, we're maybe educate them into other options that may even be better for them. Thank you.
Great question.
There's definitely a lot more to unpack there.
Then I suspect the time allows.
Here's a look bullet points that are easy.
Two to rattle off so the probability of repeating at the same store is generally speaking highest for majority of stores. There are some unique stores.
Just not going to come back because you already have.
Treadmill tomorrow, but.
Vast majority of time, especially for some of the largest partnerships is highly likely that you will repeat at the store where you came from.
Two.
There is definitely propensity to repeat on the same product initially, but as each cohort matures and we have more opportunities to teach them what else from can do for them.
Widens.
Three.
There is a fundamental difference between the behavior of people that have our app and the ones that don't like that it's just a profoundly different.
Behavioral pattern than I could write a small science paper on that one but.
Once you are using the App, you're basically starting to think of a firm as replacement for your purchasing device.
Let's use that.
Let's see what else can I say very quickly.
Last thing Thats worth, noting so I'd have to check out, which I sort of break bottled earlier.
You can think of it as a router for financial tools, we have sort of unpack the credit card. The idea of like Hey, you swipe your card will figure it out later.
Actually it could be user interface, it's terrible for you as they sort of financial decision personally, but it's a really really nice user interface.
The thing that we have to accomplish here is with the continuing offering you the choice.
Kind of have to guide you to a good decision because they are already we have a lot of choices and you are used to be neutral. We said all versus the category. So I'd have to check out is that idea as cannabis, where you say hey, here's three choices.
One is no interest at all this one is over the longer term, but has some interest et cetera.
As we deploy that across more and more services you.
We'll see more product cross pollination.
And we're right in the middle of just pushing that very very hard like literally I'm watching the.
First numbers coming in from some of the deployments outside of our own products.
Probably next quarter, we'll start talking about what that cross pollination, where it looks like.
That's great. Thank you so much.
Our next question comes from the line of James Fawcett with Morgan Stanley You May proceed with your question.
Very much thanks for all the details today on wanted to ask about.
On your credit performance, you said it had been a little bit better than you'd thought Michael and can you talk a little bit about how you're managing that right now, especially with the changing environment are you being more restrictive at different points or are you finding that that is necessary yet I'm. Just wondering how you are good.
Just wondering if you could give a little color in terms of how you are managing.
Credit applications.
<unk>.
And going out of credit right now.
I'll start and Michael probably give a more precise answer.
No.
<unk> always managed at exactly the same way we have not at all.
<unk> our approach we look at both vertical and horizontal slices. We asked the question how is this.
Born in American Society is doing median Australia.
How are the overall in terms of their job security is sort of the policy set surface horizontal slice and then vertically. We asked the question. How is this how are the sales in this.
Merchant category, we know where folks are selling we know.
It's selling a better or worse, which means that the advertising campaigns that drive consumer demand can reach audiences that are potentially over extended already and maybe we shouldn't be borrowing so all of that feeds into the policy setting.
And then we tune it but we tended all the time, it's not a thing that we sort of get together and say all right.
It's been a quarter, let's talk about it like we talk about it literally every Monday morning, there is a triage conversation about credits with our head of risk in the room with the executive team and we review all of our numbers and say Hey, how do we feel about the American consumer at the highest level and then we dive deep into here's this product split date, how is it doing.
On Shopify.
So that's what we're doing and it's performing a little bit better.
Typically means that the precautionary steps we took.
We're slightly less necessary than we expect.
At least one or two degrees to the right as we left it's never let's pull a handbrake.
We over tightened or something like that we really do not run it as like a banquet.
It was very very bucket of Michael probably has better numerical answers I think the other.
Guys as we look at the unit economics in the business.
Whether you measure that through the financial statements like we do in the revenue less transaction costs or are you looking at.
Horizontal basis, and we make sure that there is enough economic context, and we make sure that we make credit decisions consistent with that the things. We're always looking at is based upon prior originations how are they trending against the forecasted numbers and given the very short duration of our asset we're able to get that signal very quickly to feed back into Decisioning and if you could.
You just look at where we're at right now we did better on the revenue less transaction cost lying in large part because we performed better this is a bit of a.
Our counter signal to what Youre seeing in a lot of other companies right now and we attribute that mostly to the fact that we're pretty careful on the front end and we're very diligent about managing it as Max alluded to.
Got it I appreciate that and then when we look at when we look at it you're adding additional capital partners and commitments et cetera.
How are you feeling about where you are positioned now with.
Kind of those commitments versus your growth targets. There are a lot of cushion there I know you haven't given guidance for next year, but but obviously I would assume that those carry into next year et cetera. So just wondering if you could give a little bit of.
Nuance and color of where you're at versus where you want to be on both capital commitment and how that relates to your growth ambitions generally.
Yes, I think the easiest.
We feel really really good.
We ended the quarter with $9 billion.
We actually have over $10 $1 billion as we sit here today.
Additional capital that we've talked about the call, but the $22 a deal in the ABS market as well as the Onboarding of the new forward flow partner both of those two are just we think massive endorsement of the product.
I think it's just a tad.
Good time to remind everybody that there is.
Widespread support for the asset, we generate and the capital markets and we have not seen that be a real difficulty we have seen the overall macro market change so that changes rates it changes spread for the asset underneath the asset we create continues to be something that all of our capital partners, both understand and value and even the rating agency.
These value as I talked about the AAA rating on the senior tranche in our last ABS deal that suggests we're producing really quality assets and is linked back to the credit question. So we keep our eye on the ball and produce good assets like we have been and will continue to do well.
We feel really good about it we're not giving guidance like you said for fiscal 'twenty, three but we feel very good about where we stand if anything I think youre going to see us continue to be slightly larger and capacity are lower and utilization.
Because of.
The macro concerns even though we actually don't have though that the management team.
Got it thanks for that Michael.
Our next question comes from the line of Jason Kupferberg with Bank of America. You May proceed with your question.
Thanks for all those guys. So yeah, just a couple of things maybe I'll come back to the sustained profitability.
<unk> just wondering if you can.
Quantify that at all I'm, just thinking back to the analyst day last year.
When I think you guys had said that adjusted operating margin would get to the zero to 10% range. Once revenue growth had slowed to 20% to 30% <unk> to 30 to 40 so.
Is that the right way to think about where you may exit.
23.
Just wondering how we should view that in light of the analyst day or do you feel like this is a little bit of a.
Updated messaging just given how much the macro environment has changed.
Yes. Thanks for the question and appreciate the way you worded. This is definitely as we say and this does not replace our prior and nor is it meant to suggest that we think growth will slow quite the opposite as Max talked about.
And to be really clear, we do not think that the decisions will take in order to get us to that breakeven or better adjusted operating income will result in any sort of slowdown in growth period.
The growth will allow us to achieve it and the focus on unit economics will get us there.
Inevitably.
Please don't read into suggesting that the growth rates will slow quite the opposite we feel very good about that.
Growth into next year.
We're not giving any guidance today I think there are a few trends that are worth highlighting.
<unk>.
The first is that remember we.
Experiencing the full year for both Shopify and Amazon and Thats, just the full year of those deals, but the full year with expanded product Rollouts, we talked about the expansion on shopify to new products, including adaptive checkout, but also all the optimizations that Max talk so often about whether it's the sum of a lot of little things that we're doing with these large <unk>.
<unk>, that's going to be a key avenue for growth for us.
And as always we talk about data plus is a thing that.
We will continue to be very incremental to any of the current run rate in the business.
So we feel really good about growth into next year, we're not giving any guidance, but please don't hear our profitability target as any indication that we expect to slow down quite the opposite.
Very helpful. And then just on gross profit on rents less transaction expense.
Youre going to exit this year I mean based on your Q4 guide just add or maybe a hair above the top end of the 3% to 4% longer term range and I know, we'll have to wait till next quarter to get kind of a full complement of guidance, but is there any reason to believe.
Sitting here today that you won't be able to comfortably stay in that range next fiscal year.
Absolutely not we feel very strong about our ability to deliver that.
The market environment, and we will continue to use that as the range you talked about in the business this quarter saw us pretty materially above that range.
And again, I would characterize that as being a little bit warmer than we want it to be three or four presents a very good range for us.
This is the fifth straight time, we've hit our commitments and we would expect to.
We continue to do that and we are committed to do 3% to 4%.
Good to hear thanks for the comments.
Our next question comes from the line of Ramsey El <unk> with Barclays. You May proceed with your question.
Hi, Thanks for taking my question. This evening and I wanted to follow up on Jason's last question in terms of the timing of the ramp of the Shopify expansion and also of the stripe deal will that should we think of that is just hitting 2023, rather than having an impact later this year and in addition, if how long is the shop renewal for I think I saw on the press release multiyear I'm not sure if.
You can tell us exactly how long those four.
Yes. The last question first it's all the way through June of 2025.
<unk>.
The timing we are in the midst of rolling out additional products stopped by right now at Max as Max mentioned, it's uncertain. If it will have any material impact in the next six weeks of the quarter, but feel good about it I think that Ana stripe deal are much bigger going into fiscal 'twenty. Three and then maybe you can provide some color on a stripe deal strategy.
Supercool basically.
One of the key.
Common.
Delays, if you will when we signed a merchant to launch them. The conversations are always say hey, how long is going to be before we can go live. So hey, we got to put two lines of Javascript into your checkout and audio product page and off you go.
And then we have to integrate with your payment system and.
Tom if you will be.
The settlement and money transfer and everything and if you have a deal with existing.
Payment provider for that merchant EGF, ISR global payments or add in stripe, which is the latest one you can literally replace that whole backend integration with Oh, Yes, we will just route affirmed transactions on the rail that has already been put in there by stripe.
And that's literally flipping a switch to an enormous number of merchants that have partnered with strength literally millions in their case.
We also have a bunch of really interesting projects plan with them.
That's probably beyond the scope again, I would not think of them as it immediately accretive.
Accretive thing, but it is a vast market opportunity that we're very very excited.
As a longtime friend and fan.
Striping full disclosure and investor in the company.
We are very happy with the partnership there.
Great It sounds like a pretty careful about creating these.
Avenues for more growth for many years forward, if that's what they saw that.
Perfect follow.
A follow up from me sales and marketing expense was down quarter over quarter quite a bit I guess first how should we think about that line going forward in terms of where it might stand as a percentage of revenue, but in addition, as you ramp with a larger platforms and brands like Amazon Shopify et cetera can you will have a positive impact on your marketing spend can you rely on.
On their brand in there.
Marketing spend effectively to kind of take some of the pressure off of your P&L.
So first on a non-GAAP basis, you did see sales and marketing come down quite a bit.
Sequentially and.
Really even on a year on year basis.
That is mostly due to the timing of some marketing campaigns that we run we talk a lot about this but our marketing activity isn't tied to.
In quarter revenue or GMB generation, the kind of investments that we've been making over the past year have really been around building a brand and building awareness in the consumer which has less direct and less tied to in quarter performance measure and Thats why youre able to see in this quarter that really strong growth. Despite.
Pretty substantially less amount of sales and marketing on a non-GAAP basis.
I think going forward, we're not prepared to give you any indication about the shape of the P&L or where we expect those lines to be.
But obviously as we work ourselves towards.
Breakeven or better on that adjusted operating income line, we would expect leverage across all of our fixed cost lines.
Great. Thanks.
Our next question comes from the line of Andrew Jeffrey with True Securities. You May proceed with your question.
Hi, Good afternoon, certainly appreciate you taking the question.
And I appreciate the conviction Max as usual.
Michael.
We get a lot of questions about the.
The defense side of the business not as much the tech side of the business in a couple of things stand out to me and I wanted to ask first about <unk>.
Just the platforms portfolio and funding mix slide 19, the fact that equity capital required is actually down to 2%. There was a lot of talk about the securitization that didn't get done intra quarter. For example is that a sustainable level to me Thats Super impressive given especially given all the concerns about liquidity.
It seemed to be swirling around the market and around the firm in particular.
I appreciate the question, Yes, I think we said that we'd like to be below 5% on a sustainable basis and feel like Thats, a good range to be at Youll see it ebb and flow quarter to quarter based upon.
How much forward flow or or onetime deals might happen in this last quarter saw securitization happen early in the quarter, which I guess folks.
Werent really attending to that actually allowed us to move quite a bit at zero percent paper off the balance sheet and you can see at the top bar on that on that chart. There you see on that slide.
That will continue to be the way we want to operate we want to be both durable and the quantum of capital that we have access to we wanted to deliver the unit economics that we've signed up for and be very efficient with the shareholders' capital.
We definitely never want to let growth.
Impacted by our capital program, So we're always going to be overfunded with excess capacity.
<unk> seen us do that this past quarter, and we will do that into the future.
While still delivering really strong units. So I would say that would be below 5% don't know that would stay in the 2% range sustainably and again I just would reiterate that I think our team is doing a very good job executing in these pretty volatile markets.
And we're pretty proud of the access to capital that we enjoy right now because we generate a high quality asset.
Yes.
Clear.
I appreciate that and then.
Maybe a question I know it's.
It's early.
On a firm debit plus but can you talk about.
Any learnings or thoughts about inflows in and the ability to drive direct deposit attach and what you think the opportunity is for for for growth from.
More more recurring spend on that product.
See I promised myself and Michael I will not.
Jump out with a bunch of cool stats.
And yet.
Yes.
Engineered I'm prone to them.
Here's a quick one.
Number one most visited physical retail used by consumers right now is Walmart grocery.
I think it's probably true for a lot of America, but it's to me a super anecdotal. So just just ignoring if you will but.
It tells you that a subset of consumers that we have given the card to have now use it to buy groceries.
Which I think thats probably the.
Warmer spud these news I've heard about the products so far in Super incident. This is a very very busy product. It has on the current UX Travis.
Something and it's going to be in a thousands before we're satisfied here but.
<unk>.
The fact that people are using it to buy food is the best indicator I've heard.
Wanted to be top of wallet, we wanted to be the thing that people.
Go shopping for their family to give them financial flexibility.
I have a lot of miles and the lack of commitment to this product to go.
In terms of Shareable statistics.
Growing at a ridiculously rates right now, but it's also completely.
Self stimulated in the sense that we're finally opening up to a bunch of weightless theaters. So of course, it's going to grow at crazy rates at some point, it's going to even out and then we'll know what the natural growth rate looks like we will open it up to the entire a firm base. Once the waitlist has cleared out you'll just have a button in Europe , our lab, saying, Hey, do you on your card.
It's a little bit more time to scale.
And my team the alerting me that I misspoke.
We had earlier in the in Q3 was in interest bearing that is present in any event it got off sheet and.
Private execution I wanted to make sure they got red and so they don't get it back.
[laughter] alright, well very.
I appreciate it thank you.
Our next question comes from the line of Dan <unk> with Mizuho. You May proceed with your question.
Hey, guys. Thanks for letting me ask a question so.
Really quick can you.
Give us a sense of sort of.
The interplay between.
The reserves and the charge offs charge offs are rising reserves are seem to be coming down like how much of it is Michael like denominator. So split the difference makes difference.
And then I have a quick follow up thank you.
Yes.
The allowance is always the current estimate.
As a percentage of loans held for sale the current estimate of future losses, and so that six 4%, where Randy that that's where we'd expect it to be on a percentage basis.
If you want more of a.
Kind of a backward looking measure that's why we showed the delinquency performance and you can see that's trending.
On I guess, it's slide 21 of the supplement you can see where that's trending charge offs are a bit difficult to get too much information out of given that we charged off at 120 days.
Pretty difficult to really get a sense of how credit performance is reflected through the charge off line.
The short duration of our asset makes it doubly true.
Got it got it.
Just one last data point.
And if I missed it but can you give us like some GPP estimates for shopify and Amazon.
Yes, Unfortunately I can't.
What we did say.
No one's listening okay.
Dan you and I, both that is true.
<unk>.
The thing we said in the call.
The prepared remarks, which is true is that no partner with more than 10% of GMB or revenue on a three and nine month basis.
Can get some sense. There. We also showed you the general merchandise category, which is inclusive of some of the largest retailers in the world.
Grew to over $670 million.
We can sir.
Okay, great. Thank you great quarter.
Yes.
Our next question comes from the line of.
Rob <unk> with Autonomous Research you May proceed with your question.
Hi, guys. Thanks for fitting me in just as a percentage of funding that the funding costs in the quarter were quite a bit lower can you talk about what's going on there.
Yeah, I think that reflects a number of factors not the least of which is execution remember the we.
We can talk about it a lot.
Rates moving does impact us, but not in the near term most of our.
Is locked in and committed very little of it is truly floating and if you look at our warehouses.
At that limit.
<unk> rate exposure that we have and then just generally we have a lot of very well executed capital markets activity over the past 18 months that reflects.
Really strong performance.
Got it thanks, and then bigger picture I think the adaptive checkout it seems to be a real linchpin of all the deals that you've announced recently specifically from the enterprise partners. Max you talked about it a little bit but anything to add on why that product kind of stands out as being particularly interesting to those partners.
Sure.
A couple of different reasons.
We talked about it before so I apologize if this is sort of old news.
Vast majority of large enterprise partners that we have one.
Picked us because we span the entire gamut of products possible.
You are just basically pay specialist.
That's great, but if you sell both bicycles and bicycle tires.
You will need to providers and if you are.
Picking a technology partner anyone to scale you wouldnt be good at underwriting you want to Jeff Good capital markets you'd want to go out of business.
Fit all those criteria really well, but the one thing that we do have is we have excellent well performing products that meet the price point the consumer need.
That doesn't.
So our product is great, but you still need to integrate those products multiple times.
To check out with this idea that what if we gave you just one single integration.
And we will guide the consumer to the right financial choice for them, so that the consumer satisfaction actually accrete to both us and the brand that we are.
Literally helping to personally be healthier financial life and so it's only it resonated with our partners certainly really resonated with us because it's extremely admission.
And it allows us to just continue driving savings in terms of.
The paid interest to consumers and better conversion to the merchant so.
It's almost a meta product infrastructure for multiple products that we built in the past to live together in harmony and a single page.
It has been really well received by the market you are right in that sense and some merchants by the way are not really appropriate if you only sell apparel within sort of a very tight 30 to $50 price range, you might not care about the ability to pay for things over 12 months, but if you are Walmart and Amazon or many many many other merchants that sell multiple skus.
Fairly wide range of price points that have to check out is the ideal product is only integrated once it has all the same property as a firm.
Changes to meet the consumer need on the spot without having to configure anything by the way also supports things legacy deals that all the stuff that we're famous for that he has done so well with Boston here as it's all baked inside a single integration.
Very helpful. Thank you.
Our last question comes from the line of Bryan Keane with Deutsche Bank. You May proceed with your question.
Hi, guys just.
Just a couple quick ones I guess, just thinking about the tightening of the credit market.
You guys transaction acceptance rate changed at all.
Given kind of where we are in the market and then secondly, when we look at delinquencies.
Is there a reason why it's excluding split pay now on this line in 'twenty, one and maybe I missed that piece and then where do you expect delinquencies to track at these levels kind of through the fiscal year. Thanks.
Alright.
We liked in the first half part of the question by question. So we've written in front of me Tony Carter I'm sorry.
The transaction approval rate has not changed very much at all and again, we really manage this at a merchant to merchant basket of risk level to basket at risk, there's multiple different countries and they're really really quite different. It's just really important to think of a firm as.
One number it's a weighted average in the wheat are quite dramatically different from bucket to bucket that said the weighted average right. Now is roughly the same the reason afford isn't because there arent people paying more or less of their bills, but because of the application rates that we have the number of people asking us for a loan vastly exceed the ones that we're at.
Actually going to approve and.
<unk> what was wrong with the.
Approval rates have remained pretty good remain the same the point there is our job is to bring risks we've been quite good historically and intend to remain in the future very very good at rank ordering applicants that come through.
Approve the ones, we believe can pay their bills.
Then after that we stop the number of people ask that can't pay their bills.
It does not seem to be changing very much and so the approval rates. Therefore have remained roughly what the acceptance rates have remained roughly the same.
I'll, let Michael contact my way through this one Michael take care of them.
Yes, so the DQ chart does not exclude slipped pay the vast majority of our balances onto our platform portfolio basis, our non PE.
That's a 50 day asset and we have a 120 day charge off policy. So as you can imagine.
The way that actually works and with respect to delinquency calculation doesn't really make sense to look at on a very basic I think it's pretty misleading to look at it that way in terms of where it's going we would expect to continue to track.
At or below that 19 levels on a portfolio basis based upon our current projections.
Great. Thanks for taking the question.
Ladies and gentlemen, we have reached the end of today's question and answer session. This does concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and for the rest of your day.
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