Q2 2023 Affirm Holdings Inc Earnings Call

Good afternoon, welcome to affirms Holdings second quarter 2023 earnings Conference call.

Following following the speaker's remarks, we will open up the lines for your questions. As a reminder, this conference call is being recorded and a replay of the call will be available on our Investor Relations Web site 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.

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.

Adding 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, except as required by law.

In addition, todays call may include non-GAAP financial measures.

These measures should be considered as a supplement to and not a substitute for GAAP financial measures.

For historical non-GAAP financial measures reconciliations to the most directly comparable GAAP measures can be found in our earnings supplement slide deck, which is available on our investor Relations website.

Hosting todays call with me are Max Levchin, firm's founder and Chief Executive Officer, and Michael Linford, the 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.

I hope you've had a chance to review our letter to shareholders because it contains a great deal of detail.

And then just increased macroeconomic headwinds our fiscal Q2 had mixed results revenue was at the low end of our expected range and adjusted operating income came in better than expected.

Other hand gross merchandise volume was short of expectations as was revenue less transaction costs as our mix shifted to more interest bearing loans and we retain more loans on the balance sheet.

We once again reported excellent credit performance of delinquencies fell on a sequential basis, our continued vigilance and attention to credit outcomes allowed us to meaningfully increase our funding capacity in January .

We also acknowledge a tactical error on our part that hurt our results, we began increasing prices for our merchants and consumers later in the year that we should have as this process has taken us longer than we anticipated.

This is the lesson, we will not soon forget though it does not change our long term outlook at all.

We have taken appropriate action from implementing pricing initiatives, which are gaining traction to refocusing our product development effort on margin optimization in core growth.

Two the most difficult decision at all.

<unk> the size of our team by 19% today.

I believe this is the right decision as we have hired a larger team that we can sustainably support in todays economic reality.

But I am truly sorry to see many of our talented colleagues depart.

And it will be forever grateful for their contributions to our mission.

With a smaller therefore nimbler team, we are focused on achieving profitability on an adjusted operating income basis as we exit fiscal 'twenty three by executing on three key initiatives accelerating GDP growth, while optimizing our OTC.

Engaging consumers to drive greater frequency and repeat usage and growing debit plus.

We continue executing on our strategy to scale, our network make disciplined high conviction.

Most promising opportunities and capitalize on a massive secular tailwind.

If anybody wants to ask me about the recently proposed rule I believe he please go for it.

The Q&A now back to you, saying.

Thank you Max with that we will now begin our question and answer session.

Operator, please open the line for our first question.

Thank you and if he would like to ask a question. It is star one on your telephone keypad.

Eli receive a confirmation tone as you enter the question queue. You May press star two if he would like to remove yourself from the queue.

For participants using speaker equipment may be necessary to pick up the handset before pressing the sorry. Our first question is from Ramsey El <unk> with Barclays. Please proceed.

Hi, Thanks, so much for taking my question.

This evening I was wondering on the new pricing actions that rolled in a little bit like what do you see there typically in terms of attrition or other impacts kind of downstream.

When you go about rolling those and is that is that a risk factor for later or do you have a pretty good idea in terms of what to expect as you as you roll those pricing actions and over the course of the next few months.

We have seen zero attrition that I can think of I call. It Triple correct me, but it.

It is not a matter of.

Risk of implementation, but it is very much a matter of timing.

The Prost.

Process is a little bit more complicated than.

In some cases anyway than simply notify someone because for a large percentage of our merchants.

They utilize.

Something or anything in our set of offerings as far as buying downgrades is concerned so the conversation isn't just hey, we need to raise prices on consumers need to pay us for MTR, it's inevitably a conversation about how the programs change with buy downs will look like going forward now that there is.

Different construct in front of the consumer.

For example, you might see we now have a significantly more visible set of four 5% APR is not a product or not a program that we featured.

Last year at all of them et cetera, So it's a matter of underestimating complexity on our part.

The other.

Unfortunate reality is that having these conversations in calendar Q4 with merchants is just not something that happens very quickly. So we don't have.

Much risk in those conversations, but the timing made a leader.

And then I think it's also.

Important to know that from a consumer price standpoint, we continue to believe that there is very minimal elasticity. So in thinking about the impact on the top line and the top of the funnel. We don't think there is a measurable impact there.

Okay, one quick follow up for me.

I also noted that more of your <unk> is coming from interest bearing loans.

And as you called out the highest ratio and in our corporate history can you just kind of comment on.

How we should expect that to trend going forward is that a rate that should continue to increase or.

I've noticed that Ive seen some for example, some zero percent loans on the Amazon website. The patents in the past could we expect that to kind of come in.

I guess generally speaking are reasonable to expect.

As the fed rate.

Continues to go up or at least remains high were elevated relative to last year to see more interest bearing loans versus zeros that said.

The subsidies to reduce the rates or eliminate them entirely come from both merchants and platforms as well as manufacturers et cetera, and so.

Overall, the trend should we expect it to be towards more interest bearing loans.

But we are certainly still very much in the business of finding ways of offering consumers magical deals that contain no interest at all which is obviously far more valuable now.

Overall borrowing cost for consumers went up a lot.

Our next question is from Rob <unk> with Autonomous Research. Please proceed.

Hey, guys, the new guidance, especially in the second half of 'twenty three points too.

Lower volume and revenue growth in our LTC, thats actually going to be down year over year.

I know you've stuck to the profitability target, but how are you thinking about the longer term margin and profitability of that business and how do you get there given that the growth seems to be slowing before you've really hit.

Velocity.

That's a good question.

We continue to believe.

I believe that the long term range.

Revenue less transaction costs as a percentage of <unk>.

It should be in the 3% to 4% range.

I think what you have a couple of factors going on in Q2 with respect to the timing of how we earn the revenue and how we recognize the expense that distorts it and given the what we think is.

A one time step up and loans that are held for investment to our warehouse financing growth.

We think that obviously will weigh down the full the full year number but still allow us to end up in the 3% to 4% and the reason for that is as we've talked about before the businesses.

Really a mix of split pay paying for volume, which has margins that are much lower and very profitable longer term monthly installment.

And the two mix in a way, where we can pretty reliably predict that 3% to 4%. Additionally.

Additionally, I would point out that we feel really good about the quality of the assets that we originated this quarter and as I say the economic content. There is really good because that hasnt hasnt been a primary driver most of what Youre seeing is again.

How those yields flow through the P&L.

Thanks, if I could just.

Follow up there.

Similar question, but more from an operating profit standpoint that the long term target I think used to be a 20 or 30% operating margin win.

<unk> growth was below 30% youre kind of there now but still have a lot.

Fixed costs to scale so.

From an operating profit standpoint, how do you think about the longer term margin here.

Yeah, we've not given any update to the framework that we laid out last year I think that.

We would probably say we're in the midst of one of the the <unk>.

<unk> kind of moments of volatility from a macro sense. So.

Not sure that we would hold ourselves to the framework that we outlined a year and a half ago. In this very moment, but I think part of the reason we laid out our profitability commitment to the end of the year.

Was it a reflection of the fact that we were.

Wanting to get ahead of that from a framework standpoint.

Yeah.

Just for the record.

This is not the.

The growth rate that I personally like.

We intend to grow the business faster so the.

Expectation of.

We're there now.

Is not the expectation that I have for this business that said, we will manage credit.

Credit most importantly.

Job number zero.

We will never allow growth.

Trump the necessity of managing.

Losses in yields et cetera, but.

There is absolutely no reason to believe that having taken over a quarter of U S. Retail sales were going to attenuate.

Match some.

Steady as she goes growth rate.

Our next question is from Dan Perlin with RBC capital markets. Please proceed.

Thanks, I wanted to explore the long term profitability question again.

But from the viewpoint I feel like I've heard you say a conferences like one of the biggest toggle points is really kind of the human capital aspect of your business and you. Just you obviously just did a very large.

The reduction in force here. So my question is.

That seems to be helpful today, but to the extent that you're able to sustain long term profitability are you going to have to lean into something that requires a lot more automation on your part or are you doing that.

Or are you just trying to match, obviously right now, obviously, you're kind of matching and expense versus the <unk>.

Driving the top line, but I'm thinking about this longer term from a sustainability perspective. Thank you.

A couple of different thoughts on that.

The risk is very unfortunate isn't.

Certainly saddens me greatly and the rest of the team.

It is an economic reality that we have to live within our means and match growth of head count with growth of revenue.

But for.

For the record what we've done is we've rolled back six months of engineering hiring.

This is not a.

Everything is gonna be replaced by robots.

We're writing a lot of code and we'll continue to do so.

We have definitely shifted our geographic hiring focus to Poland, where we've been able to attract exceptional talent.

At significantly lower cost than Silicon Valley for example.

Okay.

Sure.

We have a lot of things that we want to build and it will certainly.

Expect to ourselves to build it and deliver it but we are doing right now is not building all of those things concurrently what we've really done is reduce the surface area of engineering projects, we're allowing ourselves to have duston.

<unk>.

A year and a half ago or two years ago with exactly the right strategy standby those decisions.

Today.

It's a little bit tougher to justify.

Things that will create the next billion dollar business three years from now built today will have to build a year from now.

Got it.

If I can just do a quick follow up on the on the pricing initiatives. The question here is really as you increase.

Up to 36% is the cap.

And then you also I guess toying with the idea of increasing <unk>.

The zero percent, Apr's, which kind of puts a burden on merchants I'm just wondering.

Do you.

Kind of foresee any.

I guess diminishing returns associated with that.

From a merchant perspective, I know you have to get.

Some approvals it sounds like in order for you to actually take those caps up but I'm just wondering how those discussions have gone in and what that kind of feels like from us.

But from a margin perspective.

I think.

Everyone merchants and a firm alike.

Our keen on more volume and.

As.

Repeated often sit again, we are fundamentally governed by.

Yield.

And risk management, so we must maintain the risk frameworks that we've signed up with our capital partners.

If we are able to.

Increase.

Compensation, we get for taking the risk and we really do think of it in terms of.

MTR EPR tradeoff there are many situations, where the merchant is more than willing to pick up the increased cost because they want to pass those savings onto the consumer and attractive. This way, obviously works really well for folks with direct to consumer brands were maybe manufacturing is partially or fully owned and in other situations where the brand.

As already.

Paying us.

Possible and is unable to shoulder anymore. Then it's the consumer that has to see increased rates in either of those two cases.

If we are.

<unk>, we will increase approvals. This is fundamentally not about expanding our margin we're quite comfortable with the margin structure that Michael outlined we continue targeting.

Those.

Percentages, but being able to talk to <unk> about helping them sell more and a period of obvious consumer slowdown is a pretty welcomed conversation it is not a.

Not in every case anyway is it a hey, we're just going to do this because again, we run complex program is part of why this business is defensible.

Is because the vast majority of our merchants have significantly more to do with us than just showing up our logo on their checkout. If you look at their product detail pages Youll see that there are pre calls and various forms of finding out a true cost to the consumer which has to be updated for regulatory.

Sure.

Just marketing purposes et cetera, so it's a.

More complicated thing to execute than perhaps meets the eye, but it is not a.

Difficult conversation with the merchant and as Michael pointed out we've run.

The 36 versus 30 sensitivity tests.

Last year and found that our consumers actually smart enough to realize that when there are no fees that are fixed schedules and theres no compelling difference between 30 and 36 on a $240 loan over 12 months is 77 per month. So the true cost to consumer is practically de minimis on a cash basis and our merchants are smart.

So understand that as well.

I think it's important to note that our direct to consumer channel, where we have complete control, it's probably the best.

Insight into where the structural economics are here and that's our most profitable product and channel we have a very efficient way to engage and monetize that engagement.

And our App I think Max's opening remarks pointed out that one of the ways. We're getting to our goal is by driving that engagement back to our own services, where we can very profitably engage consumers and we're in full control of that experience.

Our next question is from Jason Kupferberg with Bank of America. Please proceed.

Thank you guys I just wanted to start on <unk> and just looking at the.

The new outlook, there youre talking to shareholder letter about some.

Slowdown in discretionary consumer spending, but just wanted to take your temperature on how much of the lower outlook on the volume is that versus other factors, whether it be competition or just some tightening of the credit box and.

And then if you can just talk about what you see ultimately re accelerating the GMB growth because I think the math suggests you'll be down around 13 or 14% in the next couple of quarters.

Thank you.

It's a great question.

So the.

Those discretionary.

<unk> is down.

We would get a pretty good preview of what that looks like especially around Christmas shopping and Black Friday.

From our seats.

Electronics were down about 11% Homewares and sports equipment in particular, we're hovering in the negative high thirties, So theres quite a lot of.

I'm not sure what the right word to use but.

Our.

Digesting the purchases made during the pandemic and I think that those those are.

<unk> not.

Transactions that will disappear forever, but I think they're probably going to remain muted for.

We expect at.

At least a few quarters of that.

On the flip side.

Credit is always an input we sets the loss rate that we're willing to live within our capital partners. We're willing to live with and then we manage everything towards that that's why the delinquencies are as good as they look we have total control.

Are willing to compromise GMB, although you don't have to compromise too much of it to maintain industry leading.

Loss rates.

So.

Sure I'm prepared to give you a breakdown, but those are the two fundamental reasons consumers are pulling back their spent every time I talk to my friends Ceos of.

Broadline retailers. They tell me that discretionary spend is down quite a lot of movement into.

Things like consumables, and obviously food prices being higher does not help either.

Hi.

Two the Reacceleration point.

Obviously, we've talked for a long time about debit plus I'm sure somebody will ask me I will give you a full update on what's going on there, but I remain very very bullish on that.

Really hard over the last six months, it's hard to.

Overstate just how much work put into the product just over the last couple of quarters.

We feel very good about it state of readiness and we'll start.

Finding out just how much of that food and consumables spend we're going to be able to.

Shift to affirm our consumers still love us they still come back to US you can see that the frequency per user.

Pricing the network activity is extremely healthy.

I think probably a set of metrics that I would direct all of you to look at if you wanted the how does the firm wind story spelled out very clearly, there's almost a 40% growth in active consumers year over year, almost 40% growth in transactions three five transactions per year per active user 51% growth in transactions themselves and.

86% up slightly from last one.

The repeat transactions. So the network itself is increasing density and that is fundamentally the long term play if we are able to pick up more and more of your transactions. We will ultimately have a really good shot at also helping you buy groceries and that is the transactions that do not generally speaking diminish much.

The positive and negative economic environment, So that is where the real acceleration will come from we're also selling to more merchants.

Launching new projects and new products with them, so that too will bear fruit, but in terms of new categories offline.

Lower AB transactions offline in particular areas, where I'm most excited about.

And then just quickly on Amazon I think the exclusivity provision in the contract expired January 31, just any updates there. Thanks again.

I think the world, where you can lock up your partners with a 10 year contract and.

Not not do much after that.

Left to card issuing banks were not one of those the way we.

Maintain our partnerships.

Hopefully have a right to to continue showing up is by showing up and delivering real value everyday.

I think.

We feel very good about state of all of our enterprise partnerships.

Okay.

Yes.

Just real quick.

In our in our Q Youll see we are breaking down the concentration that you see for Amazon and I think.

We are.

We have a meaningful exposure there we are.

A little over 20% of our GMB that is.

Still underpenetrated versus Amazon share of E. Commerce that we still feel like we have a lot of room to grow there.

Nothing happened to our business on <unk> earlier point on the data.

Contract terms turned over.

Our next question is from Reena Kumar with UBS. Please proceed.

Hi, Thanks for taking my question just looking at your FY2023 guidance, you're calling for.

Got at the midpoint of our revenue up 8% and transaction cost to be cut by 2% at the midpoint. Just just wondering what that why there is that big differential any call outs there.

Sorry.

Is your question why are we able to while we're able to.

Why are you cutting revenue more than on the transaction call.

Okay, Yeah I think.

The guidance for the back half of the year transaction costs does reflect continued.

And volatile macroeconomic conditions, including and especially the.

Capital markets, where.

Where we would continue to expect there to be a lot of pressure on the yields that we need to generate for our capital partners.

I think the.

This is reflected in the guide and Thats the thing Thats happening to us the thing that we're doing about it is.

Is the pricing initiatives and Max alluded to I think we'd feel better about the world that have that.

<unk> been in the ground and are reflected in the mix of GMP that were originating and so we do expect that continue to be.

That source of pressure on us in the near term.

Got it that's really helpful. And then just one follow up if you can just provide us an update on how the shopify partnership is ramping and how that one wafer growth looks like from here.

We're very happy with the shop fire relationship.

Sort of the headline answer is.

These things take a long time to build out its a sort of again I love being our chest a little bit about the complexity of this business.

Moat, but it really is that it typically takes us two to three years to get to kind of a full deployment because it's such an interesting beast.

Have to figure out how to promote the product the right way and yet you can't over promoted because then you're going to be pushing people into depth, where they shouldnt be in and.

And so theres a lot of <unk>.

The nurse to figuring out how to get to.

Full sort of fully deployed mode and you know you were there when youre seeing kind of a one.

Not better than that and we're still at a really happy position to where we can rollout and improvement of our project with shopify.

The meaningful improvements come out and JV or in profitability of the program et cetera. So we're still very much at work we have a significant percentage of our effort dedicated to what we call PBA powered by farm, that's the component componentry that powers both.

Shopify.

Several other platforms for us and we're still very significantly invested in building that out, but theres still quite a lot of opportunity. There. So generally speaking very excited great relationship.

Spend a lot of time talking to my counterparts there.

Our next question is from Andrew Jeffrey with truly Securities. Please proceed.

Hey, guys I appreciate you taking the question this afternoon.

Michael.

By all accounts it would appear that capital markets are maybe healing a little bit.

And equity as a percent of the total funding platform is up.

Substantially quarter on quarter, So I guess a couple of questions one.

How do you sort of SaaS.

State of capital markets from a funding standpoint, I noticed you expanded capacity and two you think.

Youre going to be able to stay below that sort of 10% pre IPO equity funding threshold.

The cycle.

Yes, so the first question first.

The markets are healing I think that.

I think that the new year did an awful lot for the debt capital markets broadly.

And Youre seeing the avs market open up youre seeing much more constructive conversations with the forward flow partners.

Max and I spent a lot of time over the past couple of weeks meeting with.

Capital partners of all stripes, and the tone is markedly better than where it was as the volatility appear to be reducing in the new year really did help.

So we feel much better today and yet we are still very much.

Humboldt around just how how difficult it is to execute and how volatile uncertainty remains.

You saw that with saw this week in around the fed meeting and I think that kind of volatility is something we're just we're we're prepared to and comfortable navigating but it does.

Reflecting that's being very thoughtful and careful about how we run the business with respect to your second question, absolutely we will stay below 10%.

We think this is near the high watermark for where that number should be we think that the.

Seasonality.

Our gmg, specifically the holiday shopping season late in the quarter and then of course in the quarter itself.

Positive an increase a pretty big step up in total platform portfolio that we don't think we will continue to grow as quickly to the back half of the year, which means that our funding mix will probably be very stable through the back half of the fiscal year. So you wouldn't expect any meaningful increases in that equity capital.

Wired.

And we would continue to feel confident in our ability to execute both securitizations like we did earlier.

In January as well as net new capacity with forward flow partners and so we feel we feel good about our ability to do that right now as we sit here today.

But.

But nowhere near 10%.

Okay.

And as a follow up.

<unk>.

Just wondering about.

Pardon me.

Awesome I lost my train of thought Oh, yes on the.

The loan loss reserve.

I know.

You've been modest us not to do.

Necessarily consider that as we would have more traditional financial but can you just discuss sort of the 5%.

And where do you think that goes in the current environment should it fall given the slowdown in growth.

I think 5% is a really good number I think it.

It is obviously linked to delinquencies and again.

Apologize if this comes off as it is modest but it's really not it's just a chance to learn about how this how this business works.

We have a chart in my in my letter I would really encourage I wouldn't look at it shows the delinquency trends at a firm as compared to some of those traditional players whose measures I think some folks are wanting to apply to our business.

We're the only player with a lineup of delinquencies pointing down okay, and some players are not as high as other.

But the directionality is very different and that's because.

Our asset turns over so fast that youre not building for losses for loans that you have in.

It's somewhat of a of.

Apache statement, but we can't build allowance for loans that we don't own and so we can't build ahead for originations that hasnt happened, yet and what you see here then isn't a judgment about how the back book will deteriorate in the macroeconomic environment. It is a reflection of the quality of loans that have originated recently given the velocity.

The book and so what you should interpret as the 5% is very much connected to that declining delinquency trend that you see that's a reflection of extremely strong credit performance much more so than anything anything else.

Lastly, I think we have included a chart in the supplement that I would encourage folks to look at it just breaks out where the allowance bridge to from from September to December and then again with last 12 months have gone and Youll see the allowance build is a reflection of both growth and assets, but also the actual charge.

Also in the period.

Yes.

I don't mean for it to be modest with either but.

I will I will attempt to say exactly what Michael said.

Probably.

Less careful way, but I think it's really.

It's important to understand the whole point of including this chart.

It's not as though our consumers are experiencing less or more stress on average is that we have through the really short term nature of the products that we print and the fact that we decide every loan individually, where we think we are not able to take the risk we don't.

The downward slope of delinquency is a direct result of our actions we changed our credit posture sometime.

Starting maybe nine months ago, and we've done it again several times since sometimes with finesse than other times.

More actively but the.

The point is we are in control of the credit outcomes and we will continue controlling them and that's really really important to understand we're not building allowances for the mistakes. We made that we couldn't have predicted three years ago by giving someone a credit card we make that decision every single time they choose to transact.

A direct consequence of <unk> might be lower because we decided that the <unk> that is coming to us is higher risk than we wanted to take on.

But we do rank risk really well, reducing give you a little bit eliminates a tremendous amount of potential loss and we are in total control of what kind of loss. We take on that is the reason. We included that is to just drive the message home. We're not interested in building up giant piles of cash for losses that will make for loans from three years ago, because we don't really have a.

A lot of loans left from three years ago at all.

I hope that didn't sound toward monitoring.

Our next question is from Bryan Keane with Deutsche Bank. Please proceed.

Hi, Good afternoon, I guess, just thinking big picture here, Michael what surprised you.

Versus the guidance you just laid out last quarter was it was it the pullback in consumer spend was it that you thought the pricing would get all pushed through was it the mix of loans I'm, just trying to get a handle on the reduction in the guidance going forward.

And kind of the surprise and that caught you by surprise.

Yes, I think it really is.

The overall consumer demand, which shows up both in the aggregate <unk>.

But also the mix underneath that.

And I think there is.

Some good progress that we made so for example, we were pretty happy to get.

Our business with peloton to actually be ahead of where we thought it was going to be there is a lot of strength of that program as they returned to some of the programs that we had.

From years before and then there was a lot of real legitimate slowdown and the broadline merchants that we are very proud to partner with and some more of the durable goods categories. These are the larger considered purchases.

And so I think we were surprised about that and then frankly, we continued to manage credit very tightly and we were probably and continue to be.

As Max alluded to.

We're going to manage credit first and that shows up on the positive side with really excellent credit performance, which ensures that we continue to access capital in our capital is not a constraint on the growth in our business.

And yet it does create.

Some short term top line headwind.

Got it no that's helpful and then Max I'll take the bait and ask about debit plus the rollout there.

And the prospects of profitability I know there was some hesitation worried about the profitability of debit plus so maybe you can update on that well as well you can just help me out could not a certainly a better for that one. Thank you alright. So okay.

So the <unk>.

I'll spare you the long story, but.

So sometime about eight seven or eight months ago, we rolled out.

First kind of a seriously sized batch if you will.

Of cards to our existing users and began observing so obviously youre rolling out a completely new set of credit programs youre, taking overnight or multi day risk on pay no transactions at a whole bunch of different things that we needed to watch and it's the kind of thing that you can't really model because you just don't have any real background information and so.

We did that and much to my children sometime by mid summer, we knew that transactions, we knew how to do which is longer term interest bearing.

Short term pain for us were generally performing.

Blaine, but.

We encountered a whole bunch of types of transactions and I certainly wouldn't get into the details, but there are multiple modalities of using the card that we're just fundamentally unprofitable and as we were looking at the usage and the fact that the product is so sticky consumers with literally shift from using a firm than any other mode to using the card the second they had access to it.

Sort of debated the responsibility of rolling out a product that was inherently less profitable than somebody else's unprofitable to users who are very hungry for it but.

<unk>.

We're not going to transact with our other product and so we spent the last six months just.

Drilling into profitability of debit plus and there are people, who know who they are so I'm not going to name them embarrass them, but they extended uncountable number of hours figuring out how to optimize it. This is primarily machine learning work, where you're figuring out things like probability of insufficient funds and someone settlement accounts and the outlook.

Major body of work that was.

Actually in EMEA and faster than I expected, but the punch line is that I'm very happy to report that every class of transactions and debit plus is profitable.

No.

And enormous amount of optimization again, one of these things where you look back and say no. One else will go through the trouble they'll just pronounce some revolving line and move on but our consumer doesn't want to revolving line. They want that would lessen so very excited that this thing is profitable now and the other thing a little bit less but kind of even more in the weeds.

We saw really good stickiness of the product once you comprehended the value proposition, but theres a bunch of wrinkles in Onboarding in particular that lost too. Many people as we were trying to onboard them and so we spend the remainder of the time in the last six months, just figuring out how to make it as easy to get live with a card.

Emanating a huge number of steps, while not losing anything in <unk> and all the other things that we have to do so both of those projects are basically completed the way you know you will know that we are matching the pedal to the floor as Michael likes to say is you'll see debit plus cease to be its own separate applications. So up until now it's been a standalone app that you have to download them.

Purposely put in a bunch of friction so that we would be able to control the spread.

Now that we feel very good about the economics and the comprehensibility of the product, we're actually going to integrated directly into the mainline app.

Im not going to make the same mistake I did in the past and put a number out there.

I'll do that internally, but.

The team knows exactly.

The pressure and excitement we have for the product.

So extremely bullish.

You'll see it in your App.

Soon as.

The rest of the team is looking at me angrily so that's all I'll say.

Remember the debit plus product is another one of these channels that we control entirely so.

The profitability of the product as a function of that and we feel really good about where that sits right now.

Good morning.

Our next question is from Moshe Orenbuch with credit Suisse. Please proceed.

Great. Thanks.

Most of my questions have been asked and answered.

Could you talk a little bit more about the.

<unk>.

How much of your GMP, you think will be on the balance sheet, you sort of talked a little bit about some of that.

Versus what you'd be able to sell and.

And the idea of what in those discussions you were talking about that Youre happy with your capital markets partners. How much is their pricing to you changing in and how much do you need to raise pricing to keep them.

Perhaps where they had been prior to this range.

Of interest rate increases.

Yes, it's two factors there is interest rate increases and then there is credit.

A lot of time on talking about why controlling credit is so important for the yield those investors that and that is a point of pretty big differentiation when thinking about us versus some of the other alternatives that some of these workflow partners could be buying.

And as that differentiation grows we know we'll get rewarded for it and yet also we do feel the need to increase the revenue content in the loans that were selling in the form of higher APR for example.

I think that we're not giving specific guidance to the balance sheet or to the funding models through the back half of the year, but we do expect the mix that we saw in our second quarter to be pretty consistent with the mix that you would you would end the year at so I think it's safe to say starting point is to assume that were flat flattish which means we.

We'll have our largest funding channel is still going to be the forward flow Mark Yes, that's where the most of the total platform portfolio will be sitting as the single channel.

Did the securitization.

Beginning this quarter, which will allow us to grow that line item in and yet that's still on the balance sheet with slightly more leveraged yet with the warehouses, so anyway I would assume flat.

Within certainly within modeling errors is a good assumption, which means that our fourth what partners are at the table and still dealing constructively and maintaining their level of commitment throughout the back half of the year.

Thanks, Michael maybe just as a follow up.

When you gave the guidance for revenue less transaction costs did you factor in kind of.

Better worse or comparable level of gain on sale.

Assets that will be sold.

That's a great question. It's worse, so we've contemplated that we would continue to have.

Yield pressure with respect to our forward flow partners we.

We saw that in the pricing conversations that we've had and been having.

We're very confident about our ability to control the asset yields as Max talked about.

It is the case that the rising rate environment has put the yield threshold higher for all of these programs.

Thanks.

Our next question is from Kevin Barker with Piper Sandler. Please proceed.

Kevin Please check and see if your phone line is muted.

Okay, we will move on to Chris <unk> with D. A Davidson. Please proceed.

Hi, Thanks, Good afternoon, I wanted to try to the volume question. One more time, just make sure I'm understanding correctly, just relative to your expectations three months ago.

Is it fair to say that.

It was probably a little bit of.

Consumer moving away from discretionary item associated surrounds that would be okay.

Ticket size that would make us on a firm product.

Is that is that.

Part of it what about the.

The offset of increased consumer demand in a in a stressed macro environment is that still.

Factor or is it overall net negative when consumers are choosing to spend today I have a follow up.

It's a great question.

We pulled back from discretionary spend is exactly right.

You rattled off a bunch of its category draw.

Drops that we're seeing year on year and so that's certainly.

Factual and we do expect it to continue nobody knows when the.

Trough for consumer demand has hit but I don't feel like people are running out and buying couches, although February or January .

But.

The demand for the program I think I dropped a.

Do you see stats in the in the <unk>.

Opening part of my letter, we see about $1 billion of demand every week.

And I think thats not the same thing as well great why don't you guys take it because each one of these loans are with each one of these applications has to be underwritten before.

Through the lens of what's responsible for us to take a risk on and what's responsible frankly for this person to borrow.

So increasing consumer demand.

Certainly there I think if we were careless, we could probably grow GMB astronomical numbers quite quickly, but that is certainly not what we're going to do we are unique in a sense that we don't charge late fees, we do not profit from delinquencies, we did not celebrate.

Lee fee increases.

I'm glad there's some pressure downwards in that particular part of the world recently, so hopefully the playing field is getting a little bit more level, but.

It's a good thing to have.

I think we are now big enough, where the overall consumer sentiment makes a difference to our business a little bit more than it used to we're still growing three times the U S ecommerce rates, but as people walk away from buying more Tvs.

For example, it will have consequences and so long as we are responsible lenders, we will see a little bit of that.

Okay, Great and then the follow up would be sort of a clarification that sort of putting all these factors together and correct me if I'm wrong here, but.

It sounds like.

Consumers arent experiencing be NPL burnout.

To the extent that your last question unless answer suggests that there is still very much a lot of interest and be NPL, especially in this macro environment is not really.

Consumers tiring of the product it is more your lineup, which calls on making sure youre doing profitable loans and because of the higher interest rate environment as well as higher sensitivity of credit costs, you pulled back maybe potentially at the bottom of the funnel at the top of the funnel, but more of the bottom of the funnel and as you make pricing changes.

You could see a better conversion rate.

Next fiscal year potentially that there that's exactly right and actually Michael I'm stealing his line. This one but he loves to remind everybody that our loans are ranked in profit with the correlation between profitability of our loans and the internal credit score FICO score. If you will more or less are tightly correlated other way.

Words, the highest credit quality loans are also the most profitable for us we're not using.

Pardon the kras statement poor people to subsidize great deals corbridge people were actually attributes.

Attributing the cost and profitable profitability quite directly which means that any time, we need to or we decided to improve the profitability of the book, we end up taking slightly less risk at the very bottom.

Overall demand for the product is still very strong we're not seeing it.

Any.

Had enough be NPL during the pandemic back to my.

I'm, not sure, which credit card come on here, but.

No not seeing burn out if anything.

On the margin I feel like there is demand for.

More flexibility I think the one thing about we're probably seeing this a little bit more anecdotal so take it with a little bit of a grain of salt, but any experiments during did a plus we looked at.

Sensitivity and consumer demand for.

Longer terms that obviously people always longer terms, because just a little bit less cash flow hit on the monthly basis.

As the overall economic environment softened in consumer.

Pulled back it seems that at least part of the pull back pull back is actually cash flow dependent versus kind of a general decluttering trend, which is also by the way happening.

Again.

We don't talk enough about this but we should.

We're growing at somewhere between two and three times, we estimate the U S e-commerce growth rate to be and Thats, despite posting a 115% growth in <unk> last year, and so I think it's easy to think about.

Thinking that the industry has slowed down but that you have to put into context. The overall scale that we've got to and how we got there a little bit more quickly we still feel like it's underpenetrated and we'll get to the kind of numbers that we talked about.

Some of the quarter growth rate numbers are a reflection of the comps and again the growth rate last year was buoyed up by the launch of three major programs all happening at the same time and we're quite proud that we were able to do that but that doesn't mean that some of the growth rates need a little bit.

Our aperture to get them to get an understanding of what's really going on the fact that transaction counts are up 50% year on year suggest that consumers are not at all being burned out by very high demand for we are figuring out a way to profitably serve those transactions.

Should I just quoted.

Transaction growth I think thats, the single highest growing metric actually in this quarter.

Our next question is from James Faucette with Morgan Stanley . Please proceed.

Thanks wanted to ask a couple of follow up questions, particularly to the one that was just asked.

It's understandable in terms of.

Tightening.

The bottom of the funnel and as you said, a little bit on where appropriate and to manage that.

Any sense for how.

How much that then cost sure introduces incremental friction to bring those people back whether that'd be first time applicants for people that have taken out multiple loans in the past and for whatever reason just don't meet the criteria youre looking for for the incremental one.

That is a great question and something that is extremely top of mind for me. So I spent a lot of my time staring at re engagement stats, which is why you see it in my top three priority.

Both in my letter and certainly communications for the company.

The good news there so first of all Youre exactly right. If you tell someone sorry, no load for you and it's the first transaction that is not a great first impression.

We will have to work harder to get the consumer back.

Hi.

Perhaps even worse you can imagine I've been a loyal customer for a very long time and now he can no longer Serbian so we invest a tremendous amount of resources to both the communication of declines and.

So trying to make sure that we can bring folks back where.

<unk>.

Appropriate and part of why we know so well that the rate sensitivity is not actually a major problem for our consumers certainly at the bottom part of the credit funnel is because.

We tested tremendous amount of those communications in various forms of re engaging the consumer and our own surfaces, where we have total control where of course, we are able to raise prices in us for significantly higher down payments and optimize the overall experience instead of saying no. We can say yes.

The.

Long and short of it is the results are good.

Probably not worth getting into without a whiteboard, but perhaps when we see each other in person I'll show you.

We'll probably have to publish a charge for everybody to see but we've tested what happens when.

We re contacted consumer that we have decline what do they do what we tell them Hey, you are now approved or when we tell them here's a different form of transaction that we can approve you for and they are very encouraging in the sense that.

Consumers, especially those that have used affirmed before are not particularly hurt or offended by the decline because we think we do a pretty good job of explaining what happened and are quite willing to come back and reapply. So.

On the margin.

Confident we'll be able to continue engaging those consumers and youll see us actually invest quite a lot in products that enable that reengagement. That's a huge push within the product roadmap for the next couple of quarters really.

But it is very much top of mind and not something that.

We think it is just going to be.

Available to us and take for granted.

Year of extreme focus for me.

And then just as a follow up as you mentioned.

A couple of times, particularly as it relates to the changes in pricing et cetera.

Some of those implementations.

Or price changes and work with the merchants took longer than expected.

More.

Back and forth there maybe than you had anticipated.

What does that what are you being able to do so that in the future like you've got more flexibility there and can move more dynamically.

As rates.

I've got to imagine in a very long run we're going to move around quite a bit. So just wondering how you're approaching that.

Yeah. This is if I have.

Some egg on my face to clean off stills, but this is the one.

I found myself a bit of a payments expert going back 30 years and.

I think I still am, but I completely forgot the part where visa and Mastercard whenever they change rates, where any network rule changes.

<unk> operated in the six months schedule with six months notice and then Theres, a six months implementation window and late summer.

Decided this is what's going to have to happen then.

It in fact take six months.

And.

The way you do this right is you structure. These into the contracts you make sure that these contracts stipulate, both what happens when the rates go up and when rates go down.

You make sure that.

You know what the transition periods look like et cetera et cetera. This is.

Again somewhat embarrassingly, our first effort of that kind. This is a lesson that we.

We will now learn here certainly.

<unk>.

In the line.

The lesson learning so I think you should not expect us to have to.

I have another one of these apologizing sessions, where we say Oh, yes, we're going to change prices, but we took a lot longer than we thought so we've now figured out or we've learned how to price and the right amount of time.

Our next question from Eugene <unk> with Moffett Nathanson. Please proceed.

Hey, guys good evening.

I wanted to ask about the margin comps actually so.

See the data on the slight decrease in total merchant count and I understand that that's driven by smaller merchants that you're showing in a very helpful disclosure on what's happening with the larger merchants, even with a larger merchants, there's a pretty noticeable slow down in kind of the incremental merchants added to the network.

To ask about that what's sort of driving that in your view and what's your expectation for that trend going forward. How important it is to the overall growth to be a platform for that kind of a number of larger merchants, let's say to keep growing at a decent pace.

First of all.

Merchant count is a little bit about any network at our scale I think Michael has a.

A few promises in the letter we're going to publish.

Slightly different metrics to make sure just shows kind of a true state of penetration.

Huge merchants quote unquote.

Accountable set and we are very well penetrated there.

<unk>.

Midsize merchants are important because these are kind of leaps and bounds of volume that we're picking up and thats where majority of our.

If you will hand to hand sales combat takes place these days and probably has been in the last few years and so those are important.

Little merchants are.

A little bit different.

Some times become inactive, especially the really small scale.

Excuse me.

We have been active for a course of a quarter the crew count of.

Installed merchants or activated about necessarily active are significantly larger than the number we published and be easy to sort of have uneven or fleet a vanity metric here.

But we're trying to be transparent here so.

The growth of merchant base is.

Kind of.

Set of weights for the weighted average total of JV, obviously GDP growth is what we are entirely focused on.

Yeah got it okay. That's helpful. Thank you and then a quick follow up I wanted to ask about the firm App and kind of the transactions that <unk> initiated through Europe through <unk> App through your website I think if I am kind of looking at these numbers correctly, the proportion of that declined a little bit.

Sequentially, but my question is really brought our sort of what are the what is what.

What are your initiatives around improving the.

The engagement with the App and again, how important it is keeping investing in it and what are you doing to keep driving traffic through it.

No.

Yes.

Sure.

To be honest.

I also have my head, whether it declined or.

Oh, Yes, I guess it is.

Slightly down quarter on quarter on a percentage basis.

It is super important to us so are they going to doubt that is a thing that I care tremendously about.

There's a little bit of equivalence between.

Transactions that happen in our partner apps for example, as we grow within Shopify, you know that I imagine you know that you can service those transactions both inside the shopify app and in our <unk> and <unk>.

Always.

Route to consumer towards the most likely place of repayment because again the job number one Brazil is making sure that credit metrics remain excellent.

But the overall reengagement within the network is what we care about the most at our App at our sites.

Pension and.

A bunch of other things most importantly to me at least right now acquired.

Where we are investing a huge percentage of our engineering cycles.

The App is it required companion to the card in fact, the functionality in the App youre borrowing money in the App youre not ever borrowing money and the card itself.

And.

That is where we think a lot of orders for engagement will take place.

Experiments taking place there.

Im.

Airing spreadsheets titled Maxus Top 20, which has 35 elements in it right now.

Projects that we put in.

The motion over Christmas break with our head of consumer products.

We're shipping.

Couple of those every week now so im very happy with the velocity of the experiments we are doing there.

Also as a math, it's really important when we are scaling programs like we are with the largest platforms and.

E Commerce players in Amazon and Shopify as an example.

All of that growth all of those transactions are obviously not starting on our on our platform and so a lot of growth is coming from there which means that IMAX.

I'm actually very impressed we've been able to hold that as content given the rapid rise in growth in these partners and so I think to <unk> earlier point that the health of the network is reflected and those engagement stats and the user SaaS and growth in transaction count and the fact that we're holding.

Serve on the level of engagement through our properties today is a really encouraging sign given the growth that's happening away.

Those growth rates attenuate youre going to see our share pickup.

Our next question is from Andrew <unk> with <unk>.

<unk> Nikko Securities. Please proceed.

Hey, guys. Thanks for squeezing me in.

Just wanted to hone in on one of the comments in the shareholder letter you are.

Where you say you are redirecting.

R&D efforts towards margin driven projects I guess, how much of that is tangible and the current guidance and is it fair to assume that that is a.

Bottom line margin improvement.

Variable rather than any kind of shifts the potential long term LTC numbers.

Yes, so the short answer is.

When we talk about some of the speed of it for example, taking pricing.

<unk>.

We would have a lot more of the impact in this year's guidance, how do we how do we reacted earlier.

And especially true given the size of the balance sheet that were sitting on right now.

So we feel like there's a lot of very long very big initiatives to improve the margin and that is up in the revenue less transaction costs line item much more so than in an opex, we feel like Theres, a lot of very big and structural improvements that we're going to be able to Meg.

They don't really show up in the vertical periods in Q3 and Q4, just given the timing of so many of the flow throughs for any movements on the balance sheet for example, and so.

That's where the focus is the effort is reflected in our guidance, but youre not youre not going to see the full benefit of all of the efforts until the quarters play out in the back half of the calendar year.

Makes a lot of sense and then.

The sensitivity that you guys have historically provided.

Of our LTC relative to rates.

Material change in that what was provided last quarter I know that heading into fiscal first quarter, you had narrowed the range of impact.

Given where rates could potentially do but just wanted to double check on that one.

No no material change.

I think we're thankfully staring down what looks like a more flat rate curve, which I think is allowing us to focus our efforts on making sure we create profitable units at the kind of peak rate curve environment.

But further stress above that would continue to have the same reaction and our framework.

Got it thanks guys.

That is all the time that we have for the Q&A today.

To hand, the conference back over for closing comments.

Thank you everybody for joining today, we look forward to speaking with you again next quarter.

Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

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Good afternoon, welcome to affirm our holdings second quarter 2023 earnings Conference call.

The following following the speaker's remarks, we will open up the lines for your questions. As a reminder, this conference call is being recorded and a replay of the call will be available on our Investor Relations Web site for a reasonable period of time after the call I would now like to turn the call over to Zac Taylor director of Investor Relations. Thank you.

You may begin.

Okay.

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, except as required by law.

In addition, todays call may include non-GAAP financial measures.

These measures should be considered as a supplement to and not a substitute for GAAP financial measures.

For historical non-GAAP financial measures reconciliations to the most directly comparable GAAP measures can be found in our earnings supplement slide deck, which is available on our investor Relations website.

Hosting todays call with me are Max Lipson, a firm's founder and Chief Executive Officer, and Michael Linford, the firm's Chief Financial Officer.

With that I'd like to turn the call over to Max to begin.

Yes.

Thank you Dan.

We appreciate everyone, taking the time to join US I hope you've had a chance to review our letter to shareholders as it contains a great deal of detail.

And then increased macroeconomic headwinds our fiscal Q2 had mixed results revenue was at the low end of our expected range and adjusted operating income came in better than expected.

On the other hand gross merchandise volume was short of expectations as was revenue less transaction costs as our mix shifted to more interest bearing loans and we retain more loans on the balance sheet.

We once again reported excellent credit performance of delinquencies fell on a sequential basis, our continued vigilance and attention to credit outcomes allowed us to meaningfully increase our funding capacity in January .

We also acknowledge a tactical error on our part that hurt our results, we began increasing prices for our merchants and consumers later in the year that we should have as this process has taken us longer than we anticipated.

This is a lesson that we will not soon forget though it does not change our long term outlook at all.

We have taken appropriate action from implementing pricing initiatives, which are gaining traction to refocusing our product development effort on margin optimization in core growth.

The most difficult decision of.

Reducing the size of our team by 19% today.

I believe this is the right decision as we have hired a larger team that we can sustainably support in todays economic reality.

But I am truly sorry to see many of our talented colleagues depart.

And it will be forever grateful for their contributions to our mission.

With a smaller therefore nimbler team, we are focused on achieving profitability on an adjusted operating income basis as we exit fiscal 'twenty three by executing on three key initiatives accelerating GDP growth, while optimizing our OTC.

Engaging consumers to drive greater frequency and repeat usage and growing debit plus.

We continue executing on our strategy to scale, our network make disciplined high conviction that hit our.

Most promising opportunities and capitalize on a massive secular tailwind.

If anybody wants to ask me about the recently proposed rule on Li Please go for it.

Q&A now back to using.

Thank you Max with that we will now begin our question and answer session.

Operator, please open the line for our first question.

Thank you if you would like to ask a question. It is star one on your telephone keypad.

You will receive a confirmation tone as you answered. The question queue. You May press star two if he would like to remove yourself from the queue.

For participants using speaker equipment may be necessary to pick up the handset before pressing the star keys.

Our first question is from Ramsey El <unk> with Barclays. Please proceed.

Hi, Thanks, so much for taking my question.

This evening I was wondering on the new pricing actions that rolled in a little bit late what do you see there typically in terms of attrition or other impacts kind of downstream.

When you go about rolling those and is that is that a risk factor for later or do you have a pretty good idea in terms of what to expect as you as you roll those pricing actions over the course of the next few months.

We have seen zero attrition that I can think of bi cold Triple correct me, but.

It is not a matter of.

Risk of implementation, but it is very much a matter of timing.

The <unk>.

Process is a little bit more complicated than.

In some cases anyway than simply notifying someone because for a large percentage of our merchants.

They utilize.

Something or anything in our set of offerings as far as buying downgrades as concerns and so the conversation isn't just hey, we need to raise prices on consumers need to pay us for MTR. It's inevitably the conversation about how the programs change with buy downs will look like going forward now that there is a different construct in front of the consumer.

Yeah.

For example, you might see we now have significantly more visible set of.

Four 5% APR is not a product or the program that we featured.

Last year, it all et cetera, so it's a matter of underestimating complexity on our part.

The other.

The unfortunate reality is that having any conversations in calendar Q4 with merchants is just not something that happens very quickly. So we don't have.

Much risk in those conversations, but the timing needle.

And then I think it's also.

Important to know that from a consumer price standpoint, we continue to believe that there is very minimal elasticity. So in thinking about the impact on the top line and the top of the funnel. We don't think there is a measurable impact there.

Okay, one quick follow up for me.

I also noted that.

More of your <unk> is coming from interest bearing loans.

And as you called out the highest ratio in corporate history can you just kind of comment on.

How we should expect that to trend going forward is that a rate that should continue to increase or.

I have noticed that ive seen some for example, some zero percent loans on Amazon website that I hadn't seen in the past could we expect that to kind of come in.

I think it's generally speaking are reasonable to expect.

As the fed rate.

Continues to go up or at least remains high for elevated relative to last year to see more interest bearing loans versus zeroes that said.

The subsidies to reduce the rates are eliminated entirely come from both merchants and platforms as well as manufacturers et cetera. So.

Overall, the trend should we expect it to be towards more interest bearing loans.

But we are certainly still very much in the business of finding ways of offering consumers magical deals that contain no interest at all which is obviously far more valuable now.

Overall borrowing cost for consumers went up a level.

Our next question is from Rob Wazzock with Autonomous Research. Please proceed.

Hey, guys, the new guidance, especially in the second half of 'twenty three points too.

Lower volume and revenue growth in our LTC thats actually going to be down year over year, I know you stuck to the profitability target, but how are you thinking about the longer term margin and profitability of that business and how do you get there given that the growth seems to be slowing before you've really hit escape velocity.

That's a great question.

We continue to believe that the long term range.

Less transaction costs as a percentage of <unk> should.

It should be in the 3% to 4% range.

I think you have a couple of factors going on in Q2 with respect to the timing of how we earn the revenue and how we recognize the expense that distorts it and given the what we think is.

A one time step up and loans that are held for investment through our warehouse financing growth.

We think that obviously will weigh down the full the full year number but still allow us to end up in the 3% to 4% and the reason for that is as we talked about before the business is.

Really a mix of split pay paying for volume, which has margins that are much lower and very profitable longer term monthly installment and.

The two mix in a way, where we can pretty reliably predict that three months to 4%.

I would point out that we feel really good about the quality of the assets that we originated this quarter and as I say the economic content. There is really good.

That hasnt hasnt been a primary driver most of what Youre seeing is again how.

How those yields flow through the P&L.

Thanks, if I could just.

Follow up there.

Similar question, but more from an operating profit standpoint that the long term target I think you used to be a 20 or 30% operating margin.

GMB growth was below 30% youre kind of there now but still have.

A lot of fixed costs to scale. So so from an operating profit standpoint, how do you think about the longer term margin here.

Yes, we have not given any update to the framework that we laid out last year I think that.

We would probably say we're in the midst of one of the biggest kind of moments of volatility from a macro sense. So not sure that we would hold ourselves to the framework that we outlined a year and a half ago. In this very moment, but I think part of the reason we laid out our profitability commitment to the end of the.

Year, what was the reflection of the fact that we were.

Wanting to get ahead of that from a framework standpoint.

Just for the record.

This is not.

The growth rate that I personally like.

We intend to grow the business faster so the.

Expectation of.

We're there now.

Is not the explanation that I have for this business that said we will manage.

Credit most importantly.

John <unk> zero.

We will never allow growth.

Trump the necessity of managing.

Losses in yields et cetera, but.

There is absolutely no reason to believe that having taken over a quarter of U S. Retail sales were going to attenuate.

Match them.

Steady as she goes growth rate.

Our next question is from Dan Perlin with RBC capital markets. Please proceed.

Thanks, I wanted to explore the long term profitability question again.

But from the viewpoint I feel like I've heard you say a conferences like one of the biggest toggle points is really kind of the human capital aspect of your business and you. Just you obviously just did a very large.

Reduction of force here. So my question is.

That seems to be helpful today, but to the extent that you're able to sustain long term profitability are you going to have to lean into something that requires a lot more automation on your part or are you doing that.

Or are you just trying to match, obviously right now, obviously, you're kind of matching and expense versus a downdraft in the topline, but I'm thinking about this longer term from a sustainability perspective. Thank you.

Couple of different thoughts on that.

The risk is very unfortunate.

Certainly saddens me greatly and the rest of the team.

It is an economic reality that we have to live within our means and match growth of head count with growth of revenue.

But.

For the record what we've done is we've rolled back six months of engineering hiring.

This is not a.

Everything's going to be replaced by robots and we're writing a lot of code and we will continue to do so.

We have definitely shifted our geographic hiring focus to Poland, where we've been able to attract exceptional talent.

At significantly lower cost than Silicon Valley for example.

Okay.

Sure.

We have a lot of things that we want to build and it will certainly.

Expect to ourselves to build it and deliver it but we are doing right now is not building all of those things concurrently what we've really done is reduce the surface area of engineering projects, we're allowing ourselves to have duston.

Which.

A year and a half ago or two years ago was exactly the right strategy I standby those decisions.

Today.

It's a little bit tougher to justify having things that will create the next billion dollar business three years from now built today will have to build a year from now.

Got it.

If I can just do a quick follow up on the on the pricing initiatives the <unk>.

And here is really as you increase.

<unk> is up to 36% is the cap.

And then you also I guess toying with the idea of increasing mtr's.

The zero percent, Apr's, which kind of puts a burden on merchants I'm just wondering.

Do you.

Kind of foresee any.

I guess diminishing returns associated with that.

From a merchant perspective, I know you have to get.

Some approvals it sounds like in order for you to actually take those caps up but I'm just wondering how those discussions have gone in and what that kind of feels like from us.

From a margin perspective.

I think.

Everyone merchants and Afirma alike.

Our keen on more volume and.

As.

Repeated often sit again.

We are fundamentally governed by.

Yield.

And risk management, so we must maintain the risk frameworks that we've signed up with our capital partners.

If we are able to.

Increase the.

Compensation, we get for taking the risk and we really do think of it in terms of.

MTR EPR tradeoff there are many situations, where the merchant is more than willing to pick up the increased cost because they want to pass those savings onto the consumer and attractive. This way, obviously works really well for folks with direct to consumer brands were maybe manufacturing is partially or fully owned and in other situations where the brand.

As already.

Paying us.

Possible and is unable to shoulder anymore. Then it's the consumer that has to see increased rates in either of those two cases.

If we are.

To read the rates, we will increase approvals. This is fundamentally not about expanding our margins were quite comfortable with the margin structure that Michael outlined we continue targeting.

Those.

Royalty percentages, but being able to talk to <unk> about helping them sell more at a period of obvious consumer slowdown.

A pretty welcome conversation it is not a.

Not in every case anyway is it a hey, we're just going to do this because again, we run complex programs part of why this business is defensible.

Because the vast majority of our merchants have significantly more to do with us to just showing up our logo on their checkout. If you look at the product details pages Youll see that there are pre calls and various forms of finding out a true cost to the consumer which has to be updated for regulatory.

<unk>.

Just marketing purposes et cetera, so it's a.

More complicated thing to execute than perhaps meets the eye, but it is not a.

Difficult conversation with the merchant and as Michael pointed out we've run.

<unk> 36 versus <unk> 30 sensitivity tests.

Last year and found that our consumer is actually smart enough to realize that when there are no fees that are fixed schedules and theres no compelling difference between 30 and 36 on a $240 loan over 12 months is 77, a month. So the true cost to consumer is practically de minimis on a cash basis, our merchants are smart enough.

I understand that as well.

I think it's important to note that our direct to consumer channel, where we have complete control, it's probably the best.

Inside into where the structural economics are here and that's our most profitable product and channel we have a very efficient way to engage and monetize that engagement.

And our App I think Max's opening remarks pointed out that one of the ways. We're getting to our goal is by driving that engagement back to our own services, where we can very profitably engage consumers and we're in full control of that experience.

Our next question is from Jason Kupferberg with Bank of America. Please proceed.

Thank you guys I just wanted to start on <unk> and just looking at the.

The new outlook, there youre talking to shareholder letter about some.

Slowdown in discretionary consumer spending, but just wanted to take your temperature on how much of the lower outlook on the volume is that versus other factors whether it be.

Competition or just some tightening of the credit box.

And then if you can just talk about what you see ultimately reaccelerate the GMB growth because I think the math suggests you'll be down around 30% or 14% for the next couple of quarters.

Thank you.

It's a great question.

So the.

Those.

Discretionary spend is down.

We can get a pretty good preview.

It looks like especially around Christmas shopping and Black Friday.

From our seats.

Electronics were down about 11% Homewares and sports equipment in particular, we're hovering in the negative high thirties.

Quite a lot of.

I'm not sure what the right word to use but.

Folks are.

Digesting the purchases made during the pandemic and I think those.

Not.

Transactions that will disappear forever, but I think they're probably going to remain muted for.

We expect.

So a few quarters of that on the flip side.

Credit is always an input we set the loss rate that we're willing to live within our capital partners. We're willing to live with and then we manage everything towards that that's why the delinquencies are as good as they look we have total control and we are willing to compromise GMB. Although you don't have to compromise too much.

Of it to maintain industry winning.

Loss rates so.

Sure I'm prepared to give you a breakdown, but those are the two fundamental reasons consumers are pulling back their spend time I talked to my friends Ceos of.

Broadline retailers. They tell me that discretionary spend is down there's quite a lot of movement into things.

Things like consumables, and obviously food prices being higher does not help either.

Two the Reacceleration point.

Obviously, we've talked for a long time about debit plus I'm sure somebody will ask me and I'll give you a full update on what's going on there, but I remain very very bullish on that.

Worked really hard over the last six months, it's hard to.

Overstate just how much work put into the product just over the last couple of quarters.

We feel very good about it state of readiness and we'll start.

Finding out just how much of that food and consumables spend we're going to be able to.

<unk> to affirm our consumers still love us they still come back to US you can see that the frequency per user is.

Pricing the network activity is extremely healthy.

I think probably the set of metrics that I would direct all of you to look at if you wanted the how does the firm wind story spelled out very clearly, there's almost a 40% growth in active consumers year over year, almost 40% growth in transactions three five transactions per year per active user.

Two 1% growth in transactions themselves and 86% up slightly from last one.

The repeat transactions and so the network itself is increasing density and that is fundamentally the long term play if we are able to pick up more and more of your transactions. We will ultimately have a really good shot at also helping you buy groceries and that is transactions that do not generally speaking diminish much in the positive.

Economic environment, So that is where the real acceleration will come from we're also selling to more merchants and launching new projects and new products with them, so that too will bear fruit.

With new categories offline and.

Lower ABS transactions offline in particular is where I'm most excited about.

And then just quickly on Amazon I think the exclusivity provision of the contract expired January 31, just any updates there. Thanks again.

I think the world, where you can lock up your partners with a 10 year contract and.

Okay.

Not do much after that.

Thats left to card issuing banks were not one of those the way we.

Maintain our partnerships.

Hopefully have a right to to continue showing up is by showing up and delivering real value everyday.

I think.

We feel very good about all of our enterprise partnerships.

Okay.

Yes.

Just.

Just real quick.

In our in our Q Youll see we are breaking down the concentration that you see for Amazon and I think.

We are.

We have a meaningful exposure there we are.

A little over 20% of our G&P that is.

Still underpenetrated versus Amazon share of E. Commerce. So we still feel like we have a lot of room to grow there.

Nothing happened to our business on to Max's earlier point on the data contact.

Contract terms turned over.

Our next question is from <unk> Kumar with UBS. Please proceed.

Hi, Thanks for taking my question just looking at your FY2023 guidance, you're calling for cod at the midpoint of our revenue up 8% in transaction costs to be cut by 2% at the midpoint.

Just wondering what that why there is that big differential any call outs there.

Sorry.

Is your question why are we able to while we're able to.

Why are you cutting revenue more than on the transaction call.

Okay, Yes, I think the.

The guidance for the back half of the year transaction costs. It does reflect continued.

It's a volatile macroeconomic conditions, including and especially.

Capital markets, where.

Where we would continue to expect there to be a lot of pressure on the yields that we need to generate for our capital partners.

I think the.

This is reflected in the guide and Thats the thing Thats happening to us the thing that we're doing about it is.

Is the pricing initiatives that Max alluded to I think we'd feel better about the world that have that are.

<unk> been in the ground and are reflected in the mix of GMP that we originating and so we do expect that continue to be.

That source of pressure on us in the near term.

Got it that's really helpful. And then just one follow up if you can just provide us an update on how the shopify partnership is ramping and how bad one wafer growth looks like from here.

We're very happy with the Shopify relationship.

Sort of the headline answer is.

These things take a long time to build out is sort of again, I love being or just a little bit about the complexity of this business.

As a moat, but it really is that it typically takes us two to three years to get to kind of a full deployment because it's such an interesting beast.

You have to figure out how to promote the product the right way and yet you can't over promoted because then you're going to be pushing people into depth, where they shouldn't be.

So theres a lot of fun.

To figuring out how to get to.

Full sort of fully deployed mode and you know you were there when youre seeing kind of a one.

Not better than that and we're still at a really happy position to where we can rollout and improvement project with shopify.

The meaningful improvements come out and JV or in profitability of the program et cetera. So we're still very much at work we have a significant percentage of our effort dedicated to what we call PBA powered by firm that's the.

<unk> come out and treat that powers both.

Shopify.

Several other platforms for us and we're still very significantly invested in building that out, but theres still quite a lot of opportunity. There. So generally speaking very excited great relationship.

We spend a lot of time talking to my counterparts there.

Our next question is from Andrew Jeffrey with truly Securities. Please proceed.

Hey, guys I appreciate you taking the question this afternoon.

Michael.

All accounts it would appear that capital markets are maybe healing a little bit.

And equity as a percent of the total funding platform is up.

Pretty substantially quarter on quarter, So I guess a couple of questions one.

How do you sort of SaaS to state of capital markets from a funding standpoint, and I noticed you expanded capacity and two you think.

Youre going to be able to stay below that sort of 10% pre IPO equity funding thresholds.

Through the cycle.

Yes, so the first question first.

The markets are healing I think that.

I think that the new year did an awful lot for the debt capital markets broadly.

And Youre seeing the ABS market open up youre seeing much more constructive conversations with <unk> partners.

Max and I spent a lot of time over the past couple of weeks meeting with.

Capital partners of all stripes and the.

The tone is markedly better than where it was as the volatility appear to be reducing in the new year really did help.

So we feel much better today and yet we are still very much.

Humbled around just how how difficult it is to execute and how volatile uncertainty remains.

You saw that with saw this week in around the fed meeting and I think that kind of volatility is something we're just we're we're prepared to.

And comfortable navigating but it does.

And thats being very thoughtful and careful about how we run the business.

With respect to your second question, absolutely, we will stay below 10%.

We think this is near the high watermark for where that number should be we think that the.

The seasonality of our Gmg, specifically the holiday shopping season late in the quarter and then of course in the quarter itself.

Causes.

<unk>, a pretty big step up in total platform portfolio that we don't think we will continue to grow as quickly to the back half of the year, which means that our funding mix will probably be very stable through the back half of the fiscal year. So you wouldn't expect any meaningful increases in that equity capital required.

And we would continue to feel confident in our ability to execute both securitizations like we did.

Earlier.

In January as well as net new capacity with forward flow partners and so we feel we feel good about our ability to do that right now as we sit here today.

But.

But nowhere near 10%.

Okay and as a follow up.

Just wondering about.

Pardon me.

Awesome I lost my train of thought Oh, yes on the.

The loan loss reserve.

I know it's.

You've been modest just not.

Necessarily consider that as we would have more traditional financial but can you just discuss sort of the 5%.

And where do you think that goes in the current environment should it fall given the slowdown in growth.

Okay.

I think 5% is a really good number I think.

It is obviously linked to delinquencies and again I apologize. If this comes off as it is modest but it's really not it's just a chance to learn about how this.

How this business works.

We have a chart in my in my letter I would really encourage I wouldn't look at it shows the delinquency trends at a firm as compared to some of those traditional players whose measures I think some folks are wanting to apply to our business.

We're the only player with the line on delinquencies pointing down okay, and some players are not as high as as others, but the directionality is very different and that's because.

Our asset turns over so fast that youre not building for losses for loans that you have.

It's somewhat of a statement.

Statement, but we can't build allowance for loans that we don't own.

And so we can't build ahead for originations that havent happened, yet and and what you see here then isn't a judgment about how the back book will deteriorate in the macroeconomic environment. It is a reflection of the quality of loans that have originated recently given the velocity of the book and so you should interpret as the 5%.

That is very much connected to that declining delinquency trend that you see that's a reflection of extremely strong credit performance much more so than anything anything else.

Lastly, I think we included a chart in the supplement that I would encourage folks to look at it just breaks out where the allowance bridge to from from September to December and then again with last 12 months have gone in and Youll see the allowance build is a reflection of both.

Growth in assets, but also the actual charge offs in the period.

Yes.

I don't mean for it to be at modest but either but.

I will attempt to say exactly what Michael said.

Probably.

Less careful way, but I think it's really.

It's important to understand the whole point of including this chart.

Not as though our consumers are experiencing less or more stress on average is that we have through the really short term nature of the products that we print and the fact that we decide every loan individually, where we think we are not able to take the risk we don't.

The downward slope of the delinquency is a direct result of our actions we.

Changed our credit posture sometime.

Starting maybe nine months ago, and we've done it again several times since sometimes with finesse than other times.

More actively but the point is we are in control of the credit outcomes and we'll continue controlling them and thats really really important to understand we're not building allowances for the mistakes. We made that we couldn't have predicted three years ago by giving someone a credit card we make that decision every single time they choose to transact.

As a direct consequence of <unk> might be lower because we decided that the <unk> that is coming to us is higher risk than we wanted to take on.

But we do rank risk really well reducing to give you a little bit eliminates a tremendous amount of potential loss and we are in total control of what kind of loss. We take on that is the reason. We included that is to just drive the message home. We're not interested in building up giant piles of cash for losses that we will make from loans from three years ago, because we don't really have a whole.

Lot of loans left from three years ago at all.

I hope that didn't sound towards monitoring.

Sure.

Our next question is from Bryan Keane with Deutsche Bank. Please proceed.

Hi, Good afternoon, I guess, just thinking big picture here, Michael what surprised you.

Versus the guidance you just laid out last quarter was it was it the pullback in consumer spend was it that you thought the pricing would get all pushed through was it the mix of loans I'm, just trying to get a handle on the reduction in the guidance going forward.

And kind of the surprise in that that caught you by surprise.

Yes, I think it really is.

The overall consumer demand, which shows up both in the aggregate <unk>, but also the mix underneath that and I think there's.

Some good progress that we made so for example, we were pretty happy to get.

Our business with peloton to actually be ahead of where we thought it was going to be there is a lot of strength of that program as they returned to some of the programs that we had.

From years before and then there was a lot of real legitimate slowdown and the broadline merchants that we are very proud to partner with and some more of the durable goods categories. These are the larger considered purchases.

And so I think we were surprised about that and then frankly, we continued to manage credit very tightly and we were probably and continue to be.

As Max alluded to.

We're going to manage credit first and that shows up on the positive side with really excellent credit performance, which ensures that we continue to access capital in our capital is not a constraint on the growth in our business.

And yet it does create some some short term top line headwind.

Got it no that's helpful and then Max I'll take the bait and ask about debit products the rollout there.

And the prospects of profitability I know there was some hesitation worried about the profitability of debit plus so maybe you could update on that well as well you can just help me out could not have set me up better for that one. Thank you alright. So okay.

So the.

The long story, but.

So sometime about <unk>.

Seven or eight months ago, we rolled out.

First kind of a seriously sized batch if you will.

Cards to our existing users and began observing so obviously youre rolling out a completely new set of credit programs youre, taking overnight or multi day risk on pay no transactions at a whole bunch of different things that we needed to watch and it's the kind of thing that you can't really model because you just don't have any real background information.

So we did that and much to my children.

By mid summer, we knew that transactions, we knew how to do which is longer term interest bearing.

Short term pain for us were generally performing.

Blaine.

We encountered a whole bunch of types of transactions and I certainly wouldn't get into the details, but there are multiple modalities of using the card that we're just fundamentally unprofitable and as we were looking at the usage and the fact that the product is so sticky consumers with literally shift from using afirma than any other mode to using the card the second day.

Had access to it sort of debated the responsibility of rolling out a product that was inherently less profitable than some but all of these unprofitable to users that were very hungry for it but.

But we're not going to transact with our other product and so we spent the last six months just drilling into profitability of debit plus and there are people, who know who they are so I'm not going to name them embarrass them, but they spend an uncountable number of hours figuring out how to optimize it. This is primarily machine learning work, where you're figuring out things like <unk>.

Probability of insufficient funds and someone settlement accounts and downside.

Major body of work that was.

Actually in India, and faster than I expected, but the punch line is that I'm very happy to report that every class of transactions and debit plus is profitable and so.

An enormous amount of optimization again, one of these things where you look back and say no. One else will go through the trouble Bill just pronounce some revolving line and move on but our consumer doesn't want to revolving why do they want that would lessen so very excited that this thing is profitable now.

And the other thing a little bit less but kind of even more in the weeds.

We saw really good stickiness of the product once you comprehended the value proposition.

But there is a bunch of wrinkles in Onboarding in particular that lost too. Many people as we were trying to onboard them and so we spend the remainder of the time in the last six months, just figuring out how to make it as easy to get live with a card eliminating a huge number of steps, while not losing anything in <unk> and all the other things that we have to do.

So both of those projects are basically completed the way you know you will know that we are matching the pedal to the floor as Michael likes to say is youll see debit plus cease to be its own separate applications. So up until now it has been a standalone app that you have to downloads, we purposely put in a bunch of friction so that we would be able to control the spread.

Now that we feel very good about the economics and the comprehensibility of the product, we're actually going to integrated directly into the mainline app.

Im not going to make the same mistake in the past and put a number out there.

I will do that internally, but.

The team knows exactly.

The pressure and excitement we have for the product so extremely bullish.

You will see it in your App.

Soon as.

The rest of the team is looking at me angrily so that's all I'll say.

Remember the debit plus product is another one of these channels that we control entirely so some of the.

The profitability of the product as a function of that and we feel really good about where that sits right now.

Okay.

Our next question is from Moshe Orenbuch with credit Suisse. Please proceed.

Great. Thanks.

Most of my questions have been asked and answered.

You talk a little bit more about.

The how.

How much of your GMP, you think will be on the balance sheet, you sort of talked a little bit about some of that.

Versus what you'd be able to sell and.

And the idea of whats in those discussions you were talking about that Youre, having with your capital markets partners. How much is their pricing to you changing in and.

How much do you need to raise pricing to keep them.

Perhaps where they had been prior to this strange.

Of interest rate increases.

Yes, it's two factors there is interest rate increases and then there is credit.

Well a lot of time on talking about why controlling credit is so important for the yield those investors get and that is a point of pretty big differentiation when thinking about us versus some of the other alternatives that some of these workflow partners could be buying.

And as that differentiation grows we know we'll get rewarded for it and yet also we do feel the need to increase the revenue content in the loans that were selling in the form of higher APR for example.

I think that we're not giving specific guidance to the balance sheet or to the funding models through the back half of the year, but we do expect the mix that we saw in our second quarter to be pretty consistent with the mix that you would you would end the year at so I think it's safe to say starting point is to assume that were flat flattish which means.

We still have our largest funding channel is still going to be the forward flow Mark Yes, that's where the most of the total platform portfolio will be sitting as the single channel.

Did the securitization.

Beginning of this quarter, which will allow us to grow that line item in and yet that's still on the balance sheet was slightly more leveraged yet with the warehouses, so anyway I would assume flat.

Within certainly within modeling air is a good assumption, which means that our fourth full partners are at the table and still dealing constructively and maintaining their level of commitment throughout the back half of the year.

Thanks, Michael maybe just as a follow up.

When you gave the guidance for revenue less transaction costs did you factor in kind of a.

Better worse or comparable level of gain on sale.

Assets that will be sold.

That's a great question. It's worse. So we've contemplated that we would continue to have you.

Yield pressure with respect to our forward flow partners.

We saw that in the pricing conversations that we've had and been having.

We're very confident about our ability to control the asset yields as Max talked about.

It is the case that the rising rate environment has put the yield threshold higher for all of these programs.

Thanks.

Our next question is from Chris <unk> with D. A Davidson. Please proceed.

Hi, Thanks, good afternoon.

Try to the volume question, one more time just to make sure I'm understanding correctly, just relative to your expectations three months ago.

Is it fair to say that.

There was probably a little bit of.

Consumer moving away from discretionary items, especially the discretionary items that would be okay.

Ticket size that would make it on a firm product.

Is that is that.

Part of it what about the.

The offset of increased consumer demand and in a stressed macro environment is it still.

Factor or is it overall net negative when consumers are choosing to spend today I have a follow up.

It's a great question.

The pullback from discretionary spend is exactly right I think already rattled off a bunch of its category draw.

Drops that we're seeing year on year, and so that certainly.

Factual and we do expect it to continue nobody knows when the.

Trough for consumer demand has hit but I don't feel like people are running out and buying couches, although February or January .

But.

The demand for the program I think I dropped.

Do you see stats in the in the opening part of my letter, we see about $1 billion of demand every week.

And I think thats not the same thing as well great why don't you guys take it because each one of these loans or these one of these applications has to be underwritten before.

Through the lens of what's responsible for us to take a risk on it with responsible frankly for this person to borrow.

So increasing consumer demand.

Certainly there I think if we were careless.

Could probably grow GMB astronomical numbers quite quickly, but that is most certainly not what we're going to do we are unique in a sense that we don't charge late fees that we do not profit from delinquencies, we did not celebrate link.

Linked fee increases and I'm glad there's some pressure downwards in that particular part of the world recently, so hopefully the playing field is getting a little bit more level.

But.

The demand is a good thing to have.

I think we are now big enough, where the overall consumer sentiment makes a difference to our business a little bit more than it used to we're still growing three times the U S ecommerce rates.

As people work.

Away from buying more Tvs.

For example, it will have consequences and so long as we are responsible lenders, we will feel a little bit of that.

Okay, Great and then the follow up would be sort of a clarification that sort of putting all these factors together and correct me if I'm wrong here, but.

It sounds like.

Consumers arent experiencing be NPL burnout.

To the extent that your last question unless answer suggests that there is still very much a lot of interest and be NPL, especially in this macro environment is not really.

Consumers tiring of the product. It is Moore your line is open which calls on making sure youre doing profitable loans and because of the higher interest rate environment as well as higher credit costs, you pulled back maybe potentially at the bottom of the funnel at the top of the funnel, but more of the bottom of the funnel and as you make pricing changes.

You could see a better conversion rate.

Next fiscal year potentially that there.

That's exactly right and actually Michael I'm stealing his line. This one but he loves to remind everybody that our loans are ranked and profitable correlation between profitability of our loans and the internal credit score or even a FICO score. If you will more or less are tightly correlated in other words, the highest credit quality.

Theyre also most profitable for us.

Not using.

Pardon the kras statement poor people to subsidize great deals corbridge people were actually.

Distributing the cost and profitable profitability quite directly which means that any time, we need to or we decided to improve your profitability of the book, we ended up taking slightly less risk at the very bottom.

Overall demand for the product is still very strong we're not seeing it.

Any.

<unk> had enough be NPL during the pandemic back to my.

I'm, not sure which credit card on here, but.

No not seeing burnout if anything.

On the margin I feel like there is demand for <unk>.

More flexibility I think the one thing that we are probably seeing this a little bit more anecdotal so take it with a little bit of a grain of salt, but any experiments during debit plus we looked at.

Sensitivity and consumer demand for.

Longer terms that obviously people always longer terms, because just a little bit less cash flow hit on the monthly basis.

But as the overall economic environment softened in consumer.

Pulled back it seems that at least part of the pull back pull back is actually cash flow dependent versus kind of a general decluttering trend, which is also by the way happy.

And again.

We don't talk enough about this but we should.

We're growing at somewhere between two and three times, we estimate the U S e-commerce growth rate to be and Thats, despite posting a 115% growth in <unk> last year, and so I think it's easy to think about.

Thinking that the industry has slowed down but that you have to put into context. The overall scale that we got to and how we got there a little bit more quickly we still feel like it's underpenetrated and we'll get to the kind of numbers that we talked about.

Some of the quarter growth rate numbers are a reflection of the comps and again the growth rate last year was buoyed up by the launch of three major programs all happening at the same time and we're quite proud that we were able to do that but that doesn't mean that some of the growth rates need a little bit.

Our aperture to get the to get an understanding of what's really going on the fact that transaction counts are up 50% year on year suggest that consumers are not at all being burned out by very high demand for we are figuring out a way to profitably serve those transactions.

Should I just quoted.

Transaction growth I think thats, the single highest growing metric actually in this quarter.

Our next question is from James Faucette with Morgan Stanley . Please proceed.

Thanks wanted to ask a couple of follow up questions, particularly to the one that was just asked.

It's understandable in terms of.

Tightening.

The bottom of the funnel as you said, a little bit on where appropriate and to manage that.

Any sense for her.

How much that then cost sure introduces incremental friction to bring those people back whether that would be first time applicants are people that have taken out multiple loans in the past and for whatever reason just don't meet the criteria youre looking for for the incremental one.

That is a great question and something that is extremely top of mind for me. So I spent a lot of my time staring at re engagement stats, which is why you see it in my top three priorities.

Both in my letter and certainly communications to the company.

The good news there. So first of all you are exactly right did you tell someone sorry, no load for you and it's the first transaction that is not a great first impression.

We will have to work harder to get the consumer back.

Hi.

Perhaps even worse you can imagine a been a loyal customer for a very long time and now he can no longer Serbia. So we <unk>.

Tremendous amount of resources to both the communication of declines and that's it.

Turning to make sure that we can bring folks back.

Where.

Appropriate and part of why we know so well that the rate sensitivity.

He is not actually a major problem for our consumer certainly at the bottom part of the credit funnel is because.

We tested tremendous amount of those communications in various forms of re engaging the consumer in our own surfaces, where we have total control where of course, we are able to raise prices in ask for significantly higher down payments and optimize the overall experience instead of saying no. We can say yes.

<unk>.

Long and short of it is the results are good.

Probably not worth getting into without a whiteboard, but perhaps when we see each other in person I will show you.

We'll probably have to publish a charge for everybody to see but we've tested what happens when we re contacted consumer that we have decline what do they do what do we tell them Hey, you are now approved or when we tell them here's a different form of transaction that we can approve you for and they are very encouraging in the sense that.

Consumers, especially those that have used affirmed before are not particularly hurt or offended by the decline because we think we do a pretty good job of explaining what happened and are quite willing to come back and reapply. So.

On the margin.

Confident that we'll be able to continue engaging those consumers and youll see us actually invest quite a lot in products that enable that reengagement.

Huge push within the product roadmap for the next couple of quarters really.

But it is very much top of mind and not something that.

We think it is just going to be available to us and take for granted.

We have extreme focus for me.

And then just as a follow up as you mentioned.

A couple of times, particularly as it relates to the changes in pricing et cetera.

That some of those implementations.

Or price changes and work with the merchants took longer than expected and.

More.

Back and forth there maybe than you had anticipated.

What does that what are you being able to do so that in the future.

<unk> got more flexibility there and can move more dynamically.

As rates.

Imagine in the very long run, we're going to move around quite a bit so just.

Just wondering how you're approaching that.

Yeah.

If I have.

So again my face to clean off stills, but this is the one.

I found myself a bit of a payments expert going back 30 years and.

I think I still am, but I completely forgot the part where visa and Mastercard whenever they change rates, where any network rule changes. They always operated in the six months schedule with six months notice and then Theres a six months implementation window.

And late summer we decided this is what's going to have to happen then.

It in fact take six months.

The way you do this right is you structure. These into the contracts you make sure that these contracts stipulate, both what happens when the rates go up and when rates go down.

You make sure that.

You know what the transition periods look like et cetera et cetera. This is.

Again somewhat embarrassingly, our first efforts of that time. This is a lesson that.

We will now learn here certainly.

First in the line of.

Learning. So I think you should not expect us to have to.

I have another one of these apologizing sessions, where we say Oh, yes, we're going to change prices, but we took a lot longer than we thought so we've now figured out or we've learned how to price and the right amount of time.

Our next question is from Eugene to Muni with.

Moffett Nathanson. Please proceed.

Hey, guys good evening.

I wanted to ask about the margin comps actually.

<unk>.

See the data on a slight decrease in total merchant counts and I understand that that's driven by smaller merchants is showing a very helpful disclosure on what's happening with the larger merchants.

Even with the larger merchants, there's a pretty noticeable slow down in kind of the incremental merchants added to the network just wanted to ask about that what what sort of driving that in your view and what's your expectation for that trend going forward.

How important it is to the overall growth to be a platform for that kind of number of larger merchants, let's say to keep growing at a decent pace.

First of all.

Merchant count is a little bit of a Vanity network at our scale I think Michael has.

Few promises in the letter.

We're going to publish a slightly different metrics to make sure just shows kind of a true state of penetration.

Huge merchants quote unquote.

Very accountable set and we are very well penetrated there.

No.

Midsize merchants are important because these are kind of leaps and bounds of volume that we're picking up and thats where majority of our.

If you will hand to hand sales combat takes place these days and probably has been in the last few years and so those are important.

Little merchants are.

Little bit different.

Some time, it's become inactive, especially the really small scale.

Excuse me.

We have been active for a course of a quarter.

The crew count of.

Installed merchants or activated about necessarily act to the significantly larger than the number we published and be easy to sort of have a even more inflated and the metric here.

We're trying to be transparent here so.

The growth of merchant base is.

Kind of.

Set of weights for the weighted average total of JV, obviously GDP growth is what we are entirely focused on.

Yeah got it okay. That's helpful. Thank you and then a quick follow up I wanted to ask about the firm App and kind of a transaction that I initiated through Europe through your app through your website.

Im kind of looking at these numbers correctly, the proportion of embedded declined a little bit.

Sequentially, but my question is really brought our sort of what are the.

What is what are your initiatives around improving the.

The engagement with the App and again, how important it is to keep investing in it and what are you doing to keep driving traffic to it.

Yes.

Yes.

To be honest.

I'll start my head, whether it declined or.

Oh, Yes, I guess.

It is slightly down quarter on quarter on a percentage basis.

It is super important to us so are the holdings of doubt that is a thing that I care tremendously about.

There's a little bit of equivalents between.

Transactions that happen in our partner apps for example, as we drove within Shopify, you know that I imagine that you can service those transactions both inside the shopify app and in our.

No doubt.

Always.

The consumer towards the most likely place of repayment because again the job number one Brazil is making sure that credit metrics remain excellent.

But the overall reengagement within the network is what we care about the most at our App at our sites was their.

Our extension.

A bunch of other things most importantly to me at least right now acquired.

Where we are investing a huge percentage of our engineering cycles.

The App is it required companion to the card in fact, the functionality in the App youre borrowing money in the App youre not everybody or anybody in the market itself.

And.

That is where we think a lot more of this reengagement will take place.

Because experiments taking place there.

Im staring at a spreadsheet titled Max's Top 20, which has 35 elements in it right now all the projects that we put in.

The motion over Christmas break with our head of consumer products and we're shipping a.

A couple of those every week it out so I'm very happy with the velocity of the experiments for Dana.

There is also some math that's really important when we are scaling programs like we are with the largest platforms and.

E Commerce players in Amazon and Shopify as an example.

All of that growth all of those transactions are obviously not starting on our on our platform.

So a lot of growth is coming from there which means that.

I'm actually very impressed we've been able to hold it as constant given the rapid rise in growth in these partners and so I think to <unk> earlier point that the health of the network is reflected in those engagements stats and the user stats and growth in transaction count and the fact that we're holding.

Serve on the level of engagement through our properties today is a really encouraging sign given the growth that's happening away as those growth rates attenuate youre going to see our share pickup.

Our next question is from Andrew <unk> with <unk>.

<unk> Nikko Securities. Please proceed.

Hey, guys. Thanks for squeezing me in.

Just wanted to hone in on one of the comments in the shareholder letter here.

Where you say you are redirecting.

R&D efforts towards margin driven projects I guess.

How much of that is tangible and the current guidance is it fair to assume that that.

It is a.

Bottom line margin improvement.

Variable rather than any kind of shift the potential long term our LTC numbers.

Yes, so the short answer is.

When we talk about some of the speed of pit for example, taking pricing.

We would have a lot more of the impact in this year's guidance, how do we reacted earlier.

And especially true given the size of the balance sheet that were sitting on right now.

So we feel like there's a lot of very long very big initiatives to improve the margin and that is up in the revenue less transaction cost line item much more so than in Opex.

Feel like Theres, a lot of very big and structural improvements that we're going to be able to Meg.

But they don't really show up in the vertical periods in Q3 and Q4, just given the timing of so many of the flow throughs for any movements on the balance sheet for example, and so.

That's where the focus is.

The effort is reflected in our guidance, but youre not youre not going to see the full benefit of all of the efforts until the quarters play out in the back half of the calendar year.

It makes a lot of sense and then.

The sensitivity that you guys have historically provided.

Of our LTC relative to rates.

Material change in that what was provided last quarter I know that heading into fiscal first quarter, you had narrowed the range of impact.

Given where rates could potentially do but just wanted to double check on that one.

No no material change.

We're thankfully staring down what looks like a more flat.

<unk>.

Rate curve, which I think is allowing us to focus our efforts on making sure we create profitable units at the kind of peak rate curve environment.

But further stress above that would continue to have the same reaction.

A framework.

Got it thank you guys.

That is all the time that we have for the Q&A today I would like to hand, the conference back over for closing comments.

Thank you everybody for joining today, we look forward to speaking with you again next quarter.

Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.