Q1 2025 Affirm Holdings Inc Earnings Call
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Acquire operator assistance simply press star and zero.
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Speaker Change: Good day, ladies and gentlemen, and thank you for joining us for this a firm physical holdings first quarter 2025 getting started all participants are in a listen only mode. But later you will have the opportunity to ask questions. During the question and answer session. You may registered to ask a question at any time by pressing the star and one on your telephone keypad. Please note. This session is being recorded and I'll be standing by should you need it.
Speaker Change: The assistance. It is now my pleasure to turn the floor over to Mr. Zane Keller. Please go ahead Sir.
Zane Keller: 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.
Zane Keller: Actual results may differ materially from any forward looking statements that we make today.
Zane Keller: 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.
Zane Keller: 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.
Zane Keller: 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.
Speaker Change: Hosting todays call with me are Max Levchin affirms founder and Chief Executive Officer, Michael Linford affirms Chief operating officer, and Rob O'hare, our firm's chief financial Officer in line with our practice in prior quarters. We will begin with brief opening remarks from Max before proceeding immediately into Q&A on that note I will turn the call over to Max.
Speaker Change: Begin.
Max Levchin: Thanks, Zane with another killer quarter, whereas you all can see.
Speaker Change: I will stick to tradition of having your comments so long as there is also a good.
Speaker Change: We're firing on all business, we're getting ready for a really good holiday season, everything looks very nice scrubbing the engines to fly across the Atlantic.
Speaker Change: Et cetera, et cetera back to using.
Max Levchin: Great. Thank you Max with.
Speaker Change: With that we will now take your questions. Operator, Please open the line for our first question.
Speaker Change: Ladies and gentlemen at this time, if you would like to signal for a question. A reminder, that is star and one on your telephone keypad to remove yourself from the queue. If your question has been asked it is simply star and two.
Speaker Change: We'll take our first question today from Andrew Bock at Wells Fargo. Please go ahead.
Speaker Change: Hey, guys nice set of results here and thanks for the question.
Speaker Change: Could you unpack the uplift to revenue as a percentage of G. N V for the full year and then our LTC coming up nice from 10 to 20 basis points.
Speaker Change: And what are the drivers of that.
Speaker Change: Yeah. Thanks for the question.
Speaker Change: The business continues to have really strong unit economics, we're able to.
Speaker Change: Earn more through both the interest income from the pricing initiatives. We think that benefit has largely played through we continue to enjoy benefits in the capital markets, So impacting things like gain on sale.
Speaker Change: And of course, we have further upside with <unk>.
Speaker Change: Merchant fees in the form of.
Speaker Change: Improvements like what you're seeing with the visa flexible credentials.
And those flow through those all of those all flow through to the bottom. So you know I think about the revenue improvements guang flowing through to the margin as well.
Speaker Change: Yeah, I understand I thought I would assume that you guys were planning on reinvesting some of the excess our LTC backing for growth. So maybe if you can just kind of expand upon the thought there.
Speaker Change: We still want to do that I think we're still in a position where we've got.
A healthy amount of margin.
Speaker Change: Margin that we can invest in and we will do that and we'll do that in the form of.
Speaker Change: Foregone revenue.
Speaker Change:
Speaker Change: What percent are APR incentive offers.
Speaker Change: To do that in the form of operating expense investments, we want to make down the P&L, but but overall.
There is still a healthy amount of benefit flowing through.
Speaker Change: Great. Thank you Michael.
Next we'll hear from Jason Kupferberg with Bank of America.
Speaker Change: Yeah.
Speaker Change: Hi, This is actually made on for Jason.
Speaker Change: The results here I think Max you previously talked about.
Speaker Change: LTC margins above 4% means youre not putting enough people below 3% is not enough at least not great enough leverage.
Speaker Change: Just looking out to Q here like the.
Speaker Change: The guidance implies a margin about three 8% royalty fee and.
Speaker Change: People go to a low point in terms of margins. So I'm just curious like.
Speaker Change: Can I get some more color on like your current underwriting posture and like where we expect our LTC margins, particularly the trend.
Speaker Change: Great question. Thank you.
Speaker Change: Our posture is largely unchanged, we obviously monitor the results all the time and on any given week we are.
Speaker Change: Tuning settings.
Speaker Change: But theres not been any major movement.
Speaker Change: Upwards or downwards.
Speaker Change: For the approval standpoint youre.
Speaker Change: Youre exactly right, we were able to enjoy some very healthy consumer growth in the numbers from in Q1, because we found ourselves with capital to put forward towards some incremental approvals.
Speaker Change: We'll continue tuning that as we go forward.
Speaker Change: And Youre.
Speaker Change: Youre right Q2 is typically low points.
Speaker Change: We feel good about what we're seeing in the.
Speaker Change: In front of US right now, but again, we always do.
Speaker Change: The answer in the point of view of having really strong credit results and everything else kind of falls out of that we won't compromise on that everything else is driven by goals versus numbers.
Speaker Change: Michael certainly got it thank you.
Speaker Change: We actually are pretty optimistic on the margin in the back half of the year as well I don't want to see at that point.
Speaker Change: The result in Q2 are going to be strong at three eight.
Speaker Change: You suggested that we're going to have good unit economics this quarter, we believe.
Speaker Change: But we're also going to have strong performance.
Speaker Change: Of the year as well I just wanted to double click a little bit on on the capital side I do think there is.
Speaker Change: Really constructive capital markets out there for US right now and that does cause certain quarters, including Q2, maybe a little bit outperform what we consider to be more of a run rate quarter for Q2, but again for the full year deficit with where you wanted it isn't to be in the higher end of the 3% to 4% range.
Speaker Change: Thank you Sir our next question today will come from the line of John Hecht at Jefferies.
Speaker Change: Afternoon, guys congratulations on another good quarter.
I guess.
Speaker Change: One of the trends we are seeing out there now is a pretty big pickup in secondary market activity I think thats tied to kind of interest rate movements in credit trends and so forth.
Speaker Change: How does that how does that impact your thinking about kind of a balance sheet management retention versus sale and so forth.
Speaker Change: Given those trends.
Speaker Change: Yes.
Speaker Change: The market for a forward flow whole loan purchasers has is really really strong right now.
Speaker Change: Credit performance that we've delivered over the past year and a half.
Speaker Change: Combined with that.
Speaker Change: The real understanding of the value of the short duration asset and the disciplined managers that we have at affirm it put us in a really strong position.
Speaker Change: And where we think at or near the top of the pack.
Speaker Change: <unk> of these assets alongside that.
Speaker Change: The dynamics on the supply side of that capital with trends like the private credit trend has created an environment that is very very good for us.
Speaker Change: So we will continue to.
Speaker Change: To benefit from that.
Speaker Change: When the.
Speaker Change: Whenever we have one funding channel all of that that is.
Speaker Change: High demand or we could maybe benefit from in the near term, we're still very careful to make sure that we create a stable funding base across all of our channels you've seen our ABS execution also be very consistent and that has served us very well.
Speaker Change: And in fact, our ABS execution helps our fourth well execution the two work together.
Speaker Change: And that I would not read very constructive for low market is the suggestion that we don't want to continue to grow our ABS business as well which of course.
Our revolving deals are still consolidated onto the balance sheet what.
Speaker Change: But I do think is true is that.
Speaker Change: The warehouse funding channel for US is a channel that we can continue to to maintain but not grow as a percentage of total platform portfolio given the robust forward flow and ABS market reception.
Speaker Change: Perfect. Thanks.
Speaker Change: James Fawcett with Morgan Stanley. Please go ahead with your question.
Speaker Change: Great. Thank you very much I wanted to just quickly touch base on kind of the outlook or zero percent promotions as.
Speaker Change: As we go into the holiday season and typically this.
Speaker Change: B, where we see some strength in and I am wondering kind of tying that back to the royalty fee commentary a lot of times because of the MTR differences that can provide some our LTC benefit as well. So just help us think through that potential.
Speaker Change: River and promotion for the holiday season. Thanks.
Speaker Change: Sure.
Speaker Change: Certainly no.
Speaker Change: No.
Speaker Change: No strangers to leveraging zeroes and.
Speaker Change: We are seeing really great excitement from the merchants as we head into the holidays I don't really want to give any <unk>.
Speaker Change: Numerical guidelines here, but it's fair to say, we feel very good about it seeing a lot of demand.
Speaker Change: See what else can I share.
Speaker Change: Certainly successfully using it as a way of.
Speaker Change: Enticing new consumers to give us a try.
Speaker Change: That's an important lever that we have been quite successful in.
Speaker Change: Obviously, there's plenty of surfaces, where merchants are excited to advertise that they have a gimmick free late fee free promotion, where you also pay no interest and so we expect to.
Speaker Change: Draft behind our best merchant partners advertising campaigns, which are always beneficial to our cost so lots of goodness to come.
Speaker Change: Thank you.
Speaker Change: We will also see I alluded to that in.
Speaker Change: In my letter.
Speaker Change: We are in a process of harmonizing, our financial programs, which is the fancy term we use for various promos both fixed apr's reduced APR has there been any prs.
Speaker Change: You will see consistency across multiple channels.
Speaker Change: <unk> and digital wallets included which is going to be very exciting because those are higher frequency at least some of them are card, obviously, a huge outlier there.
And then all those things combined we just expect more more of that volume.
Speaker Change: I'll, maybe add I think the strong unit economics in that business right now.
Speaker Change: Bind with a pretty favorable outlook that we have on them on the next quarters to come and put us in a position where we get to be pretty aggressive do you think we were constrained over the past couple of years, where we had a little bit of catch up to do where we're very front footed right now and our ability to meet those merchants, where they are to price very.
Speaker Change: Competitively and to be very aggressive.
Speaker Change: It's a really good position to be and we're obviously very mindful about the economics of these promotions and so we're careful about them.
Speaker Change: We're in a very different spot than we were a couple of years ago, where we actually feel like we can be pretty aggressively right now.
Speaker Change: Great. Thanks.
Speaker Change: Vincent <unk> at <unk>. Please go ahead with your question.
Speaker Change: Hi, Good afternoon. Thanks for taking my question wanted to go back to the discussion about margins. So it was nice to see the guidance for the adjusted operating income margin now above 20%.
Speaker Change: And then the guidance for the fiscal second quarter of 2123%. So wonder if you could maybe discuss sort of what are you.
Speaker Change: <unk> in terms of longer term operating margins, where you think you can operate it seems like.
Speaker Change: The 21% to 23% is sort of in that mid to high 3% of our LTC, where do you think that can get in.
Speaker Change: Run rate going forward. Thank you.
Speaker Change: So we're not updating our long term outlook.
Speaker Change: And.
Speaker Change: I'm, certainly not going to touch that 3% to 4% framework that we've had out there forever.
Speaker Change: No. Those are those are those are still as they were but it is obvious that we are running above that.
Speaker Change: The margin framework that we put out just about a year ago at the Investor Forum and Thats not lost on US. We think part of that is because the pace at which we were able to drive operating leverage in the business exceeded our own expectations.
Speaker Change: And part of Thats, because we now have our eyes set on achieving the next financial milestone, which is which is profitability down the P&L and we still feel like we're in a really good position to do that and I think once we do I think we'll be in a position to update where we would expect the business to be longer term, but.
Speaker Change: I'd also reiterate our statement that we made last summer and I think we can repeat it on the Q1 call.
<unk>.
Speaker Change: We expect to continue to grow margins from here. We think there is still more operating leverage in this business and believe that we can continue to grow margins from here.
Speaker Change: Okay, great very helpful. Thank you.
Speaker Change: Our next question will come from Dan <unk> at Mizuho. Please go ahead Sir.
Speaker Change: Hey, guys. Thanks for taking my question Great results as always Max we noticed that.
Active consumer growth accelerated again can you maybe touch a little bit on the factors behind the acceleration.
Speaker Change: Thank you.
Speaker Change: Hi, Dan. Thank you for your question.
Speaker Change: Consumers Love a firm just more mark coming our way.
Speaker Change: Hi.
Speaker Change: Probably most important lever jokes aside is we had the margin.
You saw the outsize print last quarter this quarters no slouch, either we feel great about the bottom line economics, and we're able to reinvest them in <unk>.
Speaker Change: Approvals more compelling new consumer deals.
Speaker Change: We're also just getting smarter and smarter about re.
Speaker Change: Marine gauging consumers that had.
Speaker Change: One transaction a year to transact three times a year or you just saw we clipped five transactions a year, which is a new front digit for us on that one so.
Speaker Change: Any different efforts, we focused very deliberately on active users this quarter and I keep repeating this but everytime. It firm team decides to do something it is rarely overnight, but it is never not successful we have a very good track record of delivering on our goal we set in front of us.
Speaker Change: The zero.
Speaker Change: Zero to 60 in half a second but once we get going there's no stopping us and so this quarter's explicit goal was we want more new users we want more active users with higher frequency and all of that has happened and we're not stopping and we'll have a lot more of that in store.
Speaker Change: Hello.
Speaker Change: Thanks Max.
Speaker Change: Rob while Tac at Autonomous Research. Please go ahead with your question.
Speaker Change: Hi, guys maybe.
Speaker Change: Maybe just to start I wanted to get your certainly early thoughts on the U K launch I mean, how have the conversations they're gone with merchants and I'm curious why you think or what you think is youre right to win in that already a pretty competitive market.
Speaker Change: Yes.
Speaker Change: It was actually if I do say so myself unbelievable. So we went to them. So we've been pre selling in UK. Thank him now allowed to say that word for a long time, we were.
Speaker Change: What's the right word to use but we've been in the market.
Speaker Change: Quietly and then.
Speaker Change: Less quietly talking to merchants.
Speaker Change: That includes the folks we know from the U S and Canada markets are bringing them or bringing Australia along for the right in the U K and then of course, we built a sales team in the U K, we have an amazing leader in UK market named Bruce who has been with us for over a year now leading the sales effort and she was just.
Speaker Change: Really really instrumental to the initial reception, we're getting which is very strong and the merchants.
Speaker Change: Talk to US both of those groups basically bring out two key reasons why they can't wait for us to get very active in UK market one.
Speaker Change: The longer term.
Speaker Change: Monthly payment products, so six months on not the pain for a 45 day product, but three months six months 12 months on and on and on it's just not well served it is not really a well addressed need in the U K and people there need their prams and their couches and their TV just as much as they do in the U S. Right now the only competitor in that space really are banks.
Speaker Change: <unk>.
Speaker Change: No comment on how well like that is and so we're very excited to deliver.
Speaker Change: It doesn't hurt to be fee free and not compounding interest in holding so we expect a lot of demand for our longer term products. In fact, that's what we're really focusing on when we go to the UK. The other maybe slightly more subtle version of what's happening in the U K market. We are very clear about our business model. We're just trying to help folks.
Speaker Change: Buy things and not confuse them with other things that the market may be well developed but theres a lot of innovation, the kind that merchants don't necessarily enjoy.
Speaker Change: We're coming in as a pure player that is just going to be helpful for more sales and merchants are unequivocally excited about that so.
Speaker Change: Very early very excited to spend some time with our launch partner managing director at chemical alternative Airlines and.
Speaker Change: Processing dozens and dozens of transactions and they are quite pleased with what they are seeing and it hits exactly that need where it's longer terms higher tickets people need a little bit more time to pay et cetera. So we're quite excited by U K Big Anglophile can't wait to ride my bike.
Speaker Change: In outside London, So I'll be spending a lot more time in London.
Speaker Change: Okay, and then a reminder than bigger sorry go ahead.
Speaker Change: Yes.
Max Levchin: Bigger picture, Max and Relatedly I wanted to ask about the competitive landscape more broadly I appreciate your thoughts on the U K at the same time.
Max Levchin: Have players from overseas, we're showing up on Apple pay and may be drifting into some longer duration products I mean, it seems like the competitive boundaries of the last couple of years might be shrinking would you agree with that characterization and then how would you think about.
Max Levchin: Sustaining growth and expansion without igniting some kind of competitive race to the bottom.
Max Levchin: Yeah.
Max Levchin: No.
Max Levchin: I will needlessly remind you that in an extremely competitive U S market, we are over a third of the volume and half more than half the revenue.
Max Levchin: There's a reason for that is what we do is really really hard and it also turns out to be really really valuable.
Max Levchin: Longer terms arent just a what we should give people more time to pay would be great to do it without late fees.
Max Levchin: Huge competitive underwriting is a very difficult thing to do you have to have massive infrastructure to mine. The data that you get is not enough to have in store. The data you actually have to know what to do with it you have a huge machine learning team you have to have a compliance team to make sure. The machine learning to use the data in the ways that are permissible versus not and so on and so forth and so on.
Max Levchin: Our moat has been our willingness to do the hard difficult thing without compromise and we're bringing that to other markets.
Max Levchin: <unk> has been brought to us in the U S. We held off the on slot better than I think anybody expected and continue to do so we're bringing the battle to them in Europe and in the U K not the other way around kind of a way to ride my bike or at least watch some quality through the fronts racing there.
Max Levchin: Oh, sorry, the bike means our <unk>.
Max Levchin: I'll stop.
Speaker Change: Thanks, Andrew.
Speaker Change: A reminder to our phone audience today that is star one if you would like to ask a question we will hear from Reggie Smith at Jpmorgan.
Speaker Change: Hey, guys congrats on the quarter.
Reggie Smith: Hi, two questions one Super quick I wanted to make sure I guess you issue a process they talked about.
Reggie Smith: Increased scrutiny on sponsor bank I wanted to make sure that that would not impact the growth.
Speaker Change: <unk> card.
Speaker Change: So the quick answer, but then I think bigger picture I'm curious.
Speaker Change: There are any like nuances in terms of underwriting consumers in the UK versus the U S and how you guys go about.
Speaker Change: Kind of building out.
Speaker Change: The underwriting knowledge, there as you got into that new market.
Speaker Change: Great.
Speaker Change: The short answer to your question is no. It will not we're very excited about rolling out of the card and are accelerating and if all things.
Speaker Change: I think.
Speaker Change: Regulatory scrutiny increasing.
Speaker Change: Your experience if youre a small.
Speaker Change: And unknown to the regulators, we've been big and getting much bigger quarter after quarter, we're very familiar with all of our regulators, we engage with them regularly we have invested in compliance.
Speaker Change: Appropriately and.
Speaker Change: The regulatory scrutiny on US is is what it is and it will continue doing and frankly, we're proud to.
Speaker Change: To have the engagement that we have and so that part we're going to be just fine.
Speaker Change: We're not dependent on any one provider incidentally, so we're quite careful to ensure that no matter, what sort of ups and downs regulatory or otherwise appear on the horizon for our providers we have.
Speaker Change: Just to make sure that were unaffected.
Speaker Change: On the UK underwriting.
Speaker Change: It's going to be great.
Speaker Change: We have the infrastructure, we have the people we have the knowledge and we have a decade of building an underwriting engine from nothing to something very very powerful.
Speaker Change: We're coming in very preparing a lot of experience our machine learning team I think the tenure of the folks in it is the longest at a firm so the guy who runs.
Speaker Change: Our underwriting and machine learning has been with the company almost as long as I have and he has seen the build out of.
Speaker Change: The BD little Afirma <unk> <unk> and is now sitting on pass the 12 launch if I remember correctly and so you just have enormous amount of experience and the folks around him are trained by him.
Speaker Change: It's a brilliant team.
Speaker Change: UK is a little bit afraid its not enormously different we spent a lot of time consulting with the local <unk>.
Speaker Change: Equivalents of the credit reporting agencies, we know a lot of people, who lend money in the market to get the knowledge primed, but ultimately we will build the engine. The same way we did in the us by scaling our loan book looking at the results and fine tuning into gathering proprietary data that we can continue squeezing.
Speaker Change: Incremental value under the curve from.
Speaker Change: Is there anything you can talk about in terms of the nuance in that market.
Speaker Change: Anecdotally like consumers are different from American consumers in any way paybacks, maybe anything you can share.
Speaker Change: Yeah.
Speaker Change: Empirically not yet.
Speaker Change: It's been like I don't know eight days of transactional data live or something along those lines. The first first payment defaults haven't hit yet so we'll speak to that probably towards next quarter, but.
Speaker Change: And as always we measure seven times cut what so it will be deliberate we'll be very careful.
Speaker Change: <unk> very cautiously rolled out our merchant rollout timeline does not.
Speaker Change: Timelines locked pipeline is not accidental we know exactly what we'll do next.
Speaker Change: So far so good but obviously, we have a lot of early signals that we monitor most importantly in fraud and abuse, we feel good about that.
Speaker Change: Okay.
<unk> got really sort of thing that prognosticating now is pointless, but in 34 days from the first loan will tell you exactly how the very first cohort is doing and we'll certainly be watching like Hawks and continue tracking all these metrics.
Speaker Change: Perfect. Thank you.
Speaker Change: And Jill Shea with UBS. Please go ahead your line is open.
Speaker Change: Jill Shea. Your line is open you may have us on mute.
Speaker Change: Sorry, sorry about that thanks for taking the question.
Speaker Change: You noted in the shareholder letter that as it relates to funding that declining mark rates will be a tailwind to our LTC can you just touch on your view on the path of funding costs in light of the current interest rate outlook and maybe help us think about the magnitude and pacing of the benefit as we move through the year.
Speaker Change: Yes.
Speaker Change: The way to think about rate impacts on our business on the way down with really the same way on the way up.
Speaker Change: The kind of full benefit are full.
Speaker Change: Impact on the P&L, because about 40 basis points for every 100 basis points of rate movement.
Speaker Change: But that takes about a year to year and a half to play to play through.
Speaker Change: We were really experiencing still the rising rate the impact of rising rates through the first part of this calendar year, even though rates have stopped moving well before that and so we would expect that declining rates to be tailwind, but to be tailwind marginally and take time to flow through the P&L, but a good rule of thumb is 40 basis point.
Speaker Change: The benefit in terms of cost for every 100 basis points.
Speaker Change: Rate movement.
Speaker Change: That being said, we do think because we are able to operate in the higher end of our margin structure right. Now we would not anticipate flowing that through to margin, we anticipate that to be part of what we're able to reinvest back.
Speaker Change: And really compelling consumer and merchant offers.
Speaker Change: Very helpful. Thank you.
Speaker Change: And that was our final question from our audience gentlemen, I will turn it back to you for any additional or closing remarks that you have.
Speaker Change: Thank you all for joining today, we appreciate your time and look forward to speaking with you again next quarter.
Speaker Change: Okay.
Speaker Change: This does conclude today's teleconference and we thank you all for your participation you may now disconnect your lines.
Speaker Change: Okay.
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Speaker Change: Good day, ladies and gentlemen, and thank you for joining us for this the firm physical holdings first quarter 2025 getting started all participants are in a listen only mode. But later you will have the opportunity to ask questions. During the question and answer session. You May Register to ask a question at any time by pressing the star and one on your telephone keypad. Please note. This session is being recorded and I'll be standing by should you need.
Speaker Change: Any assistance. It is now my pleasure to turn the floor over to Mr. Zane Keller. Please go ahead Sir.
Zane Keller: 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.
Zane Keller: 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.
Zane Keller: 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.
Zane Keller: 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.
Zane Keller: Hosting todays call with me are Max Levchin affirms founder and Chief Executive Officer, Michael Linford affirms Chief operating officer, and Rob O'hare affirms Chief Financial Officer.
Speaker Change: In line with our practice in prior quarters, we will begin with brief opening remarks from Max before proceeding immediately into Q&A on that note I will turn the call over to Max to begin.
Speaker Change: Zane was another killer quarter, whereas the occupancy.
Zane Keller: I will stick to the tradition of having your common so long as the results are good.
Zane Keller: Firing on all Pistons were getting ready for a really good holiday season, everything looks very nice scrubbing the engines to fly across the Atlantic.
Zane Keller: Et cetera, et cetera back to using.
Max Levchin: Great. Thank you Max with.
Speaker Change: With that we will now take your questions. Operator, Please open the line for our first question.
Speaker Change: Ladies and gentlemen at this time, if you would like to signal for a question. A reminder, that is star and one on your telephone keypad to remove yourself from the queue. If your question has been asked it is simply star and two.
Speaker Change: We will take our first question today from Andrew Bock at Wells Fargo. Please go ahead.
Andrew Bock: Hey, guys nice set of results here and thanks for the question.
Could you unpack the uplift to revenue as a percentage of G. N V for the full year and then our LTC coming up nice from 10 to 20 basis points.
Andrew Bock: And what are the drivers of that.
Speaker Change: Yeah. Thanks for the question.
Speaker Change: The business continues to have really strong unit economics, we're able to.
Speaker Change: Earn more through both the interest income from the pricing initiatives. We think that benefit has largely played through we continue to enjoy benefits in the capital markets, So impacting things like gain on sale.
Speaker Change: And of course, we have further upside with <unk>.
Speaker Change: Merchant fees in the form of <unk>.
Speaker Change: Improvements like what you're seeing with the visa flexible credentials.
Speaker Change: And those flow through those all of those all flow through to the bottom so think about revenue improvements going flowing through to the margin as well.
Speaker Change: Yes, I understand I thought I would assume that you guys were planning on reinvesting some of the excess our LTC backing for growth. So maybe if you could just kind of expand upon the thought there.
Speaker Change: We still want to do that I think we're still on a vision where we've got.
Speaker Change: A healthy and out of.
Speaker Change: Margin that we can invest in and we will do that and we'll do that in the form of.
Speaker Change: A foregone revenue.
Speaker Change: <unk>.
Speaker Change: And our APR incentive offers will also do that in the form of operating expense investments, we want to make down the P&L, but but overall.
Speaker Change: There's still a healthy amount of benefit flowing through.
Speaker Change: Great. Thank you Michael.
Speaker Change: Next we'll hear from Jason Kupferberg with Bank of America.
Speaker Change: Hi, This is actually made on for Jason, but I sort of results here I think Max you previously talked about.
Speaker Change: These new margins above 4% means youre not approving enough people.
Speaker Change: So 3% is not enough latest not great enough leverage.
Speaker Change: Just looking out to Q here like the big.
Speaker Change: The guidance implies a market about three 8% royalty fee.
Speaker Change: Yes.
Speaker Change: With a low point in terms of margins. So I'm just curious like.
Speaker Change: Can I get some more color on like your current underwriting posture and like where you expect our LTC margins, particularly the trend.
Speaker Change: Great question. Thank you.
Speaker Change: Our posture is largely unchanged we.
Speaker Change: We monitor the results all the time on any given week we are.
Speaker Change: Tuning settings.
Speaker Change: So in that way, but theres not been a major movement.
Speaker Change: Afterwards or downward.
Speaker Change: For the approval standpoint.
Speaker Change: Youre exactly right, we were able to enjoy some very healthy consumer growth in the numbers from in Q1, because we found ourselves with capital to put forward towards some incremental approvals.
Speaker Change: We'll continue tuning that as we go forward.
Speaker Change: And Youre.
Youre right Q2 is typically a low point.
Speaker Change: We feel good about what we're seeing in the in.
Speaker Change: In front of US right now, but again, we always dance from the point of view of having really strong credit results and everything else kind of falls out of that we won't compromise on that everything else is.
Speaker Change: Driven by goals versus numbers.
Speaker Change: Michael Thank you.
Speaker Change: We actually are pretty optimistic on the margin in the back half of the year as well I don't want to see at that point.
Speaker Change: The result in Q2 are going to be strong with $3 eight.
Speaker Change: You suggested that we're going to have good unit economics this quarter, we believe.
Speaker Change: But we're also going to have strong performance in back half of the year as well I just wanted to double click a little bit on on the capital side I do think there is.
Speaker Change: Really constructive capital markets out there for us right now.
Speaker Change: And that does cause certain quarters, including Q2 to maybe a little bit outperform what we consider to be more of a run rate quarter for Q2, but up but again for the full year deficit with where you want the business to be in the higher end of the 3% to 4% range.
Speaker Change: Thank you Sir our next question today will come from the line of John Hecht at Jefferies.
John Hecht: Afternoon, guys congratulations on another good quarter.
Speaker Change: I guess.
Speaker Change: One of the trends we are seeing out there now is a pretty big pickup in secondary market activity I think thats tied to kind of interest rate movements in credit trends and so forth.
Speaker Change: How does that how does that impact your thinking about kind of a balance sheet management retention versus sale and so forth.
Speaker Change: Given those trends.
Speaker Change: Yes.
Speaker Change: The market for forward flow whole loan purchasers has is really really strong right now.
Speaker Change: Credit performance that we've delivered over the past year and a half.
Speaker Change: Combined with the.
Speaker Change: The real understanding of the value of the short duration asset and the disciplined managers that we have at affirm it put us in a really strong position.
Speaker Change: And where we think at or near the top of the pack.
Speaker Change: <unk> of these assets alongside that.
Speaker Change: The dynamics on the supply side of that capital with trends like the private credit trend has created an environment, that's very very good for us.
Speaker Change: So we will continue to.
Speaker Change: To benefit from that.
Speaker Change: When the.
Speaker Change: Whenever we have one funding channel all of that that is.
Speaker Change: High demand or we could maybe benefit from in the near term, we're still very careful to make sure that we create a stable funding base across all of our channels you've seen our ABS execution also be very consistent and that has served us very well.
Speaker Change: And in fact, our ABS execution helps our fourth well execution the two work together.
Speaker Change: And that I would not read the very constructive fourth low market is the suggestion that we don't want to continue to grow our ABS business as well which of course.
Speaker Change: Our revolving deals are still consolidated onto the balance sheet.
Speaker Change: What I do think is true is that.
Speaker Change: The warehouse funding channel for US is a channel that we can continue to to maintain but not grow as a percentage of total platform portfolio given the robust forward flow and ABS market reception.
Speaker Change: Perfect. Thanks.
Speaker Change: James Fawcett with Morgan Stanley. Please go ahead with your question.
Speaker Change: Great. Thank you very much I wanted to just quickly touch base on kind of the outlook or zero percent promotions.
Speaker Change: We go into the holiday season and typically this.
Speaker Change: Where we see some strength and I am wondering kind of tying that back to the LTC commentary a lot of times because of the MTR differences that can provide some our LTC benefit as well so just help us think through that potential.
Speaker Change: As a driver and promotion for the holiday season.
Speaker Change: Sure.
Speaker Change: We're certainly no.
Speaker Change: No strangers to leveraging zeros and.
Speaker Change: We are seeing really great excitement from the merchants as we head into the holidays and don't really want to give any.
Speaker Change: Numerical guidelines here, but suffice to say, we feel very good about it seeing a lot of demand.
Speaker Change: See what else can I share.
Speaker Change: Certainly successfully using it as a way of <unk>.
Speaker Change: Enticing new consumers to give us a try.
Speaker Change: That's an important lever that we have been quite successful.
Speaker Change: Obviously, there are plenty of surfaces, where merchants are excited to advertise that they have a gimmick free late fee free promotion, where you also pay no interest and so we expect to do.
Speaker Change: Draft behind our best merchant partners advertising campaigns, which are always beneficial to our cost so lots of goodness to come.
Speaker Change: <unk>.
Speaker Change: We will also see I alluded to that in in my letter.
Speaker Change: We are in a process of harmonizing, our financial programs, which is the fancy term we use for various promos both fixed apr's reduced APR has there been any prs.
Speaker Change: You will see consistency across multiple channels card and digital wallets included which is going to be very exciting because those are higher frequency at least some of them are card, obviously, a huge outlier there.
Speaker Change: Then all those things combined we just expect more more of that volume.
Speaker Change: I'll, maybe add I think the strong unit economics in the business right now combined with a pretty favorable outlook that we have on them on the next quarters to come puts us in a position where we get to be pretty aggressive.
Speaker Change: We were constrained over the past couple of years, where we had a little bit of catch up to do where we're very front footed right now and our ability to meet those merchants, where they are to price very competitively.
Speaker Change: And to be very aggressive.
Speaker Change: A really good position to be and we're obviously very mindful about the economics of these promotions and so we're careful about them, but we're in a very different spot than we were a couple of years ago, where we actually feel like we can be pretty aggressively right now.
Speaker Change: Great. Thanks.
Speaker Change: Vincent <unk> at <unk>. Please go ahead with your question.
Speaker Change #100: Hi, Good afternoon. Thanks for taking my question wanted to go back to the discussion about margins. So it was nice to see the guidance for the adjusted operating income margin now above 20%.
Speaker Change #100: And then the guidance for the fiscal second quarter of 2123%. So wonder if you could maybe discuss sort of what are you.
Speaker Change #100: <unk> in terms of longer term operating margins, where you think you can operate it seems like.
Speaker Change #100: The 21% to 23% is sort of in that mid to high 3% of our LTC, where do you think that can get in.
Speaker Change #101: Run rate going forward. Thank you.
Speaker Change #102: So we're not updating our long term outlook.
Speaker Change #101: And.
Speaker Change #101: And certainly that kind of touch that 3% to 4% framework that we've had out there forever.
Speaker Change #101: No. Those are those are those are still as they work, but it is obvious that we are running above the margin framework that we put out just about a year ago at the Investor Forum and Thats not lost on US. We think part of that is because the pace at which we were able to drive operating leverage in the business exceeded our own expectations.
Speaker Change #101: And part of Thats, because we now have our eyes set on achieving the next financial milestone, which is which is profitability down the P&L and we still feel like we're in a really good position to do that and I think once we do I think we'll we'll be in a position to update where we would expect the business to be longer term, but I would also reiterate.
Speaker Change #101: Our statement that we made last summer and I think we can repeat it on the Q1 call.
Speaker Change #101: <unk>.
Speaker Change #101: We expect to continue to grow margins from here. We think there is still more operating leverage in this business and believe that we can continue to grow margins from here.
Speaker Change #103: Okay, great very helpful. Thank you.
Speaker Change #104: Our next question will come from Dan <unk> at Mizuho. Please go ahead Sir.
Speaker Change #105: Hey, guys. Thanks for taking my question Great results as always Max we noticed that.
Speaker Change #104: <unk>.
Speaker Change #104: Yes.
Speaker Change #106: Active consumer growth accelerated again can you maybe touch a little bit on the factors behind the acceleration.
Speaker Change #106: Thank you.
Speaker Change #108: Hi, Dan. Thank you for your question.
Speaker Change #108: Consumers Love a firm just more mark coming our way.
Speaker Change #108: The probably most important lever jokes aside is we had the margin.
Speaker Change #108: You saw the <unk> print last quarter. This quarters, no slouch, either we feel great about the bottom line economics, and we're able to reinvest them in deeper approvals more compelling new consumer deals.
Speaker Change #108: We're also.
Speaker Change #108: It's just getting smarter and smarter about.
Speaker Change #108: Marine gauging consumers that had.
Speaker Change #108: One transaction a year to transact three times a year or you just saw we clipped five transactions a year, which is a new front digit for us on that one so.
Speaker Change #108: Many different efforts, we focused very deliberately on active users this quarter.
Speaker Change #108: I keep repeating this but everytime it firm team decides to do something.
Speaker Change #108: It is rarely overnight, but it is never not successful we have a very good track record of delivering on our goal we set in front of us.
Speaker Change #108: We're never the <unk>.
Speaker Change #108: Zero to 60 in half a second but once we get going there's no stopping us and so this quarter's explicit goal was we want more new users we want more active users with higher frequency and all of that has happened and we're not stopping we'll have a lot more of that in store.
Speaker Change #108: Hello.
Max Levchin: Thanks Max.
Yes.
Speaker Change #109: Rob <unk> Autonomous research. Please go ahead with your question.
Speaker Change #110: Hi, guys.
Speaker Change #111: Maybe just to start I wanted to get your certainly early thoughts on the U K launch I mean, how have the conversations they're gone with merchants and I'm curious why you think or what you think is youre right to win in that already a pretty competitive market.
Speaker Change #112: Yeah. So it was actually if I do say so myself unbelievable. So we went to the so we've been pre selling and you kind of think I'm now allowed to say that word for a long time, we were on defense, what's the right word to use but we've been in the market initially quietly and then.
Speaker Change #112: <unk> widely talking to merchants that includes the folks we know from the U S and Canada markets, bringing them or bringing Australia along for the right in the U K and then of course, we built a sales team in the U K, we have an amazing leader in UK market named Bruce who has been with us for over a year now leading the sales effort and she.
Speaker Change #112: Was just really really instrumental to the initial reception, we're getting which is very strong and the merchants.
Speaker Change #112: That talk to US both of those groups basically bring out two key reasons why they can't wait for us to get very active in UK market one the longer term.
Speaker Change #112: Monthly payment products, so six months on not the pain for a 45 day product, but three months six months 12 months on and on and on.
Speaker Change #112: Just not well served it is not really a well addressed need in U K and people there need their prams and their couches and their Tvs just as much as they do in the U S. Right now the only competitor in that space really are banks and.
Speaker Change #112: No comment on how well like that is and so we're very excited to deliver.
Speaker Change #112: Also it doesn't hurt to be fee free and not compounding interest and all that good stuff. So we expect a lot of demand for our longer term products. In fact, that's what we're really focusing on when we go to the UK. The other maybe slightly more subtle version of what's happening in the U K market. We are very clear about our business model. We are just trying to help folks.
Speaker Change #112: Buy things and not confuse them with other things that the market may be well developed but there's a lot of innovation the kind that merchants don't necessarily enjoy we're coming in as a pure player that is just going to be helpful. For more sales and merchants are unequivocally excited about that so.
Speaker Change #112: Very early very excited just spend some time with our launch partner managing director at chemical alternative Airlines and.
Speaker Change #112: Crossing dozens and dozens of transactions and.
Speaker Change #112: We're quite pleased with what they're seeing and it is exactly that need where it's longer terms higher tickets people need a little more time to pay et cetera. So we're quite excited by U K Big Anglophile can't wait to ride my bike in outside London.
Speaker Change #112: Spending a lot more time in London.
Speaker Change #113: Okay and then a reminder, then sorry go ahead.
Speaker Change #114: Yes kind of bigger picture, Max and Relatedly I wanted to ask about the competitive landscape more broadly I. Appreciate your thoughts on the U K at the same time.
Speaker Change #114: Have players from overseas, we're showing up on Apple pay and may be drifting into some longer duration products I mean, it seems like the competitive boundaries of the last couple of years might be shrinking would you agree with that characterization and then how would you think about it.
Speaker Change #114: Sustaining growth and expansion without igniting some kind of competitive race to the bottom.
Speaker Change #114:
Speaker Change #114: I will needlessly remind you that in an extremely competitive U S market.
Speaker Change #114: Over a third of the volume and half more than half the revenue.
Speaker Change #114: There is a reason for that is what we do is really really hard and it also turns out to be really really valuable. These longer terms arent just a what we should give people more time to pay would be great to do it without late fees. It's a huge competitive underwriting is a very difficult thing to do when you have to have massive.
Speaker Change #114: Infrastructure to mine the data that you get is not enough to have in store. The data you actually have to know what to do with it you have a huge machine learning team you have to have a compliance team to make sure. The machine learning team uses the data in the waste that are permissible versus not and so on and so forth and so our moat has been our willingness to do the hard difficult thing without compromise and we're bringing out to other <unk>.
Speaker Change #114: Markets.
The battle has been brought to us in the U S. We held off the on slot better than I think anybody expected and continue to do so we're bringing the battle to them in Europe and in the U K not the other way around kind of a way to ride my bike or at least watch some quality through the fronts racing there.
Sorry, the bike means are okay.
Speaker Change #115: I will stop.
Speaker Change #116: And a reminder to our phone audience today that is star one if you would like to ask a question, we'll hear from Reggie Smith at Jpmorgan.
Reggie Smith: Hey, guys congrats on the quarter.
Speaker Change #117: Hi, just a question I wanted to Super quick I wanted to make sure I guess you issue a process they talked about.
Speaker Change #117: Increased scrutiny on sponsor bank I wanted to make sure that that would not impact the growth.
Speaker Change #117: Firm card that should be a quick answer, but then I think bigger picture I'm curious.
Speaker Change #117: Or any like nuances in terms of underwriting consumers in the UK versus the U S and how you guys go about.