Q1 2023 Affirm Holdings Inc Earnings Call
[music].
Good afternoon, welcome to the affirm holdings first quarter 2023 earnings conference call.
Following the speakers remarks, we will open the lines for your questions. As a reminder, this conference is being recorded and a replay 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 Zane Keller director of Investor Relations. Thank you you may begin.
Thank you operator.
Before we begin I'd like to remind everyone listening that todays call may contain forward looking statements.
Forward looking statements are subject to numerous risks and uncertainties, including those set forth in our filings with the SEC, which are available on our Investor Relations website.
Actual results may differ materially from any forward looking statements that 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 such as required by law.
In addition, todays call may include non-GAAP financial measures.
Measure should be considered as a supplement to and not a substitute for GAAP financial measures.
For historical non-GAAP financial measures reconciliations.
Reconciliations to the most directly comparable GAAP measures can be found in our earnings supplement slide deck.
On our Investor Relations website.
Before turning the call over who want to briefly note our shift to our quarterly shareholder letter instead of a lengthy press release and prepared remarks.
We believe that this format will enable us to spend more time answering questions from the investment community.
As such we encourage you review the shareholder letter for commentary that we would typically include in our prepared remarks.
In addition, we believe that the shareholder letter when read in conjunction with our earnings supplement will enhance our ability to communicate with the investment community.
Both documents are available on our Investor Relations website.
The change was also influenced by the feedback that we received from investors.
We hope you find the shareholder letter informative and we welcome any feedback.
Hosting todays call with me are Max Levchin, affirms founder and Chief Executive Officer, and Michael one for the firm's Chief Financial Officer.
With that I'd like to turn the call over to Max to the game.
Thank you Dan we appreciate everyone, taking the time to join us.
Our results reinforce the confidence we have in our strategy and our firm's ability to capitalize on opportunities.
Two years ago that was time, we are preparing for a journey as a public company.
We're now completing our each quarter publicly traded company.
And it seems like a good time to compare our results for the 12 months ended September 32022 versus the 12 months ending December 31, 2020, which was the last calendar year as a private company for us.
Since then.
Person, we've more than tripled active consumers, we quintupled transactions almost we.
We grew transactions per active consumer one and a half times.
Transaction frequency by 50%.
Near tripled our trailing 12 month JV.
Well the double their revenue and almost tripled revenue less transaction costs growing at up to $732 million.
Meanwhile, we are in control of our credit results.
And the charge offs remain well below pre pandemic levels very important to us.
We remain focused on the long term, while making sure to navigate the present macro volatility very thoughtfully.
We're continuing to assess the risk and transaction costs to maintain a strong unit economics.
We will ship features that improve network scale and profitability like we always have.
We're going to manage our capex topic.
We're doing this right.
Manage opex carefully while investing in our highest conviction product.
We're building deep connections with consumers and merchants, who need us now more than ever before.
Both sides of our network to navigate economic uncertainty and.
And we see this as an opportunity to solidify our position as a trusted and reliable partner.
Back to use it.
Thank you Max.
We will now begin our question and answer session. Operator. Please open the line for our first question.
Thank you.
Ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the queue.
You May 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.
Please while we poll for questions.
Our first question comes from the line of James Faucette with Morgan Stanley . Please proceed.
Thank you very much.
Wanted to talk first of all this path to profits in 2023, obviously.
Reiterated that but nevertheless, you know youre looking for little bit lowered GMB and associated performance on the topline.
Are you thinking about like the evolution of that timing and what you need to do to make sure you get to breakeven or profitability in 2023.
Hey, Dan Thanks for the question yes.
Yes, we are still very much on time and on pace to achieve the profitability goals that we outlined which just to recap everybody.
Talked about getting to profitability starting in the first day of our fiscal 'twenty four.
We sit on a sustainable basis, meaning they will tend to deliver daily most of the time and looking at adjusted operating income.
So for us.
<unk>.
Pretty simple math, we need our revenue less transaction cost to be greater than the adjusted operating expenses that we have below the transaction cost line.
But keeping throughout then are and making sure we're doing everything we can to maximize the unit economics in the business and.
And if you look at our back half with your road map, we have a lot of focus on making sure. We're doing all that we can and should do there at Max outlined in the letter.
We're gonna be mindful about controlling our operating expenses.
That means being very careful in particular on hiring but also making sure that we're.
Not having any pockets of waste in that business.
We continue to scale the business.
And make the right investments. We also don't want to have a dollar is wasted in our system.
You look at our kind of guidance the back half of the year adjusted operating expenses that are implied by that.
That could put us in a really bad shape, so that we'd be exiting right, where we wanted to be to achieve that goal for next year.
Thanks for that Michael and then on.
A lot of places we could go but let's start with starting with delinquencies.
You mentioned in the prepared remarks.
We're still a bit below where you were pre pandemic. However, directionally.
Turning to get pretty close to those levels now and just wondering how you're thinking about like managing that especially since you.
I would think that.
There will be an increasing number of repeat customers and that 2023 versus pre pandemic, which if their repeat you would think they would tend to be better behaving.
In terms of at least delinquency et cetera. So.
Where should we think that you would that you're trying to top those out at how are you going to manage that and what's the.
All right I guess, the prognosis for when you would do that and under what conditions.
Sure I'll start and I think Michael could probably help quantify it.
Second half of the question.
So.
Just to set the stage.
The most important thing to take away from US we are not just managing credit outcomes, we set them.
The whole point of this ultra short term for six months weighted average life of every loan.
Every transaction is underwritten and we have full control of transactions requiring downpayment.
Not we control the amount of downtime and et cetera et cetera. So we have lots of levers we use to control risk said about.
Thing about this many many times, but never gets old.
And that gives us a lot of very nimble controls or the actual credit outcomes. So we set a number we want to hit obviously every week, we get a stack to look new information going back all the cohorts that are still active and we adjust.
We have been now managing quite actively to.
To make sure that we get to the numbers that we require because the back book runs off very quickly we have a lot of control. This compares pretty favorably with the rest of the industry does things like credit card installation loans or personal loans that go back years and there's nothing you can do about it. So that's just a really important thing to understand.
Apologize for those who for whom this sounds like a repeat but this really is how this business works and the reason our numbers are strong as they are today.
You can see this in the letter.
It's not an accident and it's not as though the world Hasnt changed there plenty of stress to the consumer in the lower income brackets Lora credit quality. We're just good at managing and we do underwrite every transaction and therefore, we have a lot of control.
That's sort of the backdrop.
The counterpoint to that is the demand for BPL is increasing.
Serving our consumers.
On the application side of things generally speaking people are turning to <unk>.
If you look at credit cards.
Turning to our board is due to the pandemic.
Done and meet higher income bracket spending through the part that makes the newest but they're getting closer probably sometime mid next year is when we'll see the exhaustion those savings, but today the lower income groups are already done.
Turning to various forms of debt.
I believe pretty heavily represented the best alternative out there we have 85% repeat transactions.
Do you see consumers to prove that.
Do you have enough demand that we do have.
A lot.
We have enough diversity.
<unk>, whereas folks ship out connected fitness.
Thanks for your Homewares and go for the Big box.
More clarity to persist we are there to help them.
With all those things and so demand is still quite strong.
We have control as we view credit outcomes, we can manage to the number that we.
Yeah.
That's sort of how we're doing it.
Michael can give you a little bit more data on exactly where we intend to.
To run it but again.
Twist, we have as opposed to a thing we have to contend with.
And it varies by product and it varies by market.
We're at and so.
Yes, I think your point is very well taken that we do see substantial improvements in credit quality as we see more repeat usage.
And I'll note that we're still acquiring new users at a pretty good clip and thinking about the business adult scaling. It we're not we're not done with the acquisition side of the equation certainly not on a gross basis.
The additional disclosures that we've got now in the shareholder letter.
Really encourage folks to spend some time with them both looking at the delinquency trends, which we now show 30, 60 90 as well as we've got the Cobra ties net charge off curve.
For our monthly while I was giving you some trending.
And I think the biggest takeaway for for all of those.
That we are dialing and where do you think it's going to be a weaker vary up or down, but we get to dial in what those losses.
That's an important strategic piece of the business that we can pick that lot.
And we can have confidence in how we think about credit losses with respect to our capital partner.
How it is that correct.
And allows us to confidently go approved through a very deep level.
I think that you would put us up against.
Most of the people.
And the traditional financial institution world or most people, who do unsecured consumer lending our results are really good and.
Feel like that is a real strength for us and we're not going to create lightweight way to continue to do first and foremost as it's an important aspect in there even at retail.
Thank you.
While we're waiting just for what it's worth.
Okay.
I'm not the only person who has the credit at this company and one of the very significant number of you who does that but when I look at our.
Credit outcomes I look at it overtime.
Data basically performance by vintage.
Hi.
Strong plus one two Michaels please have a look at what we put out in the letter we really wanted to communicate very clearly to our investors that this is the one piece of the business it matters to us she matters for investors and we are in full control and we look at these things on a coverage basis as we think you should.
Thank you. Our next question comes from the line of Moshe Orenbuch with <unk>.
<unk> Suisse. Please proceed.
Great. Thanks.
In the past couple of quarters, we've talked about the potential to change price to consumers.
In fiscal 'twenty three guide for revenue less transaction costs to assume any pricing changes and if not why.
Would it take to.
To get you to you know two of them to start that process.
Excellent question. So the short answer is there is a number of met against across merchant consumer pricing and the rest of our transaction cost line items that are not reflected in our guide.
Those remain as as upside and a little bit if you will so how we think about the guidance. We wanted to be really careful to put in the guidance things that we are certain about as opposed to the things that we hope will.
Deliver and help close the gap and that's why we for example look at the current forward curve. We don't have a proprietary house view of rate and we try to look at.
The current.
Current shift in live features of the product so.
Some aspect of higher APR, but the majority of the opportunity for higher APR to consumers is not reflected in the guide.
Is the opportunity we have on the merchant side.
From a pricing perspective.
Great Thanks, and as a follow up given the funding stresses that you and others.
The industry has seen this quarter could you maybe Mike will talk a little bit about what your plans are obviously given.
Going into a quarter, where youre going to generate a lot of interest bearing loans do you have an outlet for them.
You mentioned in some of the text here about the potential for lower gain on sale could you maybe put some numbers around that how much lower or how should we think about it. Thank you.
Yes, the thing we're pointing out in the letter that we think will be slightly above the 5% equity capital required which as you know we've been running.
Essentially lower than that over the past several quarters that does reflect what we think will be a higher usage of balance sheet in particular warehouse financing into this quarter.
Well, let me answer the broader question first anything all the way out.
Alrighty conviction and confidence in our ability to fund the business I don't think we're worried about that at all the question for us is going to be that the shape of the P&L as it goes through the various funding models that we have and it is the case that we will have a slightly more on balance sheet, which means that.
See in the Q2 guide for that revenue less transaction costs.
You have two factors that are.
Really affecting that number in the quarter and the reason for the back half of the year acceleration.
They are late in the quarter origination late November into December origination of interest bearing loans that end up on the balance sheet might.
It creates a lot of.
Vertical pressure, meaning the period Q2 adults will be the craft on a per ton to dnb. When you look out to the back half of the year, we're implying an acceleration of pretty meaningful one in revenue less transaction costs.
Hum.
Assumption of a material change in the economics of the business that simply that's stuff that will originate in Q2 are flowing through the P&L in the back half of the year the opportunity to mitigate that you alluded to at the very top those would actually just be on top of our ambition to the acceleration that we're currently guiding to.
Thank you.
Our next question comes from the line of Ramsey El <unk> with Barclays. Please proceed.
Hi, Thanks for taking my question this evening.
Was wondering on the changes to guidance if you could disaggregate the impact from peloton I think that you called out in the shareholder letter versus other factors.
Yeah, So I think there's two.
Two.
There's two drivers and then there is some dramatic and do the biggest drivers are our peloton and.
Most acutely in our second quarter to give you some some contacts and our second quarter, we talk about.
Dnb growth rate that would be 40% instead of the guided to 31% in the second quarter and we would estimate that on a revenue basis, we would be up 29% in the second quarter. Instead of 16, obviously, that's a very material headwind with respect to the topline.
Top line measures and the business back half of the year that start to attenuate quite a bit but in the back half of the year. We are modeling the impact of the movement in rates and we've talked a lot about there being roughly 30 basis points of headwind of which we're mitigating roughly half of that in our guidance in terms of our LTC take rate.
And so.
Those are the two biggest drivers.
And to talk about that.
Cause that those are the effects.
And the root causes.
But one of the important things as we were just talking about it as we use the balance sheet a little bit more in Q2, youre going to again change the shape a little bit of that margin.
And that will continue on throughout the course of the year, but we think it's more of a one time change in terms of the warehouses that we'll see next quarter, but the visits at that level for the next couple of quarters, which will result, and.
More revenue that will earn later origination and that trend will show up as you'd expect.
Okay.
And one follow up for me you also mentioned in the shareholder letter that your sensitivity to additional interest rate increases has decreased since you initially gave us a look at that in February .
What are the drivers there what is what is helping that number come down.
Honestly I think it's as much anything actually absorbing the impact that our counterparties are flowing through.
Right.
When we gave that initial framework back in February of this year, we were taking into account a lot of the.
Potential first and second order effects.
And obviously, we are doing at we gave you a framework to think about it as every 100 basis points.
The second or third order effect too because of the steepness of the curve begins to affect decisions than they.
I think it's more just as we have observed and seeing the impact we're just updating the range for everybody.
Got it alright, thanks, so much I appreciate it.
Our next question comes from the line of Mike <unk> with Goldman Sachs. Please proceed.
Hey, good afternoon, and thank you very much for the question I just have two.
First Max I was just wondering if you could give us an update on.
New product development for things like brand sponsored promotions and whether or not the CFPB report.
And things like that changed the product roadmap strategy at all.
And then second for Michael I was just wondering if you could talk about.
What Jim the EMEA have looked like excluding Amazon then.
I hear you loud and clear on the <unk>.
Our LTC ALR margin path for the rest of the year.
As we go into the back half.
That improvement in margin really driven by I guess like gross take rates on interest income and then <unk>.
Servicing income because of that.
Right.
<unk> second quarter originations. Thank you.
So.
Probably the most important thing too.
Referring to the CPD points.
Don't know if you had a chance to read it.
From my point of view too great.
Great document describing the state of the industry.
I think they did a pretty thorough job both interviewing and.
Summarizing what <unk> doing.
Gratifying to have my S. One letter quoted the CFPB reports.
Interesting.
No I don't think our roadmap has changed at all in fact I feel like in many ways.
The letter essentially.
Highlights that there's lots of companies and there'll be NPL space and Theres, one thats very different and they didn't go as far as naming us, but we're the only ones who doesn't charge late fees doesn't have.
Which are other shenanigans.
Latest really disliked it.
I feel pretty great about what I said there.
Really the most interesting sort of materials in their note is.
And the industry essentially to help consumers build their credit history and credit scores through the NPL loans and we've been working pretty closely with the accrued reporting agencies.
Various other participants and industry too.
Help further that along as well.
Definitely continue listening to what the regulators have to say on the matter and it was their own ideas et cetera, but generally speaking I felt that it was a very positive thing for the industry and certainly for <unk>.
The roadmap is not impacted.
Green sponsor promotions are.
I would say youll see more of them going forward. It has two components. One is the build out of the chain.
Isn't that the product has to be actually fully the open.
We are making pretty great progress there.
Not quite half Dolby muscles that I once but it's I think it's live in a bunch of places and then it becomes a matter of sales where you actually have to bring its merchants and manufacturers and brands.
Where are you getting on that.
Like everything else. We do these things will take time to go over and it will at some point and break them out to sell off just how good we are and how margin rich maybe comes but that's a.
All the conversation for another time.
Actually like I, maybe answer the question, whether there will be more today.
Yeah.
No. Thank you I think I covered it so I don't have a sustained market and then in terms of the kind of back half of the year and I understand the question correctly, you're talking about that <unk> as a percent D&B improving pretty meaningfully in the back half of the year.
Really just really simple math as you put more interest bearing loans on the balance sheet.
Or are you earn the revenue add those interest payments are made throughout the course of the alone.
Take a 12 month long island that's originated in.
In December for example.
Most of that happened in the back half of the year, what's important though is the.
Provision for credit losses for those loans will happen upfront and so what that means is you get less revenue less transaction costs in the period, even though those loans are very good and profitable for us throughout the year.
But then more broadly I guess, just really important to remember how early we are with these large partners and with.
The program overall, we talked about the mitigates earlier that are that are things that we're working on right now, but don't yet have reflected in our forecast thats on top of the very long list of projects that we have that focus on the unit economics as Max talked about in the letter and that's ordinary course of business, there's something special about that.
We will continue to do regardless.
And those can range from settle optimizations that we have on our product display pages tweaks that we can make to how our app search features work to really drive.
Better affiliate revenue taken in the period.
And the list goes on and there is optimization and those opportunities.
Represent for US a lot of a lot of the upside here.
The primary driver in the guidance is the flow through.
The larger balance sheet very long.
Excellent. Thanks, Max Thanks, Michael.
Our next question comes from the line of Andrew Jeffrey with True Securities. Please proceed.
Hey, Thanks for taking the questions. This is Julian on for Andrew.
Just wanted to talk go back to the credit side I know you just mentioned that the provisioning would kind of I guess.
Be more front half weighted and then.
We will see you kind of come down in the back half is that is that the right way to think about that.
Yes, so we always provision at the time of <unk>.
The original well.
Strictly speaking.
And so that's always the case, but the difference is as we on the margin will have less marginal growth dollars being sold versus placed at the balance sheet. You'll just you akshay carry the provision versus getting the gain on sale of no provision. So like the income profile of this change is a little bit.
As you as you think about those.
Those loans being on the balance sheet versus off.
Got it.
Okay.
Thank you and if I can just.
<unk> get one more in.
Can you kind of quantify maybe the non Amazon growth versus Amazon growth embedded in <unk>. This quarter and then also it seems like it's pretty good.
Good.
<unk> considered so just kind of maybe quantify that a little bit.
Thank you.
We cant quantify what we're not disclosing.
<unk> by a partner here, what I would point you to is we do disclose the near 500 or over 500% growth in general merchandise category that does pick up a number of merchants, including Amazon and Walmart and target those are big all of which had growth and strong growth.
We're not breaking out G&A by park got it.
Okay. Thank you that's it.
Okay.
And our next question comes from the line of Reggie Smith with Jpmorgan. Please proceed.
Hey, guys. Thanks for taking my questions.
You have a slide in your presentation that shows the <unk>.
30 day delinquencies.
<unk>.
I guess I wanted some help kind of interpreting the data.
So when I look at kind of pre pandemic. It appears that <unk> kind of decline as the year progresses.
But when I look at 22.
It increased as the year progressed so.
What conclusion should we draw from this charge should should we expect things to kind of follow the arc of pre pandemic is that what you're suggesting or.
Our <unk> is going to continue to kind of increase and I have a follow up thanks.
Yeah. So.
There is a seasonal pattern to credit performance in our experience that relate to both the purchasing patterns of consumers have as well as certain key cash.
Cash flow milestones like for example.
Tax refund and timeline.
What you saw during the pandemic was pretty big.
Sorry.
Monetary supply and liquidity given to consumers, which really did affect pretty substantially.
The ordinary pattern that you would expect to see.
And as we're kind of shedding all of that.
Because excess consumer liquidity, I think youre going to see a more normal pattern for consumer credit trends in terms of the seasonality and that's why we're referencing back to that.
<unk> periods.
Oh.
Page 10 of our ladder Youll see us sitting around.
The FY 'twenty pre pandemic trends, which we feel like it is again right, where we'd like the business a bit.
Got it that makes sense.
There is another slide I think you guys hinted at the potential of raising.
Kind of merchant fees, obviously interest rates have gone up a lot this year, but <unk> held your zero interest.
Take rates relatively constant can you talk about I guess the process for for raising those as it kind of like a bolt on that goes out. These do you have a sense that there may be some merchant pushback in the everybody obviously recognize that rates are higher but how mechanically like how would that actually play out and again.
Sensitivity how sensitive you think merchants are too higher.
Zero interest rates. Thanks.
So you're right we have not generally speaking moves prices either consumers or merchants to date.
I think everyone, but everyone understands that.
Our largest supplier.
Increased their price threefold as Michael put it the other day.
And at some 0.1 does pass the cost on to their customers.
The process with.
Merchants is.
A little bit different based on the type of the partnership so obviously some of our largest.
Merchant.
G&P segments come from plasma.
Platform partnerships like Shopify.
Others are individual platform.
Platform like entities, <unk>, Walmart and Amazon and then there's a whole list of.
Directly integrated folks that are either on a platform or not that waiver.
Indirect relationship there is no third party platform evolved.
Those are probably the buckets in the case of.
Uh huh.
Fully directly integrated folks.
The notification and theres different contractual.
<unk> lines that we've committed to giving them notice strategic price obviously, they have some waste.
Reacting for example, Lincoln virus.
In some cases in other cases, they can try to negotiate et cetera.
In the platform.
Okay.
And they do really large to a quality platform merchants, obviously, a little bit more of a conversation because they are responsible for a whole host of underlying merchants that have and have other financing relationships with those folks. So a lot of times it depends a little bit on their schedule of raising their prices, which.
Ill be thinking about.
So.
The merchant side of the equation, so the slower moving the consumer side.
We have quite a lot more control and because obviously every transaction is underwritten in price can and does change based on credit quality.
Seeing et cetera.
Two follow up their lending lawsuit.
On one person or the other.
There is a fair amount of consideration there.
All that said.
We've done this before as they're beginning the.
Pandemic, we went to our merchants and told them that we have no idea was going to happen next but we expect our risk to go up very substantially.
Therefore, we will price it with them.
At that time, I think exactly zero merchants required us or did anything let's say, we get into where we're going to work with you because it's important for us to continue selling so feel pretty strongly about our ability to command a fair price for our products and include the <unk>.
What ratios that we see in our supply, but it's it's not an instant switch, but it's something that we've done before but very confident we're able to execute.
Sure.
And I would say that the tone from a lot of merchants right now.
Two pieces that are targeting around this conversation one is it's a lot of focus on margin at all.
All of our merchant partners clearly anything that's perceived as an additional cost is under a lot of scrutiny on the other hand, I think a lot of merchants are looking at their own outlook for the holiday season and into early part of next year and are looking for ways. They can get back some of that growth in volume they had before.
Things always net out to a good a good deal that allows us to get the economics, we need and drive the volume that we need to them, but it is on the <unk>.
Strength.
Real margin constraint right now.
Got it.
More in real quick.
Yes go ahead.
Got it perfect.
Obviously, you guys report your reserve rate and it was down sequentially.
<unk>.
I'm thinking about like how am I going to explain that to investors and the things that come to my mind or you've got more repeat customers. So you've got a better view of.
The customer and then also your your.
The average life of your portfolio is only nine months now is there anything else I'm missing there.
Or what else can we add to maybe <unk>.
Dress concerns about a declining reserve rates.
Yes, again I would I'd.
Start with first is how we think about the reserve.
I think some financial institutions have a team of economists are thinking about the state of the consumer and trying to make a forecast what their reserved.
If we did that by the time, we got the answers from the Ivory Tower, we believed would have payback. So instead, what we do.
We look at the actual performance of the loan and we look at the AIPAC score the credits where the media loans when they originated and.
And use those two things to indicate how those loans will perform and then we look at whether or not those predictions that performance are holding up and that's very math driven we're not sitting here.
With a lot of judgment up and down our prognostication about future trends the deterioration in credit it's Barry.
And model driven.
And if you look at for example, again on Slide 11 page 11 of the letter take.
Take our pain for loan performance.
See pretty material reduction in credit losses that we have for our paying for product that's kind of a very fast it isn't the biggest part of our allowance. It is all on the balance sheet and will continue to be and therefore has as you improve the quality.
And that product you, obviously, you're going to see less allowance needed for it and similarly, I think a lot of the stress that we talked about starting to see.
In the end of our last fiscal year. The mitigates that we took resulted in us originating a higher quality asset.
Into.
Going into this quarter and into the back half of this year and that higher quality asset math would suggest a lower loss content. It's a good thing it's not.
Not a bad thing.
Very good that we estimate less losses and the loans that were originating.
That's helpful. Thank you.
Our next question comes from the line of Christopher <unk> with D. A Davidson. Please proceed.
Alright, thanks, and answering my questions.
Start with.
Another one on the credit side can you.
Quantify at all sort of obviously, it's a more difficult environment.
Across a number of issues, but for consumer credit and sort of tightening you've done delinquency trends are really impressive just given all the concerns we hear about the consumer but.
But how much of an impact does that have on your growth forecast maybe for this year I don't think you really changed your guidance that much on GMB.
So.
Is that a factor or is there enough demand that thats offsetting tighter.
Tighten their current conditions.
There is definitely an impact of a credit on our volume, it's just nowhere near as sustain.
A substantial as I think some folks might be the far bigger impact in the.
Date, and our guidance is the impact that we saw from peloton.
You take a business that has a lot of headwind like that.
We thought we were being pretty conservative in our outlook for that business. This year.
Thats it.
Underperformed EBIT, where we had set that bar.
That's the biggest driver of the reduction in the guidance for the year.
We haven't given a way to quantify it but we.
We don't take that for example, the movement in the guidance is because we sequentially have heightened our view on credit.
Okay, Great Super helpful. A follow up on.
The areas of demand and on the other side competition.
To believe and I think we've certainly heard.
Some competitors are struggling a lot more than affirm is so are you seeing any benefits yet as you talk to merchants.
The frost coming off in an improved competitive environment and.
I'd love to hear your take.
Take your temperature on your ability.
Just thinking as you talk to merchants.
Is that going to be a conversation that you are already starting to do that still on the come. Thanks.
I'm going to try really hard not to sound glib and despite the football victory.
Victory laps of Tetra the short answer is yes.
I've been saying this for a long time to Warren Buffett quote about tight coming out and noticing that some people are swimming without trunk zone.
Hi.
Exactly.
Classify our state of affairs is struggling but I do believe some of our competitors are.
And it is accretive to us we have merchants can be in saying pay.
Are you guys consider side by side with our competitor.
Where in the past, we would come in and asked them would they consider it and they said they were fine the approvals are good.
<unk> pools are not ours are still doing quite well so that just makes it that much easier to take share.
I'm, sorry, I'm, sorry by site sometimes.
Probably.
Could rattle off a handful of brands that are hurting us on either.
Instead of or alongside some of our esteemed competitors because they feel the need to continue driving the topline.
Competition in the longer Ken.
Proof as well as they used to so yes, it's been quite helpful to us.
So so long as we continue hitting our numbers on credit, which we absolutely intend to do and keep googles high which should give you a sense at all these quarters have been promising that the curve is really steep we need to move our Judy just a little bit to reduce our perspective losses by law.
It seems to be working out the way we were promised it. So let me ask it keeps growing we'll continue taking share.
Awesome. Thanks, so much and congrats on a tough environment and also thanks for all the disclosures on credits really helpful. Thanks.
Thank you.
Our next question comes from the line of Kevin Barker with Piper Sandler. Please proceed.
Thanks, and thanks for taking my questions I just wanted to follow up on.
Considering your guidance you've tightened underwriting.
Slowed a bit, but obviously a lot due to peloton.
When you look at.
2023.
Are you assuming.
The what the base case is for unemployment and whether it's slowing in spending.
Or are you starting to put in place additional measures to assume that unemployment is going to spike or theres going to be something worse than what we expect beyond where most economists have in their forecast or the forward curve indicates there's something there.
<unk>.
That you are anticipating and managing for.
Okay.
I'll start on the on the credit side, Michael probably has comments on the REIT side of things so.
We are.
Anticipating some.
To some degree a worsening on the credit side of things that said.
We really concern ourselves with.
The next four five months.
<unk> does just really really important too.
Two to communicate.
Our ability to manage credit to the numbers that we choose.
As a consequence of our ability to underwrite we get the data sources that would either make it.
Do it very quickly.
Probably the single most important structural part of how we are different from everyone else in the market is we have very short term product, we're not drinking wines, which means that a credit decision. We made today and if it's erroneous will be the last time, we made that mistake.
And we're able to deal with a lot more demand that we choose to and so as a consumer.
Consumers.
Even more stretched they come to us more often.
It does not change that we apply the same level of diligence and care to every loan that we underwrite so we.
We are primarily focusing on making sure that our data sources, a fresh set of models react correctly to the changing consumer behavior, which we have absolutely seen given just over the last five six years of operating including the last six months of the current.
Macroeconomic volatility.
All of that is fed into how we underwrite, but our ability to weather whatever whatever incoming store might be headed our way.
He is deeply rooted in the fact that we make very very short term relatively speaking credit decisions and we have no shortage of.
Demand for our products.
I'll pause there because when I had another point to make that Michael had with you.
Okay.
The way we approach it as always to take that.
Correct.
That says it would take the forward curve.
The assumption, we don't try to.
<unk> grown that Theres, a number of scenarios that could play out very differently as you point out we could enter into a recession and have more appointment of course that would probably have come with less pressure on rates and we're probably currently modeling and the flip side is the radar, but they get worse and unemployment could continue to be very very robust.
I think we're trying to just be middle of the road here it'd be very explicit around where we're assuming the current macro.
This is where the business will go.
Understanding that you know.
This forecast are always always wrong do we have to base it off of something and so just like we did when we gave our guidance at the beginning of the year, we're going to peg it to the rate curve and as rates move you should expect that to impact our business with the framework that we get here.
That's really helpful. And then I appreciate the the short duration of the product obviously vary.
One last thing on that point, the point that I was going to make a blink on.
So one of the other things that we have because it will be adaptive checkout, which we had the persons appointed to launch about a year ago.
The menu of terms the consumer will see.
He is programmatically determined by us so we have enormous amount of control over this $4 six average.
Product isn't just in and of itself short, we also get to decide whether a particular credit quality.
Applicant sees the longest.
Longer durations versus the shorter ones so.
One of the things that you could say, we're preparing to do although we don't have to act on it right now if we felt that the unemployment is about just like we are starting to go up really rapidly we wouldn't necessarily pull in terms of the $4. Six average go down just to make sure there are fewer opportunities for our borrowers to default. So that's another level of control that we have.
And.
That typically corresponds very nicely just from research in past lives with the shift from luxury buying two general merchandise purchases.
Need to borrow quite as much in there for shorter terms make more sense for the passport. So theres actually should not have it the real impact on our take rate on the consumer side.
It would reduce our risk.
We haven't.
Alright, sorry back Scott.
Okay.
Yes, I was just saying there is certainly quite a bit of an advantage to having.
Rapid velocity on your lending.
And being able to shift.
When you think about.
The RTC or T. <unk> guide for the back half of the year, implying quite a bit of improvement do you feel like you could continue to hit that if things get worse I mean, obviously, maybe there's a little bit of slowing growth and tightening underwriting.
But you.
Youre going to focus more on profitability or does that get pushed out a little further but still remains.
Something that you can see in the future at least in the near term on hitting some of those guidance.
I attempted to make some sort of read my lips joke, but I will not we will hit profitability on schedule.
We are not.
Our profitability the products, we're focusing on are about.
Creating more OTC, creating mitigating some of the <unk>.
Great volatility, but ultimately we feel very good about our schedule we are not.
Suffering from.
From any need to postpone or speak with destiny, I think I'm not supposed to say that I like the duration.
And the last thing is we take our guidance really seriously look at a lot of thought into it.
If our guys mood is because we think something something has changed and I think what you saw in the June the outlook here.
So we talked about a pretty big impact.
<unk> and then obviously, we're digesting a pretty big headwind did right.
There are certainly macro conditions that could make that goal and objective not come through but.
We feel very confident as we sit here today.
Actual God are not included in our guidance.
And our next question comes from the line of Bryan Keane with Deutsche Bank. Please proceed.
Hi, guys just wanted to ask on two parts of the questions. We get an approval rates. It sounds like they stayed high but maybe they were down a little bit.
In the quarter, maybe you can just clarify that and then the outlook.
Approval rates, what do you expect.
The approved rates actually stayed relatively flat throughout the quarter in fact.
Basically stayed flat for the last.
Nine months, if memory serves with the slight uptick in the.
Peter.
In the three months in between.
The first three in the last three.
We actually increased the real read a little bit. So maybe this month this quarter. It went down a tiny bit but this is sort of back to the products that we offer consumer. So we have enormous amount of control over the actual shape of the risk we are going to take on.
Generally speaking counterweight.
Finding a way to say, yes to a consumer where somebody comes in and says Hey, I want to borrow X hundred dollars over why months or weeks.
In some situations the answer is no thats not going to happen because we just don't think we can carry this much cash flow burn on a monthly basis. However, we're very happy to help you with the lower monthly number if you are willing to prepay.
The Delta basically and that and how it does in other levers that allow us to shape the risk we take and the.
Make sure we meet consumers, where they are without adding unnecessary burden to our provision so.
We.
Have been certainly very active in using those levers we do this at the merchant by merchant level, sometimes a SKU by SKU level, because we can infer which products are getting prioritize how it repayments and things like that but to date, we have not needed to slam the brakes on approvals again.
And I said it before credit is job number one we will always prioritize managing to numbers that we feel we must hit to ensure our capital markets partners see us.
Best yield most predictable yield generator for them.
That does not meet for us that we have to turn people with it or does it mean that some people will have a slightly larger.
Downpayment request in some cases, we will ask for more information.
As this moves that we need to see their cash flow data, which is.
Somewhat burdensome, but.
It's better than being told them and so we have a lot of comfort in our ability to maintain rates and while we don't generally speaking contractually agreed to guaranteed approval who their merchants. The reason the key for us.
Hired if you will and the reason they like to hire us over our competitors because we always deliver on.
Rates first foremost and that helps them drive their time on their top line and sales.
Sales that wouldn't have happened without affirmative.
Yes.
Got it no. That's helpful. And then maybe just an update Max on on the debit plus product and the rollout there. Thanks so much.
You for asking I was wondering if somebody you might remember.
So actually.
Yeah.
Trying trying not to be glib.
So.
One of the things that I could do a year ago.
Product and chief.
You don't feel like I can't know this rollout of product.
Economics that I don't feel are fundamentally accretive to the business so sometimes.
I think at the beginning of last quarter or right around that time, we've basically taken the.
The weakness that we generated and given.
Pretty meaningful number of people so tens of thousands of active cards type level cards to observe the usage.
As with every new credit product you end up with.
Obviously don't particularly like and we spent the last three months.
Really chewing away at all the various from doctors and loss possibilities.
Whole bunch of new kind of losses that happened in the plus Theres, obviously pre transaction, which is very similar to many of our product we have inside the super App.
There is the post one which is where you swipe and then you choose to split how they sort of 24 hour limbo those transaction might turn into paint hour could become paid later and then Theres also insufficient funds, which is the P&L can become a default.
So there's a bunch of new vectors, both potential unintentional losses, it's been the last three months, just really making sure that we feel good about unit economics of this product.
We're almost there I feel very good about it.
And probably January one it's kind of a realistic timeline to when we're going to start.
Pushing this forward product.
It's brand new we're not going to given today's reality.
The question about.
Alright turn profitability nothing will be more frustrating than saying everything you Austin, we're getting every number except that turned out to be last year than I thought so sorry about that profitability is postponed that will not happen.
That said I feel quite good about where the profitability of that product is today I'll feel a lot better in January with a whole bunch more planned.
That's when we expect to start actually delivering these cards and you will notice pretty easily right now to get to debit plus you have to either be in selected group, where we promoted.
Or are you kind of have to Norway and you can go on if you want it but it's a little bit of work the data you see.
<unk> App.
A tile setting can you give yourself a debit plus you'll note that we're starting to promote the product quite aggressively and again, we're not including anything in our guide about what business will do for us in volume or revenue basis, just because.
Too hard to model that right now, but we'll probably be able to talk about it.
Sure quite quite a lot more in terms of the actual expectations starting next calendar year.
Hopefully at least the other point about we will not risk our unit economics, just to launch a cooling products.
Sooner than we're ready.
These people.
Good view into how we think about.
The economy today.
Yeah.
Our next question comes from the line of Mihir.
Let's see here with Bank of America. Please proceed.
Hi, Thank you I'm on for Jason Kupferberg.
Just a couple of questions first of all in Europe .
Q1 results in the first quarter I think you mentioned.
Higher interest rates impacting gain on sale with pricing with certain forward flow.
Buyers can you talk about that a little more obviously I mean I understand interest rates are up but just trying to understand how often does that pricing get.
Bob.
Adjusted and is the lower pricing like going to state, though I think these agreements tend to be two to three years. So just trying to understand is there does the lower gain on sale now you are kind of locked into those lower gain on sales for the next couple of years, how does that exactly work.
That's a good question yet.
Commentary is really about the year on year comparison.
B.
The agreements vary some agreements are.
Our locked in for the duration of the contract.
Have regular repricing triggers varies with six months.
He then floating arrangement, so we kind of have lots of different flavors.
But I wouldn't I wouldn't we're not I'm not worried about being locked in.
The worst rates I think a decline in rates would be good for us.
Yeah.
Okay.
And then just wanted to ask about adjusted operating margin the first quarter came in better than your guidance.
But.
I mean, obviously the topline guidance is coming in a little bit but you also.
You also slowing down hiring just trying to understand was there something.
Unusual about the first quarter like some expenses got pushed to the second quarter or something.
What's happening there.
To call out.
No we did have a little bit of a benefit.
And with that.
In light of that.
Art.
Repeatable throughout the course of the year, but the.
Strength in the revenue less transaction costs.
Combined with slightly lower.
Hiring plan.
Biggest drivers for us in the first quarter.
The reduction in hiring plan is as much about managing.
The fiscal 'twenty core number as it is about managing 23, if you think about the timing of the hiring that we have in the plan. Obviously in play we hired the last day of the fiscal year doesn't really affect the profitability in the air but extra cost that we take into next year and I think the focus for US is to get our units is as healthy as possible and to get the operating.
That is.
Bright side as we can going into next fiscal year, when we feel like.
We wanted to do that.
Ethylene and strongest muscle.
Our next question comes from the line of Eugene <unk> with Moffett Nathan Nathan. Please proceed.
Hi, guys. Thanks for squeezing me in just one question.
On the consumer engaging with the platform. So your transactions per active user keep going up which is great great great sign of better engagement, but I think if we do the math.
Spend per active consumer that keeps going down.
Understand that there might be some mix factors in here, perhaps peloton.
Influencing that but can you talk about that trend a little bit and do you see a path to.
Getting consumers to spend more dollars.
With your platform.
Overtime, and how what elaborate you might be able to use.
Equation can do that.
So I think the.
Yeah.
This is a kind of two competing vectra is here to be completely honest I track slightly different metrics I care about average ticket size for every transaction.
And number of transactions per active user of those are kind of my contours of our consumers engaging and it is in fact, the case that if you ask someone to spend more money.
Through you with you.
Sorry.
You're trying to convince consumers to use you more often more more transactions.
You are absolutely signing up for smaller tickets right people aren't going to buy an exercise bike every quarter.
They're going to buy maybe.
Maybe a couch.
A year or so but then.
Youre really trying to get high frequency, which is certainly what we're chasing here youre looking at things like apparel maybe tickets.
Travel and so.
We're very active in all the industries general merchandise umbrella name for everything you buy it it kind of happens all the time.
So EOG is done just expect it to continue coming down.
It's an important measure of our success frankly.
I think the.
Growth of transaction frequency per user.
Is.
An indication of increasing spend in the painful category, which is uniquely.
Suitable for these shorter term lower transactions and so that's where a lot of growth coming from.
As you might expect we've dominated high is the longer periods for a very long time in the us markets.
Still very rapidly expanding into the short term.
Lower transactions.
So I think in the long term I care about.
To get to old transactions possible.
Yes.
We will naturally result in the most possible number of dollars spent with a firm who.
By any one actually consumer but for now we're just very focused on making sure that we're there for the consumer.
Four in monthly payments.
If the average ticket size goes down that frankly is a success.
Okay.
Yes.
The map I think the average is maybe I'm not quite sure what Matthew are doing and how are you.
You looked at it averages can really lie here.
One $2300 purchase can look like a lot lot longer share of wallet, even if it's not repeatable as opposed to those consumers who may be you would never entertain a 20 or a lower purchase I think for the consumers that are engaged on our platform today.
I believe we have a higher share of their staff.
Thank you and our final question comes from the line of Andrew Baum with S. MDC Nikko Securities. Please proceed.
Hey, guys. Thanks for taking my question just looking at the affirm share of U S. E Commerce spend and then this kind of dovetails with the prior question is growing above the 2% in fiscal 'twenty three and beyond.
And the trajectory of that is it more.
Function of.
And are you making progress.
Tumor side or is it more around the continued expansion of wallet within merchants I know.
Likely go hand in hand, but.
Any other color you can provide with Greg.
Yeah.
We are building a network.
And.
Scott.
When we get to the other.
And back.
I guess the.
Assuming pretty good earlier today about <unk>, 2% of E Commerce and now I feel.
I got to show up with more soon the good news is that we are currently integrated and about 60% of all U S ecommerce so.
We can increase that 2% penetration.
By getting more share of wallet with the merchants are merchants really dependent us in these inflationary times because consumers.
Need to stretch their dollars were there for them and we have a really healthy business that is generated from our own services and our app.
Some of it is merchant integrated but a lot of it is not.
Still.
Very excited about what they will do for us it extends us into things like daily purchase where we don't play today and importantly, it gets us to offline, which is not included by 60% number.
For us is a nicely growing but still very very trivial amount of volume. So we have lots of ways of getting above that too.
When we get there.
We'll also like this we will again have that wood.
And then just looking at the industry mix I mean, one that kind of sticks out to us is a pretty sizable opportunity that that could grow over time would be travel and ticketing segment thinking.
Thinking about getting further in the airline purchases or hotels, maybe you could just speak about that the vertical inside that opportunity and what what obstacles or.
Potential like roads to taking that 12% up.
Over the next couple of years to be.
Great.
Great opportunity I think it's a wonderful.
Place to apply what do you have to offer.
We have a handful of really the partnerships and the travel industry today, both he and airlines.
Hotels are probably at least penetrated from our point of view, we have a bunch of online travel agency ratios that we have for years and years and have done extraordinarily good work with them.
Direct integrations with airlines, it little bit newer and Theres more to do there as well.
Thing about travel in general.
It's kind of a sweet spot for what we know how to do it sort of thing that others.
Really do it very well.
All of these things, including an all star departmental I'll get her in a second but if you look at the work we've done with some of the largest big box retailers and with the platforms and now we're looking to do with.
Hotels, and expanding our work with Otas. It is inevitably a thing.
You do not as much in credit and underwriting and understanding the consumer use cases as you do in product I'd give you a very precise example, hotels you sort of think back to last time, you checked out you can check out a lot of times you don't check out to lead the team to really work and so the actual the exact mechanics of this transaction is now real we'd always total amount.
And now I'm going to turn into a loading youll pay it over time.
They're very different between hotels and buying a couch and so inevitably to do this right to do as well to convert a lot of consumers to really deliver the value that we should expect this to you have to build a product that is fine tuned to that.
That particular industry.
All of our long term growth opportunities are built around our ability to create products that are unique and are very hard for others to replicate very strongly about it obviously.
For a long time I used to say affirm within machine engineered in.
Our LPC out was being very careful with hiring so maybe some of these.
Opportunities to get even bigger and faster.
Well, probably the right amount of discipline to it but definitely very similar travel.
We have five other industries I can rattle off immediately where just the right product and both breakthrough and become bigger than ever.
Thank you ladies and gentlemen, this concludes our question and answer session I would like to turn the call back to Zane Keller.
Thank you everybody for joining the call today, we look forward to speaking with you again next quarter.
This concludes today's conference. Thank you for your participation you may now disconnect.
[music].
Good afternoon, welcome to the affirm holdings first quarter 2023 earnings conference call.
The speaker's remarks, we will open the lines for your questions.
A reminder, this conference is being recorded and a replay 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 Zane Keller director of Investor Relations. Thank you you may begin.
Thank you 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 that 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 such 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.
Reconciliations to the most directly comparable GAAP measures can be found in our earnings supplement slide deck, which is available on our investor Relations website.
Before turning the call over who wanted to briefly note our shift to our quarterly shareholder letter instead of a lengthy press release and prepared remarks.
We believe that this format will enable us to spend more time answering questions from the investment community.
As such we encourage you to review the shareholder letter for commentary that we would typically include in our prepared remarks.
In addition, we believe that the shareholder letter when read in conjunction with our earnings supplement will enhance our ability to communicate with the investment community.
Both documents are available on our Investor Relations website.
This change was also influenced by feedback that we received from investors.
We hope you find the shareholder letter informative and we welcome any feedback.
Hosting todays call with me are Max Levchin, affirms founder and Chief Executive Officer, and Michael Linford firm's Chief Financial Officer.
With that I'd like to turn the call over to Max to begin.
Thank you Dan we appreciate everyone, taking the time to join us.
Our results reinforce the confidence we have in our strategy for <unk> ability to capitalize on opportunities.
Two years ago at this time, we are preparing for our journey as a public company.
Okay.
We're now completing our each quarter publicly traded company.
So really a good time to compare our results for the 12 months ended September 32022 versus the 12 months ending December 31, 2020, which was the last calendar year.
For us.
Since then the comparison.
More than tripled active consumers, we quintupled transactions almost.
We grew transactions per active consumer one five times.
Transaction frequency by 50%.
Near Triple our trailing 12 month JV.
We also doubled our revenue and almost tripled revenue less transaction costs growing at up to $732 million.
And while we are in control of our credit results.
Equities and net charge offs remain at or below pre pandemic levels very important to us.
We remain focused on the long term, while making sure to navigate the present macro volatility very thoughtfully.
We're continuing to obsess over risk and transaction costs to maintain our strong unit economics.
We will ship features that improve network scaled profitability like we always have.
We're going to manage Opex capex okay.
We're doing this why manage opex carefully while investing in our highest conviction product opportunity.
We're building deep connections with consumers Americans, who need us now more than ever before.
Both sides of our network to navigate economic uncertainty and.
And we see this as an opportunity to solidify our position as a trusted and reliable partner.
Back to us.
Thank you Max.
With that we will now begin our question and answer session.
Later, please open the line for our first question.
Thank you.
Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad and a confirmation tone will indicate that Youre line is in the queue you.
You May 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.
Please while we poll for questions.
Yes.
Yes.
Our first question comes from the line of James Faucette with Morgan Stanley . Please proceed.
Thank you very much.
I wanted to talk first of all this path to profits in 2023, obviously, you reiterated that but nevertheless, youre looking for little bit lowered GMB and associated performance on the topline.
Are you thinking about like the evolution of that timing and what you need to do to make sure you get to breakeven or profitability in 2023.
Hey, Dan Thanks for the question yes.
Yes, we are still very much on time and on pace to achieve the profitability goals that we outlined which just to recap everybody.
Talked about getting to profitability starting in the first day of our fiscal 'twenty four.
You said on a sustainable basis, meaning they will intend to Delever daily most of the time and.
Looking at adjusted operating income.
And so for us the <unk>.
<unk>.
Pretty simple math, we need are.
Revenue less transaction costs to be greater than the adjusted operating expenses that we have below the transaction cost line.
But keeping throughout then are and making sure we're doing everything we can to maximize unit economics in the business and.
And if you look at our back half of the road map, we have a lot of focus on making sure. We're doing all that we can and should do there at Max outlined in the letter.
We're going to be mindful about controlling our operating expenses and for that that move is.
Being very careful in particular on hiring but also making sure that we're.
Not having any pockets of waste in the business.
We continue to scale the business.
And make the right investments, we also don't want to have.
Wait to the system.
If you look at our kind of guidance or the back half of the year adjusted operating expenses that are implied by that.
That could put us in a really fits shape, so that we'd be exiting right, where we wanted to be to achieve that goal for next year.
Thanks for that Michael and then off.
Places, we could go but let's start with starting with delinquencies.
You mentioned in the prepared remarks that you are still a bit below where you were pre pandemic. However, directionally.
Turning to get pretty close to those levels now and I'm, just wondering how you're thinking about like managing that especially sense.
I would think that.
There will be an increasing number of <unk>.
<unk> customers and that 2023 versus pre pandemic, which if their repeat you would think they would tend to be better behaving.
In terms of at least delinquency.
Et cetera, so we're.
Where should we think that you would that you're trying to top those out at how are you going to manage that and what's the.
Alright, I guess the prognosis for when you would do that and under what conditions.
Sure I'll start and I think Michael can probably help quantify it.
So can answer the question.
So.
Just to set the stage.
The most important thing to take away from US we are not just managing credit outcomes, we set them.
The whole point of this ultra short term for six months weighted average life of every loan.
Every transaction is underwritten and we have full control of transactions requiring downpayment.
We control the amount of down even etcetera etcetera. So we have lots of levers we use to control risk set about talking about this many many times, but never gets old.
It gives us a lot of very nimble controls or the actual credit outcomes. So we set a number we want to hit obviously every week, we get a stack to look new information going back all the cohorts that are still active and we adjust credit we have been now managing quite actively.
To make sure that we get to the numbers that we've acquired because the back book runs off very quickly we have a lot of control. This compares pretty favorably with the rest of the industry does things like credit card cancellation loans or personal loans that go back years and Theres nothing you can do about it. So that's just a really important thing to understand.
Apologize for those who for whom this sounds like a spin.
I will repeat but this really is how this business works and the reason our numbers are strong as they are today.
You can see this in the letter.
It's not an accident and it's not as though the world Hasnt changed there are plenty of stress in the consumer in the lower income brackets Lora credit quality. We're just good at managing and we do underwrite every transaction and therefore, we have a lot of control.
That's sort of the backdrop.
The counterpoint to that is the demand for video.
<unk>.
Serving our consumers.
And the application side of things generally speaking people are turning to <unk>.
Look at credit cards.
Turning to the broader business due to the pandemic, we will not done new higher income bracket spending through the pandemic, but they're getting closer probably sometime mid next year is when we'll see the exhaustion those savings but.
Today, the lower income groups are already done.
Due to various forms of debt.
Belief prescribed <unk>.
That's still kind of out there we have 85% repeat transaction.
<unk> seen consumers to prove that and so.
Do you have enough demand that we do have a lot.
We have enough diversity of merchants, whereas folks ship out connected fitness and.
Okay. So your Homewares and go for Big box.
More quantity of persist we are there to help them.
With all those things and so demand is still quite strong.
Have control a review of our credit outcomes, we can manage to the number that we need and want.
That's sort of how we're doing it.
<unk> can give you a little bit more data on exactly where we intend.
To run it but again.
The twist, we have as opposed to a thing we have to cause headwinds, okay and it varies by product and it varies by market.
We are at and so.
Yes, I think your point is very well taken that we do see substantial improvements in credit quality as we see more repeat usage.
And I'll note that we're still acquiring new users at a pretty good clip and thinking about the business adult scaling. It we're not we're not done with the acquisition side of the equation certainly not on a gross basis.
The additional disclosures that we've got now in the shareholder letter.
Really encourage folks to spend some time with them both.
Looking at the delinquency trends, which we now show 30, 60, 90 as well as we got the cohort highs net charge off curve.
For our monthly while giving you kind of trending that you can see our copay.
I think the biggest takeaway for for all of those is that we are dialing and where do you think it's going to be a week or a month that vary up or down, but when you get to dial in what those losses.
An important strategic piece of the business that we can pick that loss and.
And we can have confidence in how we think about the credit losses with respect to our capital partner that confidence and how it impacts our P&L.
Allows us to confidently go approved through a very deep level.
I think that you would put us up against <unk>.
Most of the people.
And the traditional financial institution world or most people, who do unsecured consumer lending our results are really good and.
Feel like that is a real strength for us and we're not going to create lightly that company were to continue to do first and foremost as it's an important aspect in there even at retail.
Thank you.
While we're waiting just for what it's worth.
Yes.
I'm not the only person who looks at credit at this company on one of the very significant number of you who does that but when I look at our.
Credit outcomes I look at cohort data basically performance by vintage.
Hi.
Strong plus one two Michaels please have a look at what we put out in the letter we really wanted to communicate very clearly to our investors that this is the one piece of the business that matters to us should matters were investors and we are in full control and we look at these things on a cooperative basis as we think you should.
Thank you. Our next question comes from the line of Moshe Orenbuch with <unk>.
<unk> Suisse. Please proceed.
Great. Thanks.
In the past couple of quarters, we've talked about the potential to change price to consumers.
In fiscal 'twenty three guide for revenue less transaction costs to assume any pricing changes and if not what would it take to.
To get you to start.
<unk> process.
Excellent question so.
The short answer is there is a number of met against across the merchant consumer pricing and the rest of our transaction costs.
Items that are not reflected in our guide.
Does it remain as as upside.
Little bit if you will so.
How we think about the guidance we wanted to be really careful to put in the guidance things that we are certain about as opposed to the things that we hope will.
Deliver and help close the gap and that's why we for example look at the current forward curve. We don't have a proprietary house view of rate and we try to look at.
Current.
Current shift in live features of the product and so there is some aspect of higher APR, but the majority of the opportunity for higher APR consumers is not reflected in the guide.
The opportunity we have on the merchant side.
From a from a pricing perspective.
Great, Thanks, and as a follow up.
Given the funding stresses that you and others in the industry have seen this quarter could you maybe Michael talk a little bit about what your plans are obviously given going into a quarter, where youre going to generate a lot of interest bearing loans do you have an outlet for them.
You mentioned in some of the text here about.
Potential for lower gain on sale could you maybe put some numbers around that how much lower or how should we think about it. Thank you.
Yes, the thing we're pointing out in the letter that we think will be slightly above the 5% equity capital required which as you know we've been running sustain.
Substantially lower than that over the past several quarters that does reflect what we think will be a higher usage of balance sheet in particular warehouse financing into this quarter.
Well, let me answer the broader question FERC, assuming all the way out.
We have conviction and confidence in our ability to fund the business I don't think we're worried about that at all the question for us is going to be that the shape of the P&L as it goes through the various funding models that we have.
The case that we will have slightly more on balance sheet, which means that as you see in the Q2 guide for that revenue less transaction costs you have two factors that are.
Really affecting that number in the quarter and the reason for the back half of the year acceleration.
They are late in the quarter origination late November into December origination of interest bearing loans that end up on the balance sheet.
A lot of.
Vertical pressure, meaning the period Q2 results will be the craft on a per client at DMV. When you look out to the back half of the year, we're implying an acceleration of pretty meaningful one in revenue less transaction costs.
Matt.
That assumption.
A material change in the economics of the business that simply.
It's not that we originated in Q2 are flowing through the P&L in the back half of the year the opportunity to mitigate that you alluded to at the very top those would actually just be on top of or in addition to the acceleration that we're currently guiding to.
Thank you.
Our next question comes from the line of Ramsey El <unk> with Barclays. Please proceed.
Hi, Thanks for taking my question. This evening I was wondering on the changes to guidance. If you could disaggregate the impact from peloton I think that you called out in the shareholder letter versus other factors.
Yes, so I think there's.
Two.
Theres two drivers and then some.
Matthew can do the biggest drivers are peloton.
And most acutely in our second quarter, so to give you some contacts and our second quarter, we talk about.
A dnb growth rate that would be 40% instead of the guided to 31% in the second quarter and we estimate that on a revenue basis, we would be up 29% in the second quarter. Instead of 16, and obviously, that's a very material headwind with respect to the top line.
Top line measures the business back half of the year that starts to attenuate quite a bit but in the back half of the year. We are modeling the impact of the movement in rates and we talked a lot about there being roughly 30 basis points of headwind of which we're mitigating roughly half of that in our guidance in terms of our LTC take rate.
And so.
That's great.
Two biggest drivers.
And to talk about that.
Cause that those are the effects.
And the root causes.
But one of the important things as we were just talking about it as we use the balance sheet a little bit more in Q2 as youre going to again change the shape a little bit of that margin.
That will continue on throughout the course of the year, but we think it's more of a one time change in terms of the warehouses that we'll see next quarter, but the visits at that level for the next couple of quarters, which will result ad.
More revenue that will earn later origination and that trend will show up as you'd expect.
Okay.
And one follow up for me you also mentioned in the shareholder letter that your sensitivity to additional interest rate increases.
<unk> decreased.
Since you initially gave us a look at that in February .
What are the drivers there what is what is helping that number come down.
Honestly I think it's as much anything actually observing the impact that our counterparties are flowing through.
Right.
When we gave that initial framework back in February of this year, we were taking into account a lot of the.
Potential first and second order effects.
And obviously, we are doing at we gave you a framework to think about it as every 100 basis points.
The second or third order effect too because the steepness of the curve begins to affect decisions and I think it's more just as we have observed and seeing the impact we're just updating the range for everybody.
Got it alright, thanks, so much I appreciate it.
Our next question comes from the line of Mike <unk> with Goldman Sachs. Please proceed.
Hey, good afternoon, and thank you very much for the question I just have two.
First Max I was just wondering if you could give us an update on.
New product development for things like brand sponsored promotions and weather.
Whether or not.
The CFPB report.
And things like that changed the product roadmap strategy at all.
And then second for Michael I was just wondering if you could talk about.
What Jim the EMEA have looked like excluding Amazon then.
I hear you loud and clear on the.
Our LTC NOI margin path for the rest of the year.
As we go into the back half.
Is that improvement in margin really driven by I guess like gross take rates on interest income and then servicing income because of that.
<unk> fiscal second quarter originations. Thank you.
So.
Probably the most important thing too.
Going through the CPD points.
I don't know if you had a chance to read it.
From my point of view.
Great document describing the state of the industry.
I think they did a pretty thorough job both interviewing and.
Summarizing what the industry is doing.
Gratifying to have my S. One letter quoted the CFPB reports.
Highlights.
No I don't think our roadmap has changed at all in fact I feel like in many ways.
The letter essentially.
Highlights that there's lots of companies and there is the NPL space and Theres, one thats very different and they didn't go as far as naming us, but we're the only ones who doesn't charge late fees doesn't have.
All sorts of other shenanigans that regulators.
Regulators really dislike it so.
So we feel pretty great about what I said there.
Probably the most interesting sort of materials in there.
Note is.
Call it in the industry essentially to help consumers build their credit history and credit scores through the NPL loans and we've been working pretty closely with the accrued reporting agencies.
Various other participants in the industry too.
Help further that along and so we will definitely continue listening to what the regulators have to Santa matter and it was their own ideas et cetera, but generally speaking.
I felt that it was a very positive thing for the industry and certainly for <unk>.
Several of our roadmap is not impacted.
Green sponsor promotions are.
I would say youll see more of them going forward. It has two components to it one is the build out of the June were taken during which wasn't that the product has to be actually fully the open were.
We are making pretty great progress there.
Quite heavily Dolby muscles that I wont, but is it that you live in a bunch of places and then it becomes a matter of sales where you actually have to bring its merchants and manufacturers and brands.
Where are you getting on that.
Like everything else, we do these things will take time to build and it will at some point break them out to sell off just how good we are and how margin rich maybe come but that's.
Probably a conversation for another time.
Okay, maybe answer the question, whether there was a remark.
Yes.
No. Thank you I think I covered it I don't have a sustained market and then in terms of the kind of back half of the year and I understand the question correctly, you're talking about that our LTC as a percent D&B improving pretty meaningfully in the back half of the year.
Really just really simple math as you put more interest bearing loans on the balance sheet.
You defer or you are in the revenue as those interest payments are made throughout the course of the loan.
Take a 12 month, while and Thats originated in.
In December for example.
Most of that income happened in the back half of the year, what's important though is the.
Provision for credit losses for those loans will happen upfront and so what that means is you get less revenue less transaction costs in the period, even though those loans are very good and profitable for us throughout the year.
But then more broadly I guess, just really important to remember how early we are with these large partners and with.
The program overall, we talked about the mitigates earlier that are that are things that we're working on right now, but don't yet have reflected in our forecast thats on top of the very long list of projects that we have that focus on the unit economics as <unk> talked about in the letter that's ordinary course of business. There's nothing special about that that's up there if you would.
We will continue to do regardless.
And those can range from settle optimizations that we have on our product display pages tweaks that we can make to how our app search feature work to really drive.
Better affiliate revenue taken in the period.
And the list goes on and there is optimization and as opportunity.
Represent for US a lot of a lot of the update here.
The primary driver in the guidance is the flow through.
The larger balance sheet and experiment.
Excellent. Thanks, Max Thanks, Michael.
Our next.
Comes from the line of Andrew Jeffrey with true Securities. Please proceed.
Hey, Thanks for taking the questions. This is Julian on for Andrew.
Just wanted to talk to go back to the credit side I know you just mentioned that the provisioning would kind of I guess.
Be more front half weighted and then.
We will see kind of come down in the back half is that is that the right way to think about that.
Yes.
We always provision at the time.
Part of the origination.
Yeah, well when we owned it strictly speaking.
So that's always the case the differences as we on the margin will have less marginal growth dollars being sold versus placed the balance sheet, you'll just akshay carry the provision versus getting the gain on sale of no provision and so I think the income profile just change gears a little bit.
As you as you think about those.
Those loans being on the balance sheet versus off.
Got it.
Okay.
Thank you.
<unk> get one more in.
Can you kind of quantify maybe the non Amazon growth versus Amazon growth and veteran GMB. This quarter and then also it seems like it's pretty good.
All things considered so just kind of maybe quantify that a little bit.
Thank you.
We can't quantify we're not disclosing GMB.
<unk> by a partner here, what I would point you to is we do disclose.
Near 500 or over 500% growth in general merchandise category that does pick up.
<unk> of merchants, including Amazon and Walmart and target those are big all of which had growth and strong growth, but we're not breaking out G&A by part got it.
Okay. Thank you that's it.
Okay.
And our next question comes from the line of Reggie Smith with Jpmorgan. Please proceed.
Hey, guys. Thanks for taking my questions.
You have a slide in your presentation that shows through.
30 day delinquencies.
<unk>.
I guess I wanted some help kind of interpreting the data.
So when I look at kind of pre pandemic. It appears that <unk> kind of decline as the year progresses.
But when I look at 22.
It increased as the year progressed and so.
What conclusion should we draw from this charge should should we expect things to kind of follow the arc of pre pandemic is that what you're suggesting or.
Our <unk> is going to continue to kind of increase and I have a follow up thanks.
Yeah. So.
There is a seasonal pattern to credit performance in our experience that relate to both the purchasing pattern consumers have as well as certain key cash.
Cash flow milestones like for example.
Tax refund and timeline.
What you saw during the pandemic was pretty big.
Sorry.
Helpful Monetary supply and liquidity given to consumers, which really did affect pretty substantially.
The ordinary pattern that you would expect to see.
As we're kind of shedding all of that.
Excess consumer liquidity, I think youre going to see a more normal pattern for consumer credit trends in terms of the seasonality and that's why we're referencing back to that.
Endemic period.
On page 10 of our ladder Youll see us sitting around.
The FY 'twenty pre pandemic trends, which we feel like it is again right, where we'd like the business.
Got it that makes sense.
There is another slide I think you guys hinted at the potential of raising.
Kind of merchant fees, obviously interest rates have gone up a lot this year, but <unk> held your zero interest.
Take rates relatively constant.
Can you talk about I guess the process for for raising those as it kind of like a bolt on that goes out. These do you have a sense that there may be some merchant pushback I mean, everybody, obviously recognize that rates are higher but how mechanically like how would that actually play out and again sensitivity how sensitive you think merchants are too.
Higher.
Zero interest rates. Thanks.
So you're right.
Have not generally speaking moves prices either consumers or merchants to date.
I think everyone, but everyone understands that.
Our largest supplier increase their price threefold as Michael put it the other day.
And.
At some 0.1 does pass the cost on to their customers.
<unk> with <unk>.
<unk> is.
A little bit different based on the type of the partnership so obviously some of our largest.
Richard.
<unk> segments come from.
Platform partnerships like Shopify.
Others are individual but platform like entities, <unk>, Walmart and Amazon and then there's a whole list of.
Directly integrated folks that are either on a platform or not that waiver.
A direct relationship there is no third party platform evolved.
Those are probably the buckets in the case of <unk>.
Fully directly integrated folks.
The notification and theres different contractual.
<unk> lines that we've committed to giving them noticed strategic price obviously they have some ways.
Reacting for example, Lincoln virus.
In some cases in other cases, they can try to negotiate et cetera.
In the platform.
And they do really large quantity platform merchants, obviously is a little bit more of a conversation because they are responsible for a whole host of underlying merchants that have and have other financial relationships with those folks. So a lot of times it depends a little bit on their schedule of raising their own prices, which may or may not be thinking about.
So.
The merchant side of the equation so the slower moving the consumer side, we obviously have quite a lot more control and because obviously every transaction is underwritten in price and it does change based on credit quality and what we are seeing et cetera, we have to follow a fair lending lawsuit change on one person or the other.
There's been a fair amount of consideration there.
All that said.
We've done this before as they're beginning the.
Pandemic, we went to our merchants and told them that we have no idea was going to happen next but we expect our risk to go up very substantially.
And therefore, we will price it with them at that time, I think exactly zero merchants required us or did anything let's say, we get into where we're going to work with you because it's important for us to continue selling so feel pretty strongly about our ability to command a fair price for our products and include the.
What are the ratios that we see in our supply.
It's not an instant switch, but it's something that we've done before but very confident we're able to execute.
And I would say that the tone from a lot of markets right now.
There is two pieces that are targeting around this conversation and one is it's a lot of focus on margin.
All of our merchant partners clearly anything that's perceived as an additional cost is under a lot of scrutiny on.
On the other hand, I think a lot of merchants are looking at their own outlook for the holiday season and into early part of next year and are looking for ways. They can get back some of that growth in volume they had before.
Things always.
Net out too.
Good deal that allows us to get the economics, we need and drive the volume that we need to them.
That is an unconstrained.
Have real margin constraint right now.
Got it.
More in real quick.
Yes.
Got it perfect.
Obviously, you guys report your reserve rate and it was down sequentially.
Yes.
I'm thinking about like how am I going to explain that to investors and it seemed to come to my mind.
<unk> got more repeat customers, so you've got a better view of that.
The customer and then also your.
The average life of your portfolio is only nine months now is there anything else I'm missing there.
Or what else can we add to maybe.
Dress concerns about a declining reserve rates.
Yes, again I would I'd.
Start with first is how we think about the reserve.
I think some financials stations have a team of economists who are thinking about the state of the consumer and trying to make a forecast what their reserves.
If we did that by the time, we got the answers from the Ivory Tower, we believed would it payback so instead, what we do.
We look at the actual performance of the loan and we look at the <unk> score the credits where the media loans when they originated and.
And use those two things to indicate how those loans will perform and then we look at whether or not those predictions that performance are holding up and that's very Matt driven we're not sitting here.
With a lot of judgment up and down our prognostication about future trends the deterioration in credit it's Barry.
And model driven.
And if you look at for example, again on Slide 11 page 11 of the letter.
Take or pay for performance.
You see a pretty material reduction in the credit losses that we have for our paying for product while it does turn over very fast it isn't the biggest part of our allowance. It is all on the balance sheet and will continue to be and therefore has as you improve the quality.
Losses in that product you, obviously, you're going to see less allowance needed for it and similarly, I think a lot of the strength that we talked about starting to see.
The end of our last fiscal year. The mitigates that we took resulted in us originating a higher quality asset going into <unk>.
Going into this quarter and into the back half of this year and that higher quality asset math would suggest a lower loss content.
Good thing it's not.
Not a bad thing it's a very.
Good thing that we estimate less losses and the loans that we're originating.
That's helpful. Thank you.
Our next question comes from the line of Chris <unk> with D. A Davidson. Please proceed.
Alright, thanks, and taking my questions.
With.
Another one on the credit side can you.
Quantify it all sort of obviously, it's a more difficult environment.
Across a number of.
Issues, but for consumer credit and sort of tightening you've done delinquency trends are really impressive just given all the concerns we hear about the consumer.
But how much of an impact does that have on your growth forecast maybe for this year I don't think you really changed your guidance that much on <unk>.
So.
Is that a factor or is there enough demand that thats offsetting.
Tighter credit conditions.
There is definitely an impact of credit on our volume, it's just nowhere near as.
Substantial as I think some welcome I think the far bigger impact.
The update in our guidance is the impact that we saw from from peloton.
Do you take a business that has a lot of headwind like that.
We thought we were being pretty conservative in our outlook for that business. This year and I think thats it.
Underperformed EBIT, where we had cut that bar and that's the biggest driver of the reduction in the guidance for the year.
Haven't given a way to quantify it but.
We don't take that for example.
Movement in the guidance is because we.
Sequentially have tightened our view on credit.
Okay, Great Super helpful.
Follow up on.
The areas of demand and on the other side competition.
I have to believe and I think we've certainly heard.
Some competitors are struggling a lot more than affirm is so are you seeing any benefits yet as you talk to merchants.
For the froth coming off in an improved competitive environment.
I'd love to hear sort of like you're you're taking.
Take your temperature on your ability.
Thinking as you talk to merchants.
Is that going to be a conversation that you are already starting to do that still on the come. Thanks.
I'm going to try really hard not to sound glib and despite the football or decreased.
Relapsed et cetera, the short answer is yes.
I've been saying this for a long time to Warren Buffett quote about tight coming out and noticing that some people are swimming without trunk zone.
Exactly.
Classify our state of affairs is struggling but I do believe some of our competitors are in.
It is accretive to us we have merchants coming in saying, Hey would you guys consider side by side with our competitor.
Where in the past, we would come in and asked them would they consider it nets it out and they were fine. The approvals are good and now pools are not ours are still doing quite well and so that just makes it that much easier to take share.
So I'm, sorry, I'm, sorry by site sometimes.
<unk>.
Probably.
Could rattle off a handful of brands that are turning us on either.
Instead of or alongside some of our esteemed competitors because they feel the need to continue driving the topline the competition the longer Ken.
Approved as well as they used to so yes, it's been quite helpful to us.
So so long as we continue hitting our numbers on credit, which we absolutely intend to do and keep googles high which should give you a sense at all these quarters have been promising that the curve is really steep we need to move our Judy just a little bit to reduce our perspective losses by law.
It seems to be working out the way we were promised it. So let me ask it keeps growing we'll continue to take share.
Awesome. Thanks, so much and congrats on a tough environment and also thanks for all the disclosures on the credits really helpful. Thanks.
Thank you.
Our next question comes from the line of Kevin Barker with Piper Sandler. Please proceed.
Thanks, and thanks for taking my questions I just wanted to follow up on.
Considering your guidance, you've tightened underwriting growth has slowed a bit, but obviously a lot due to peloton.
When you look at.
2023.
You're assuming.
What the base case is for unemployment and whether it's slowing in spending or are you starting to put in place additional measures to assume that unemployment is going to spike or there is going to be something worse than what we expect beyond.
Most economists have in our forecast over the forward curve indicates theres something there that.
That you are anticipating and managing for.
Okay.
I'll start on the on the credit side, Michael probably has comments on the rate side of things so.
We are.
Anticipating.
Some degree of worsening on the credit side of things that said.
We really concern ourselves with.
The next four five months of volume it was just really really important too.
Two to communicate.
<unk> ability to manage credit to the numbers that we choose.
As a consequence of our ability to underwrite and get the data sources that we can either make it do.
Do do very quickly, but probably the single most important structural part of how we're different from everyone else in the market is we have very short term product, we're not granting wise, which means that a credit decision. We made today, even if it's an erroneous will be the last time, we made that mistake.
Able to deal with a lot more demand that we choose to and so as consumers feel more stretched they come to us more often.
Does not change that we apply the same level of diligence and care to every loan that we underwrite so.
We are primarily focusing on making sure that our data sources of fresh that are models react correctly to the changing consumer behavior, which we have absolutely seen given just over the last five six years of operating including the last six months of the current.
Macroeconomic volatility so all of that is fed into how we underwrite, but our ability to weather whatever whatever incoming store might be headed our way is deeply rooted in the fact that we make very very short term relatively speaking credit decisions and we have no shortage of.
Demand for our products.
So I'll pause there just wanted to add another point to make but Michael has a few.
Okay.
The way we approach it as always to take the current.
Consensus that take the forward curve.
The assumption, we don't try to.
Okay.
There's a number of scenarios that could play out very differently as you point out we could enter into a recession.
More employment of course that would probably have come with less pressure on rates. Then we're probably currently modeling and the flip side is the radar, but make it worse.
And that could continue to be very very robust and I think we're trying to just be middle of the road here it'd be very explicit around where we're assuming the current macro.
This is where the business is what will play out understanding that.
This forecast are always wrong do we have to base it off of something and so just like we did when we gave our guidance at the beginning of the year, we're going to peg it to the rate curve and as rates move you should expect that to impact our business. What's the framework that we gave.
That's really helpful. And then I appreciate the the short duration of the product obviously.
One last thing sorry on that point, the point that aren't going to make it a blink on.
So one of the other things that we have because it will be adaptive checkout, which we had the presence of mind to launch about a year ago.
The menu of terms the consumer will see.
Is programmatically determined by us so we have enormous amount of control over this $4 six average.
It isn't just in and of itself short, we also get to decide whether a particular credit quality <unk>.
Seeds the longest.
For longer durations versus the shorter ones. So.
One of the things that you can say, we're preparing to do although we don't have to act on it right now if we felt that the unemployment is about to spike or starting to go up really rapidly we wouldn't necessarily pool in terms that make the $4. Six average go down just to make sure there are fewer opportunities for our borrowers to default. So that's another level of control that we have.
And that.
Typically corresponds very nicely just from research in past lives with the shift from luxury buying two general merchandise purchases.
Borrow quite as much in there for shorter terms make more sense for the gaslog. So there's actually should not have it the real impact on our take rate on the consumer side, but we will reduce that risk.
We haven't.
Alright, sorry back Scott.
Okay.
Yes, I was just saying there is certainly quite a bit of an advantage to having rapid velocity on your lending.
And being able to shift.
When you think about.
The RTC or T. <unk> guide for the back half of the year, implying quite a bit of improvement do you feel like you could.
You need to hit that if things get worse, I mean, obviously, maybe there's a little bit of slowing growth and tightening underwriting.
Youre going to focus more on profitability or does that get pushed out a little further but still remains.
Something that you can see in the future at least in the near term on hitting some of those guidance.
Sure.
I'm tempted to make some sort of read my lips joke, but I will not we will hit profitability unscheduled.
Or not.
Pushing up profitability the project, we're focusing on are about.
Creating more OTC, creating mitigating some of the <unk>.
Rate volatility, but ultimately we feel very good about our schedule we are not.
Suffering from.
Sure.
From any need to postpone or speak with destiny, I think I'm not supposed to say that.
The duration.
And the last thing is we take our guidance very seriously we put a lot of thought into it.
Hey, sorry, guys mood is because we think something something has changed and I think what you saw on the outlook here.
So we talked about a pretty big impact.
<unk> and then obviously, we're digesting a pretty big headwind right.
There are certainly macro conditions that could make that goal and objective not come through but.
We feel very confident as we sit here today.
Act of God are not included in our guidance.
And our next question comes from the line of Bryan Keane with Deutsche Bank. Please proceed.
Hi, guys just wanted to ask on two parts of the questions. We get an approval rates. It sounds like they stayed high but maybe they were down a little bit.
In the quarter, maybe you can just clarify that and then the outlook.
Approval rates, what do you expect.
The approved rates actually stayed relatively flat throughout the quarter in fact base.
Basically stayed flat for the last.
Nine months, if memory serves with the slight uptick in the.
Peter.
In the three months in between.
The first three in the last three.
We actually increased the rate a little bit. So maybe this month this quarter. It went down a tiny bit but this is sort of back to the products that we offer consumers. So we have enormous amount of control over the actual shape of the risk we're going to take on.
Generally speaking counterweight.
Finding a way to say, yes to a consumer where somebody comes in and says Hey, I want to borrow X hundred dollars over why months or weeks.
In some situations the answer is no thats not going to happen because we just don't think we can carry this much cash flow burden on the monthly basis. However, we're very happy to help you with the lower monthly number if you are willing to prepay.
The Delta basically and that and how it does in other levers that allow us to shape the risk we take in.
Make sure we keep the consumers where they are without adding unnecessary burden to our provision.
We.
Have been certainly very active with using those levers we do this at the merchant by merchant level, sometimes a SKU by SKU level, because we can and for which products are getting prioritize how it repayments and things like that but to date, we have not needed to slam the brakes on approvals again.
And I said it before credit is job number one we will always prioritize managing to numbers that we feel we must hit to ensure capital markets partners see us.
Best yield most predictable yield generator for them.
That does not meet for us that we have to turn people with it or does it mean that some people will have a slightly larger.
Downpayment request in some cases, we will ask for more information and some pieces that we need to see their cash flow data, which is.
Somewhat burdensome, but.
It's better than being told them and so we have a lot of comfort in our ability to maintain rates and while we don't generally speaking contractually agreed to guaranteed approvals with our merchants the reason be key for us.
Hired if you will and the reason they like to hire us over our competitors because we always deliver on approval rates first foremost and that helps them drive their time on.
Top line and sales that wouldn't have happened without affirmative.
Yes.
Got it no. That's helpful. And then maybe just an update Max on on the debit plus product and the rollout there. Thanks so much.
Thank you for asking I was wondering if somebody you might remember.
So actually.
Try and trying not to be glib.
One of the things that I could do a year ago.
Product and chief.
And.
Don't feel like I can now roll out a product with.
With economics that I don't feel are fundamentally accretive to the business. So soon.
I think at the beginning of last quarter or right around that time, we basically taken the.
The weakness that we generated and given.
Pretty meaningful number of people so tens of thousands of active cards type level cards to observe the usage.
As with every new credit product you end up with economics, we don't particularly like and we spend the last three months, just really chiseling away at all the various fronts ventures and loss possibilities and do a whole bunch of new kind of losses that happened in double plus theres, obviously pre transaction, which is very similar to <unk>.
Anywhere product that we have inside the Super App.
There is the post one which is where you swipe and then you choose to split how they sort of 24 hour limbo with those transaction, Mike turning to paint. Our Recompete later and then there is also a sufficient funds, which is the P&L can become adults.
So there's a bunch of new vectors, both potential unintentional losses, it's been the last three months, just really making sure that we feel good about unit economics of this product.
We're almost there I feel very good about it.
And probably January one it's kind of a realistic timeline of when we're going to start.
Pushing this forward product.
It's brand new we're not going to given today's reality.
The question about.
Turn profitability nothing will be more frustrating than saying everything to Austin, we are hitting every number except that turned out to be last year than I thought so sorry about that profitability has postponed that will not happen.
That said I feel quite good about where the profitability of that product is today I'll give a lot better in January we have a whole bunch more planned.
That's when we expect to start actually delivering these cards and you will notice pretty easily right now to get to debit plus you have to either be in the selected group where we promoted.
Or you kind of have to Norway. You can go on if you want it but it's a little bit of work with Dave you see your affirmed app.
Or a tile, saying, hey give yourself a double plus you'll note that we're starting to promote the product quite aggressively and again, we're not including anything in our guide about what business will do for us into volume or revenue basis, just because.
Too hard to model that right now, but we will probably be able to talk about it quite or quite a lot more in terms of the actual expectations starting next calendar year.
Hopefully at least be at the point of balance we will not risk our unit economics, just to answer recruiting product.
Sooner than we already do.
These people.
Good view into how we think about.
The economy thing.
Our next question comes from the line of Matt here.
<unk> with Bank of America. Please proceed.
Hi, Thank you I'm on for Jason Kupferberg.
I just want to ask just a couple of questions first in your Q1 results in the first quarter I think you mentioned.
Higher interest rates impacting gain on sale with pricing with certain forward flow.
Can you talk about that a little more obviously I mean I understand the interest rates are up but just trying to understand how often does that pricing get.
Oh.
Adjusted.
And is the lower pricing like going to state, though I think these agreements tend to be two to three years. So just trying to understand the lower gain on sale now you are kind of locked into those.
Gain on sales for the next couple of years, how does that exactly work.
That's good question yet.
The commentary is really about the year on year comparison.
The.
The agreements vary some agreements or are locked in for the duration of the contract.
Have regular repricing triggers and it varies with six months.
Floating arrangement, so we kind of have lots of different flavors.
But I wouldn't I wouldn't we're not I'm not worried about being locked in.
At the worst rates I think are declining rates would be good for us.
Yeah.
Okay.
And then just wanted to ask about adjusted operating margin of the first quarter came in better than your guidance.
But.
I mean, obviously the top line guidance is coming in a little bit but you also.
You also slowing down hiring just trying to understand was there something.
Unusual about the first quarter like some expenses got pushed to the second quarter or something.
What's happening there anything to call out.
No we did have a little bit of a benefit.
And with the light of that.
Art.
Repeatable throughout the course of the year, but.
The strength in the revenue less transaction costs.
Combined with slightly below hiring plan.
Biggest drivers for us in the first quarter.
The reduction hiring plan is as much about managing.
The fiscal 'twenty core number as it is about managing 23, if you think about the timing of the hiring that we have in the plan. Obviously employee we hired the last day of the fiscal year doesn't really affect the profitability in the air but extra cost that we take into next year and I think the focus for us to get our units as healthy as possible and to get the operating.
The.
Right size as we can going into next fiscal year, when we feel like.
We wanted to do that.
Ethylene as strong as possible.
Our next question comes from the line of Eugene <unk> with Moffett Nathan Nathan. Please proceed.
Hi, guys. Thanks for squeezing me in just one question.
On the consumer engagement with the platform. So your transactions per active user keep going up which is great to see breaks out the great sign of better engagement, but I think if we do the math.
Spend per active consumer that keeps going down.
Understand that there might be some mixed factors in here, perhaps peloton.
Influencing that but can you talk about that trend a little bit and do you see a path to.
Getting consumers to spend more dollars with your platform.
Over time, and how what are the levers you might be able to use.
The equation to do that.
So I think the.
Yeah.
They're kind of two competing factors here.
Completely honest I track slightly different metrics I care about average ticket size for every transaction.
And number of transactions per active user of those are kind of my contours of our consumers engaging and it is in fact, the case that if you ask someone to spend more money.
Through you with you.
Alright.
You're trying to convince consumers to use you more often more more transactions.
You are absolutely signing up for smaller tickets right people aren't going to buy an exercise bike every quarter.
They're going to buy maybe.
Maybe a couch.
A year or so but then.
Youre really trying to get high frequency, which is certainly what we're chasing here youre looking at things like apparel maybe tickets.
And so we're very active in all the industries General merchandize umbrella name for everything you buy that kind of happens all the time.
So EOG is expected to continue coming down.
It's an important measure of our success frankly.
I think the.
Growth of transaction frequency per user.
Is.
An indication of increasing spend in the painful category, which is uniquely.
Both for these short term lower ABS transactions and so that's where a lot of your it is coming from.
As you might expect when it was dominated the longer periods for a very long time in the us markets.
Very rapidly expanding into the short term.
Lower transactions.
So I think in the long term I care about.
Trying to get too old transactions possible.
In Nash.
Naturally result in the most possible number of dollars spent with a firm.
By any one actually consumer but for now we're very focused on making sure that we're there for the consumer.
For monthly payments.
If the average ticket size goes down that Frank was a success.
Okay.
I think that's directly on the map I think the average is maybe I'm not quite sure what Matthew are doing and how you're looking at it averages can really lie here.
One $2300 purchase can look like a lifelock wallet share of wallet, even if it's not repeatable as opposed to the consumers who may be you would never entertain thats why they are not purchased I think for the consumers that are engaged on our platform today.
And I believe we have a higher share of their staff.
Thank you and our final question comes from the line of Andrew bulk with <unk> Nikko Securities. Please proceed.
Yes.
Hey, guys. Thanks for taking my question just looking at the affirm share of U S. E Commerce spend and then this kind of dovetails with the prior question is growing above the 2% in fiscal 'twenty three and beyond.
And the trajectory of that is it more <unk>.
Function of.
No you are making progress on the consumer side or is it more around the continued expansion of wallet within merchants I know they likely go hand in hand, but.
Any other color you can provide with Greg.
Yeah.
We are building.
And.
Scott.
When we get to the other and.
And back I.
I guess the.
Assuming pretty good earlier today about <unk>.
<unk>, 2% of E Commerce, and now I feel hey.
Hey, guys I got to show up with more soon the good news is that we are currently integrated at about 60% of all U S ecommerce so.
We can increase that 2% penetration.
By getting more share of wallet with the merchants are merchants really dependent us in these inflationary times because consumers' needs.
Need to stretch their dollars were there for them and we have a really healthy business that is generated from our own services and our app.
Some of it is merchant integrated but a lot of it is not.
Still.
Very excited about what <unk> will do for us it extends us into things like daily purchase where we don't play today and importantly, it gets us to offline, which is not included in my 60% number and.
For us is a nicely growing but still very very trivial amount of volume. So we have lots of ways of getting above that too.
When we get there.
Will spike the football again, how that works.
And then just looking at the industry mix I mean, one that kind of sticks out to us is a pretty sizable opportunity that that could grow over time would be the travel and ticketing segment.
I'm thinking about getting further into airline purchases or hotels, maybe you could just speak about that the vertical inside that opportunity and what what obstacles or.
Potential like rose to taking that 12% up.
Over the next couple of years to be.
I agree it's a great opportunity I think it's a wonderful.
Place to apply what do you have to offer.
We have a handful of really good partnerships and in the travel industry today, both he and airlines.
Yeah.
Hotels are probably at least penetrated from our point of view, we have a bunch of online travel agency ratios that we have for years and years and have done extraordinarily good work with them.
Direct integrations with airlines, it little bit newer and Theres more to do there as well.
Cool thing about travel in general.
It's kind of a sweet spot for what we know how to do it sort of thing that others can't really do it very well.
All of these things, including all start far, but I'll I'll get her in a second but if you look at the work we've done with some of the largest big box retailers and with the platforms and now we're looking to do with hotels and expanding our work with Otas.
It is.
Evidently a thing you do not as much in credit and underwriting and understanding the consumer use case as you do in product and give you a very good example hotel do you sort of think back to last time, you checked out you can check out a lot of times you don't check out to lead the team to really work and so the actual the exact mechanics of this transaction is now.
<unk> total amount and now I'm going to turn into a loading youll pay it over time.
They're very different between hotels and buying a couch and so inevitably to do this right to do as well to convert a lot of consumers to deliver the value that our merchant expect us to have to build a product that is fine tuned to.
That particular industry.
All of our long term growth opportunities are built around our ability to create products that are unique and are very hard for others to replicate very strongly about it obviously.
For a long time I used to say affirm within machine engineered in.
Our LPC out we've been very careful with hiring so maybe some of these.
Opportunities to get even bigger and faster.
Why the right amount of discipline to it but definitely very similar travel in there.
We have five other industries I can rattle off immediately where just the right product and will break through and become bigger than ever.
Thank you ladies and gentlemen, this concludes our question and answer session I would like to turn the call back to Zane Keller.
Thank you everybody for joining the call today, we look forward to speaking with you again next quarter.
This concludes today's conference. Thank you for your participation you may now disconnect.