Q3 2025 Affirm Holdings Inc Earnings Call
Good afternoon, welcome to the affirm holdings third quarter fiscal 2025 earnings call. Following the speaker's remarks, we will open the lines for your questions. As a reminder, the conference call is being recorded and a replay of the call will be available on our Investor Relations Web site for a reason.
The whole period of time after the call.
Speaker Change: I'd like to turn the call over to Zane Keller head of Investor Relations. Thank you you may begin.
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.
Zane Keller: 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.
Max Luncheon: Hosting todays call with me are Max luncheon firm's founder and Chief Executive Officer, Michael Linford affirms Chief operating officer, and Rob O'hare affirms Chief Financial Officer.
Zane Keller: In line with our practice in prior quarters, we will begin with brief opening remarks from Max before proceeding immediately into questions and answers.
Max Luncheon: That note I will turn the call over to Max to begin.
Zane Keller: Zane.
Zane Keller: <unk> results are of course speak for themselves. We are pleased to improve our outlook for the current quarter and the fiscal year.
Thank you, Zane.
Speaker Change: Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telecom keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue.
Speaker Change: You May press star two to remove yourself from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Speaker Change: Your first question comes from Andrew Jeffrey with William Blair. Please go ahead.
Andrew Jeffrey: Hi, Good afternoon I appreciate you taking the questions. This afternoon.
Max Luncheon: Max I notice to call out again on the zero APR product in the in the shareholder letter you are having excellent traction can you talk a little bit about sort of the how.
Max Luncheon: How you balance the economics of those loans versus interest bearing loans, and whether or not youre going to see or you think you can see more merchant sort of contribution to that product. As you go forward. I think you noted it is a little bit lower our LTC the interest bearing so I'm just wondering about the mix implications and any other comments.
Max Luncheon: On zero interest going forward.
Max Luncheon: Okay.
Max Luncheon: And.
Max Luncheon: It is a little bit risk.
Max Luncheon: Responsive or reactive if you will.
Max Luncheon: Versus proactive so when a merchant shows up and says hey, I'm thinking of doing a giant zero percent promo. This quarter. Our answer is always going to be absolutely, let's do that like yes.
Max Luncheon: Yes, it makes a little bit less money, but the brand halo that drives for us the conversion that the merchant season, therefore attaches themselves to a firm that much more of the incremental volume to them is just like it's all goodness up and down and so.
Max Luncheon: Part of what you see in my letter this quarter as me, saying, we had a handful of those opportunities come to us and we just couldn't get enough of them.
Speaker Change: You are totally right that the revenue and oxy content is a little bit late but.
Max Luncheon: But on the other side of it the credit quality significantly better I think.
Max Luncheon: Quoted some numbers in my notes that its basically prime and Super Prime content and so we will continue reacting towards that one of the really big things that is worth being clear about on the zeros.
Max Luncheon: They are good today in fact, I think they're great today, but they're really fantastic tomorrow.
Max Luncheon: The totality of the firm card holders comes from the existing a firm base every time, we sign someone new through easier percent promo some number of months or quarters from now that is a prime candidate for card.
Max Luncheon: And that's a lifetime value booster.
Max Luncheon: We haven't come up with a better one so that's why we're so happy with that and.
Max Luncheon: It does create a little bit of.
Max Luncheon: Delayed gratification, if you will but it totally worth it.
Max Luncheon: That's super helpful. Thank you.
Speaker Change: Next question, Dan Loeb with Mizuho. Please go ahead.
Dan Loeb: Hey, guys excellent results as always.
Speaker Change: So Max and team can you maybe elaborate a little bit on the pockets of strength in G&P.
Speaker Change: We're seeing right now maybe some comments on Apple pay.
Speaker Change: How much of this is sustainable on the.
Speaker Change: Strength would really appreciate some comments thank you.
Speaker Change: Yes, Dan this is Rob.
Speaker Change: Thanks for the question the strength in <unk> that we saw in the quarter. It really was.
Speaker Change: Credibly broad based I think we had one category that declined but otherwise we really saw strong growth.
Speaker Change: The board and that was both.
Speaker Change: Growing with our largest merchants and partners, but also growing across the merchant base.
Speaker Change: Obviously, we called out in the letter that the strong growth in our direct to consumer surfaces. Those grew faster than the rest of the business at large and was led by card of course, but really it was strong growth I mean, the other thing that we called out in the letter which is that we did see growth accelerate across the quarter with March being.
Speaker Change: Our strongest month of growth at 40% at GMB growth year on year.
Speaker Change: Got it excellent results. Thank you so much.
Speaker Change: Next question Moshe a orenbuch with TD Cowen. Please go ahead.
Speaker Change: Mr. Orenbuch your line is live.
Speaker Change: Oh, sorry, sorry about that.
Mr. Orenbuch: I was hoping you could perhaps flesh out the commentary on the zero percent you mentioned that there are generally much higher credit quality.
Speaker Change: And.
Speaker Change: Is this sort of the way to think about a kind of an acquisition channel for the for the affirm card and just a different.
Speaker Change: And if that's the case then maybe could you talk a little bit about.
Speaker Change: When youre going to be willing to do more of it and how we should kind of think about that.
Rob: I'll start and undoubtedly Rob has much more precise contours around.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: The thing in promotional finance.
Speaker Change: Promises zeros no one except for us actually delivers on its 90 999, 9% of the time somebody says hey to zero percent APR Theres, an asterisk next to it and if you read the fine print. It says if you Miss a payment or you are late or something happens or it rains or Thursday, youll gets crude and interest compounds attractively and it's the worst thing in Oregon.
Speaker Change: We don't do any of those things when we tell you the zero percent APR. It is in fact as Europe has an APR at this point, we've actually earned are.
Speaker Change: Slash brand people know when a firm says as European deal. It is in fact, you will pay no interest for as long as the number of months as and so people have responded very positively the conversion rate on those sort of things is better than it's ever been merchants come to us and say hey, we want to really boost our topline, let's run a zero will pay the interest that consumers would have otherwise.
Speaker Change: As paid.
Speaker Change: Let's go forward.
Speaker Change: That typically.
Speaker Change: So very very rarely in fact, I can't remember a time, where we said now we are not interested anytime that happens we say Oh My God of course, we would love to accommodate you. Let's go now and let's do as often as possible. So in that sense. It's just a great thing right now you have to have great credit.
Speaker Change: Externalities.
Speaker Change: It hurts really well et cetera et cetera. It's also extremely on brand for us. So this is a really important Brian deposits that were making it also drives GSV growth and so generally speaking I don't have a framework in my mind, the telling point, it's too much.
Speaker Change: The card user acquisition thing is a cherry on top it's not a thing we do because we want more card users even though of course, we went more card users. It's affected when we do this it results in a disproportionately higher percentage of qualified card users. The card credit quality requirements that we have are higher than the broad from quality.
Speaker Change: And so in that sense, the more zero as we run the higher percentage of card eligible users we have.
Speaker Change: The qualitative answer now to Rob for quantitative and I would just say it really comes down to for us, whereas the portfolio profitability at large and.
Speaker Change: Do we have maybe some surplus that we can.
Speaker Change: Invest through mix not necessarily by subsidizing the MTR for merchants, but just through mix alone to.
Speaker Change: To help drive all of the the beneficial things that come with zero at the Max alluded to right, so modestly better credit edge higher.
Speaker Change: Higher growth slightly better user acquisition right all of those things are added benefits and we think that they drive.
Speaker Change: Really nice network effects for us as well.
Speaker Change: Okay.
Speaker Change: Next question.
Speaker Change: Rob will hack with autonomous research. Please go ahead.
Speaker Change: Okay.
Speaker Change: I appreciate the commentary in the letter around your sensitivity to the recession scenario I was wondering if you could unpack some of the assumptions that underpin that analysis, obviously be interested to know like what you considered for GDP and unemployment, but also if you assumed anything.
Speaker Change: That scenario with respect to the business like zero percent APR is increasing decreasing or softening in the funding market anything like that.
Speaker Change: Let's see so first of all.
Speaker Change: It's not a precise estimate the numbers should give you a pretty good clue that this is 50 and 10 are fairly.
Speaker Change: General levels, what we've done is we've looked at.
Speaker Change: Past experience. So during Covid, we had some changes we had to implement pretty quickly because of the extremely sudden nature of furloughs and layoffs and then in 'twenty to 'twenty three is a little bit slower, but it's also a little bit of hydro.
Speaker Change: And both times, we have to estimate.
Speaker Change: What's the credit results, we wanted in that period of time and empirically.
Speaker Change: On our way to the right approval rates.
Speaker Change: I gave are roughly what we saw then and then as we do.
Speaker Change: Our recession preparedness, which we always do it is not a thing that we sort of started doing some recent time, we just look at a recession scenarios.
Speaker Change: Matter of habit.
Speaker Change: We model out what happens over what period of time as delinquencies and defaults go up.
Speaker Change: Basically the process looks something like this.
Speaker Change: Just make assumptions about the existing back book and ask ourselves what are the changes we need to do to the front book to mix into the right returns for our investors. So that we continue satisfying our capital market's obligations and feel good about the results overall.
Speaker Change: We deliberately do not make assumptions around things like well of course, we will do this and that and everything will get better. So there are pockets of improvements to be had after we make those credit cuts, but the assumptions are fairly black and white because thats. The most conservative path to approach and so that's the process.
Speaker Change: The numbers are basically based on what we've seen as well as the models that we run here.
Speaker Change: I think capital markets sort of behaved in all sorts of erratic ways in the past so we have that.
Speaker Change: Yes.
Speaker Change: Empirically well known at this point, yes, and Robert This is Rob O'hare I think youll find that because the loan book turns over so quickly in our business. We tend to look much more closely at early signs of stress in our own loan book more so than.
Speaker Change: We peg our assumptions or our scenario planning around external factors like.
Speaker Change: U S unemployment rate or something like that so it's really around if we saw repayments stress in our own loan book and we sprung to action what would those actions look like and how how much would we have to tighten underwriting or adjust our credit posture.
Speaker Change: Got it Okay. And then you have held a series of headlines recently, highlighting integration and reporting back into the credit bureaus and can you do seem to be at.
Speaker Change: At the forefront of your industry in doing that so I just wanted to ask why is that something thats. So important to you and then is it challenging from a tech perspective to build out that reporting and integration.
Speaker Change: It's a great question, we do believe we are at the forefront of the.
Speaker Change: The industry in the sense.
Speaker Change: And.
Speaker Change: It is challenging at the front end. So there is a couple of somewhat conflicting considerations.
Speaker Change: In the scenario of reporting so.
Speaker Change: This is a very small handful of people that will tell you don't report by loans.
Speaker Change: I don't want it.
Speaker Change: Like the Optionality of not paying my bills on time.
Speaker Change: Having my credit score unchanged, but it is an extreme minority.
Speaker Change: And some of our competitors love to speak to that minority.
Speaker Change: But I think the vast majority of the World says, Hey, if im borrowing money and I'm paying it back on time I Wouldnt that reflected on my permanent record when I go to borrow money for a car or even get my credit check for an apartment rental.
Speaker Change: Want to know that if I borrowed from you you help me build my credit history, and ultimately help my credit score and so that part is really important to us.
Speaker Change: We're absolutely not a socialist enterprise, but we do believe in doing the right thing for our consumer.
Speaker Change: And our consumer really cares about their credit rating, so helping them build it is really important.
Speaker Change: There are some downsides to it and a follower downsizing our term sorry.
Speaker Change: You can't screwed up if you go to a credit Bureau, and you tell them Here's a bunch of data do what you will with it.
Speaker Change: That is irresponsible. So we spent years literally testing what will happen to your credit score if the NPL data is included in it what about monthly data what about bi weekly data.
Speaker Change: But if it combined with these other transactions that we see and so we worked very very hard on making sure that we can stand up and say we will report your data if you pass on time over time your credit score will improve.
Speaker Change: And it will not have weird consequences.
Speaker Change: That you might be worried about et cetera, and so that work was really significant took a lot of negotiating took some real effort with transunion Experian. All these announcements you see is literally results of years and years of work.
Speaker Change: The actual process of gathering the repayment data and sending it to the credit bureaus is not especially technically challenging you got to make sure your formatted data correctly, but.
Speaker Change: That's not the hard part the hard part is making sure that it's incorporated accurately.
Speaker Change: Represents the behavior truthfully actually helps people build their scores doesn't disproportionately benefit or punish them.
Speaker Change: Strange unexpected consequences.
Speaker Change: Okay. Thank you.
Speaker Change: I'll use this as one second is the opportunity to pound the table I invite all of our competitors to do the same thing I think it's really important I think this country's fueled by credit and it is irresponsible of them not to deliver information to the bureaus and by the way whatever regulatory regime, we are in or heading to the right thing to do is to help people.
Speaker Change: Not stack loans, which is the number one concern regulators of all types of always have if youre borrowing here in your borrowing there is at least important to know the total size of your overall debt and will lead the way we will always do the right thing first but I think it's really important the industry embraced as Bryce.
Adam: Next question, Adam fresh with Evercore ISI. Please proceed.
Adam: Thanks, a quick housekeeping and then I have a question on the CCAR.
Adam: Is yours didn't grow so fast that we're more in line with the prior mix what do you think our LTC would have been in the quarter.
Adam: Uh huh.
Adam: Got it.
Adam: We haven't we haven't given precision around that Adam.
Adam: Other than to say.
Adam: Zero is are profitable for us to profitable.
Adam: The LTC line.
Adam: And they're just less profitable than an interest bearing loan that's held but just given the complexities of in quarter funding mix.
Adam: And just taking a.
Adam: Horizontal view of an asset that lends itself to a several quarters view, it's really hard to quantify that.
Adam: Okay.
Adam: Okay No worries.
Adam: Just wanted to ask also about.
Adam: Any specific initiatives or incentives that you could speak to in order to get people using the firm acquired more like a debit card.
Adam: See them more and get an even better understanding of their finances et cetera, and if not maybe provide some color on whether banking or debit or other financial services are on your roadmap Max I think you alluded to that.
Adam: Slightly in the last call. So I was hoping maybe to get a little more color on that thanks.
Adam: Thanks.
Adam: Good question I'll try to keep it synced lest I get on.
Adam: And the preacher mode again.
Adam: Okay.
Adam: So to get to the top of wallets.
Adam: Is a major effort like we basically have to build out all the functionality we have in mind, and we're working pretty hard towards that but I would not.
Adam: Expect the pay now volume to just.
Adam: Flip up to a crazy number very quickly so it's going to be a gradual process and we're seeing good attach rates in.
Adam: Cohorts, but we are not obviously, yet be predominant way for people to pay.
Adam: Now, we're gaining traction pretty nicely in pay leader, then we're taking up more and more of the consumers' credit spend.
Adam: The goal is of course to go after all the transactions.
Adam: What it will take.
Adam: Not sure. This is the right place on which to pre announce our product roadmap and if I do Michael Elbow me.
Adam: It will hurt.
Adam: <unk>.
Adam: I think the one of the things that we did it in my notes.
Adam: Rolled out foreign transactions.
Adam: Which seem like a really minor thing, but I called it out because there's no network effects in payments geographically people, just don't travel that much but nothing sucks more than pulling out of your debit card in a foreign land and saying I'm going to buy this thing swiping it and it doesn't work.
Adam: Fixing these gaping user interface or user experience holes.
Adam: Disproportionately important for things like paying out like you just wanted to be more bulletproof as we.
Adam: Clean up those things I think you will naturally see increased pay down we have a bunch of ideas and what might we do too.
Adam: <unk> incentives.
Adam: What it's worth the single most valuable.
Adam: Consumer incentives, we've come up with is the zero percent APR like it sounds sort of pedestrian but.
Adam: We've run a b tests of all sorts and kinds.
Adam: And.
Adam: We can offer you, 10% off or zero percent deal and 910 times zero percent is just much more compelling even though it cost the merchants less than 10% and so just the economics of that trade are so powerful.
Adam: We will continue leaning into epi reductions.
Adam: A reason to use from products.
Adam: And all sorts of ways and the card is certainly a giant driver of that.
Adam: And obviously, there's a bit of a rhyming where if you signed up three zero percent promo you'd like to see more of those and so creating more of those in the card is pretty valuable.
Adam: Got it okay. Thanks, guys.
Adam: Okay.
Adam: Next question, Andrew Barish with Wells Fargo. Please go ahead.
Adam: Hey, guys, it's Lamar on for Andrew.
Adam: On the recent headlines this week around unit law enforcement by the.
Speaker Change: Administration, and the likely wage garnishment, which potentially could affect a $5 $3 million defaulted student loan borrowers. This summer are you guys internally thinking about the potential implications for our firm.
Adam: Yes.
Adam: Something that we're very mindful of.
Adam: Think we said two quarters ago that we have done extensive amount of back testing.
Adam: Presence of student loans presence of student loan delinquencies and defaults, which is obviously a really important signal.
Adam: So all that is already factored into our underwriting.
Adam: So both the right appropriate ways so.
Adam: I can't say, we are too concern that said.
Adam: Obviously.
Adam: See if there are meaningful changes to repayment of the consequence of the actions of the administration and we will adjust appropriately.
Speaker Change: Okay makes sense and then a quick follow up in your prior shareholders.
Adam: <unk>.
Adam: Worked on their own to redesign of your firm up.
Adam: Just focus in on.
Adam: And the utility there and so wanted to ask.
Adam: You if theres anything that you may be seeing so far in terms of the impact of these changes maybe in terms of driving conversion and incremental user engagement. Thank you.
Adam: Okay.
Adam: It is improving.
Adam: I strongly believe in continuous deployment so.
Adam: A meaningful percentage of the App changes haven't even rolled out yet we're very careful.
Adam: Reinforced by the way the single most important use of the App, which gets insufficient airplane from my point of view is loan repayment. The number one reason and the reason we have the app and the number one reason it's used for is to pay your loan back so as much as we love tinkering with user interface. The number one guardrail, we run against is has our.
Adam: Repayment rate changed in a way that we don't like so you'll actually see us trickle out quite a number of incremental user fees changes, which.
Adam: Every one of them move some needle somewhere positively on the conversion side of things.
Adam: Always against the backdrop of our improving or hurting repayment and if it's ever hurting those changes don't survive very long like we're very very careful not to mess with a repayment rates.
Adam: There's some really cool stuff coming in the App, that's not visible yet.
Adam: So I would say asked me. This question, maybe next quarter and Youll be able to ask you I hate you changed this thing looks cool.
Adam: If you look through the.
Adam: Our firm.
Adam: Card.
Adam: Preapproval process are lumpier process, youll see them really need changes towards the end of the flow.
Adam: Good bread Crumb, if you wanted to go Spelunk, some user flows and see what we did.
Adam: It did improve conversion very nicely.
Adam: Okay. Okay. Thanks.
Adam: Hey, John.
Ramsey El: Thank you next question Ramsey El <unk> with Barclays. Please go ahead.
Speaker Change: Hi, Thank you so much for taking my question.
Speaker Change: Could you comment on the online partnership with Costco to that announcement.
Speaker Change: Maybe in terms of impact timing of the implementation and then could this move in store at any point, maybe thats wishful thinking, but I thought I'd ask.
Speaker Change: Yes.
Speaker Change: Yeah.
Speaker Change: Let's see what we can say.
Speaker Change: It's very cool Im very excited about this one I can say that much I think.
Speaker Change: It's a brand.
The breakdown for its obsession with consumers, it's kind of the original consumer obsessed brand in many ways on the retail side of things very very proud to be a provider.
Speaker Change: To their members.
Speaker Change: I don't think we are announcing a timeline, but obviously, we wouldn't talk about it if we didnt think that Thats a.
Speaker Change: I think that will be.
Speaker Change: At some point in a reasonable future, we're definitely not updating any numbers as to its impact on our.
Speaker Change: Any metric could be seen as you know always take a long time to get rates you need to launch then you need to tune that HIV tests that you need to make sure it's profitable for all sides involved indefinitely.
Speaker Change: So don't model anything crazy in there, but like every one of our enterprise partnerships, we're very committed to it which means that over time, we will fine tune it to be a really great part of our business. So I would just hold your horses, a little bit but.
Speaker Change: We'll invest the right amount of effort into making it great.
Speaker Change: Fair enough a really quick follow up for me.
Speaker Change: Any P&L impact from the Shopify renewal I saw those.
Speaker Change: That you would need that through 2020 was there any concessions on the economic front or any P&L impact we should think for you on that renewal.
Speaker Change: No no economic concessions.
Speaker Change: One housekeeping item is that it does elongate the amortization period for the warrants that were.
Speaker Change: That jump five received in the initial agreement so it just.
Speaker Change: Because those are tied to the life of the agreement there is a longer amortization period, now, but thats pretty small.
Speaker Change: Got it thank you very much.
Speaker Change: Yeah.
Speaker Change: Well, Matt <unk> with Goldman Sachs. Please proceed.
Speaker Change: Hey, guys I appreciate you taking the question nice results as always.
Speaker Change: I also wanted to congratulate you on the Costco partnership I thought that was great. I was wondering if you could provide any.
Details on sort of your latest understanding about how the Walmart relationship will be evolving over the remainder of the year given some of the headlines out recently thank you.
Speaker Change: No.
Speaker Change: We're currently live at Walmart, We think we're doing great work.
Speaker Change: <unk> actively investing in.
Speaker Change: Making sure that they are getting the absolute best possible value from.
Speaker Change: Our work together.
Speaker Change: The day, we understand.
Speaker Change: When that changes in how we will obviously notify you in the market.
Speaker Change: Sure.
Speaker Change: At the moment I think we are being a good partner and a good vendor.
Speaker Change: Robert Michael want to add any more color.
Speaker Change: I mean, we're still proud to power the program and.
Speaker Change: We're there for Walmart consumers.
James: Next question James <unk> with Morgan Stanley. Please proceed.
James: Thank you very much I wanted to go back to the App and interesting comments there.
Speaker Change: And using that to drive and make sure that you have.
James: Good repayment.
James: Great.
Speaker Change: Just wondering how we should fit that together with some of the promotional and deal.
James: Offers that come through the App.
Speaker Change: I guess I.
Speaker Change: I would expect those to grow so just help us think about I know that there's future improvements coming but how should we think about the long term.
Speaker Change: Objective the App is it still a repayment engagement mechanism or.
Speaker Change: It seems like there is also opportunity to.
Speaker Change: Go after kind of your better higher quality customers that you're attracting initially zero percent. So just trying to think help us think through the long term scope of the app.
Speaker Change: In that endeavor.
Speaker Change: Okay.
Speaker Change: So you should think of the repayment functionality of the App.
Speaker Change: As a key guardrail.
Speaker Change: In other words, whatever it is we do to the App.
Speaker Change: In pursuit of.
Speaker Change: Other goals, we will not compromise repayments.
Speaker Change: Is sort of consistent with the credit is job number one thing that I love to repeat.
Speaker Change: We will never do something that harms repayment because it.
Speaker Change: Hurts, our capital partners two screws.
Speaker Change: So it goes up our ability to sign more capital partners et cetera et cetera. So that's the guardrail and it's probably the reason we don't talk about it is because it's understood.
Speaker Change: We will not miss with repayments.
Speaker Change: That said the App.
Speaker Change: Fundamentally.
Speaker Change: Just two more things, it's a catalog of merchants and their offers most importantly zero percent offers.
Speaker Change: That are currently available on the network.
Speaker Change: And it's really important in the sense that consumers do not come to the App.
Speaker Change: To start their shopping journeys.
Speaker Change: But they do come to the up four in addition to repaying their bills.
Speaker Change: Is to check if a thing or a merchant theyre interested in has a great financing offer beta zero percent or a reduced EPR or longer period, our increased purchasing power. There is many different kinds of promos that we know how to run and run very profitably both for our partners and for ourselves and delight consumers.
Speaker Change: <unk>.
Speaker Change: And over time, we will.
Speaker Change: And out more reasons to consumers to come to the App to check in on the offers available to them one of the things that we've rolled out.
Speaker Change: Then.
Speaker Change: Within our adaptive checkout solution that lives on merchant site is something that we've built for the App, a little while ago called dynamic optimization, which in real time figures out the best possible terms and by that mean.
Speaker Change: <unk> links of the loans you might take out an APR offers for that single consumer given something we know about their current set of interests.
Speaker Change: Maybe the best possible approximation.
Or the App, which will sound a little controversial, but actually I think it probably is the best best way of reading about it it's a search engine.
Speaker Change: <unk> you come inquiry on the topic of.
Speaker Change: I have this thing in mind our merchant.
Speaker Change: Merchant in mind.
Speaker Change: What's the smartest financial decision I can make.
Speaker Change: With a firm as Mike tool for them to fulfill their financial objectives.
Speaker Change: We expect to lean into answering that question.
Speaker Change: More and more and more you can sort of imagine some product ideas and maybe features that come out of that.
Speaker Change: The search engine that we have today is pretty goods, we are working on improvements on that.
Speaker Change: Pretty relentlessly.
Speaker Change: I think if I'm allowed a super minor comments on the topic thats not come up yet.
Speaker Change: For which I am thankful if you.
Speaker Change: You look at how the world is changing in the context of generative AI every search is going to be an AI conversation.
Speaker Change: That's very very apparent at this point you should absolutely expect us to have an answer for that as well.
Speaker Change: Got it.
Max Luncheon: Helpful context, Thanks Max.
Speaker Change: Thank you.
Speaker Change: Matthew O'neill with Ft partners. Please go ahead.
Speaker Change: Hi, good afternoon, thanks for taking my questions.
Speaker Change: I was curious if you could give us a little bit of an update on the international expansion, particularly in the UK and notably following the partnership with Audi and is that something you should expect to be.
Speaker Change: Somewhat step functional or maybe just kind of how to dimensionalize that as well as other partnerships like <unk> with Jpmorgan.
Speaker Change: Okay.
Speaker Change: Similar to some of the other payment providers or payment processors.
Speaker Change: The most important value from that partnership from a kind of partnership really is speed to integrations pizza going live so it doesn't necessarily increase our pace of sales, but it moves our pace of implementation from whatever averages too much shorter because of your already plumped through.
Speaker Change: With add in you can just light up a firm in the U K very very quickly so in the in the sense that whatever we have in our pipeline that we have signed going live if theyre on Audi and today will be a faster process.
Speaker Change: We have many of those relationships in the U S.
Speaker Change: This one is in the first one internationally, but it's definitely I think the most significant are the most visible one right now.
Speaker Change: In terms of sort of a sense for things in the U K.
Speaker Change: Just came back from London.
Speaker Change: Im spending my time and limit at this point.
Speaker Change: Doing well.
Speaker Change: Doubling down on sales and I spend lots of time visiting merchants. Obviously, we are the upstart brand in the market. So I have to spend a lot of time, just educating the market about who we are how we do business. How we are a little bit different from the incumbents.
Speaker Change: Obviously, we already said out loud so it's no surprise the big step function will come when we take shopify life there.
Speaker Change: Definitely on horizon.
Speaker Change: We're working towards that.
Speaker Change: We won't get there before we get through the beta period with Shopify in Canada, which is live now.
Speaker Change: Limited number of engineers, we can throw at this but.
Canada is going well I am confident.
Speaker Change: <unk> will happen.
Speaker Change: And reasonable time.
Speaker Change: Very well as well.
Speaker Change: Thanks, Mike and then maybe as a follow up speaking of large international incumbents, one so that had a particularly aggressive posture on AI historically, just a bit of a turn today and I was wondering.
Speaker Change: If you can sort of address where AI is working I noticed in the note.
Speaker Change: The dispute resolution.
Speaker Change: Process for example, but maybe maybe where you found the most success and I know you've been a proponent machine learning and AI for a long time, and maybe where the human touch still reigns Supreme. Thanks.
That's a great question.
Speaker Change: I would.
Speaker Change: But a lot of time on it.
Speaker Change: So.
Speaker Change: We are playing in.
Speaker Change: Unfortunately, the world has gotten really confused about what is and isn't AI under today's definition versus yesterday definition. So.
Speaker Change: Tried to be very precise so we've used machine learning since the day of our founding in fact, the idea was to build a credit score that was built on alternative data and modern machine learning techniques and obviously, we've been pretty successful with it.
Speaker Change: So we use at all the time every part of the business et cetera. So.
Speaker Change: Sir the baseline <unk> or LLS large language models have.
Speaker Change: <unk> been really really helpful.
Speaker Change: In a bunch of places.
Speaker Change: Internally, we use them in all kinds of ways, including and we're actually quite actively investing into internal adoption of AI, where we have teams that are tasked with.
Speaker Change: Finding use cases for Jennie O specifically inside.
Speaker Change: Their teams are increasing productivity anything from we have literally hundreds of thousands of legal contracts with merchants you need to find a clause that we need to modify for whatever reason, that's a great task for Reed <unk> Barton 35000 contracts or whatever the current number is fine the cost and we need to change, which very suddenly different contracts contract.
Speaker Change: Summarize it and.
Speaker Change: Construct a thing that we need to go out there and get re sign. So that's the thing that humans would take thousands of hours for potentially can be done in minutes with ice and this isn't a made up example is very real.
Speaker Change: The thing that I referred to in the letter.
Speaker Change: A big part of consumer delight.
Speaker Change: Is that at least for us anyway is transparency and speed to resolution.
Speaker Change: The ability to speak to a human and explain your cases re powerful that's one thing that I don't think will ever go away like having empathy from someone who gets it and can actually speak to you.
Speaker Change: With a human emotion in their voice.
Speaker Change: Machines aren't there yet and it may actually be irreducible, but if you kind of know what you want and you don't want to wait and you have it all figured out and most importantly have the evidence that there is a dispute and it.
Speaker Change: Just going to give a very specific way and we can use machine learning to adjudicate. The outcome you can package the entire thing with Jenny I would say all right. Let's have an interaction that you understand youre talking to a robot, but this robot can taken all your evidence process. It run it through machine learning model in the backend and say, yes. This basically means you get a refund will tell you right now the refund is coming you're going be okay. We will take care of.
Speaker Change: The rest there was a huge booster of customer satisfaction and so that's actually it.
Speaker Change: That's what I'm, referring to in the letter. That's also an example of both Gen AI as a user interface.
Speaker Change: And machine learning on the backend as a resolution device machine learning is much more.
Speaker Change: Steve will if you will the models are highly highly predictable and repeatable. That's why they are favored in precise things like credit underwriting and <unk>.
Speaker Change: <unk> models are somewhat less predictable.
Speaker Change: Everybody's heard about originations, but they make for an amazing very flexible user interface and we use both very actively.
Speaker Change: Skip the part where I talk about how we have lots of engineers using lots of AI to write code.
Speaker Change: So on but obviously, we're doing that as well so.
Speaker Change: We don't spend a ton of time talking about it we are very enthusiastic.
Speaker Change: <unk> of adopters of all this new stuff.
Speaker Change: But we also kind of thing that it's a bit of a set of tools you use.
Speaker Change: He is available to you and you try to find the very best ones and maybe it will make such a big story out of it.
Speaker Change: Appreciate it thank you.
Speaker Change: Yes.
Speaker Change: Kyle Peterson with Needham <unk> Company. Please proceed.
Speaker Change: Great.
Speaker Change: Hey, guys nice results.
Speaker Change: To ask a little bit about credit and what you guys are seeing their Oc.
Speaker Change: The trends look to be pretty healthy but.
Speaker Change: I noticed you guys did take up.
Speaker Change: The reserve for.
Speaker Change: For loan losses and balance sheet.
Speaker Change: A bit sequentially so was.
Speaker Change: Is there anything in terms of like concern or.
Speaker Change: Is there mix or anything like that I guess, how should we think about the allowance creeping up and how should we think about that.
Speaker Change: Yes. Thanks for the question I'll start and Max May have some color to add as well.
Speaker Change: We are seeing really healthy repayment rates come through we do about $100 million of <unk> today, and so we get a pretty fulsome data set everyday as those cohorts are coming in for repayment 30 days later.
Speaker Change: We're not seeing any signs of stress with the consumer in the repayment rates.
Speaker Change: One small thing that did happen during the quarter as we actually saw a slight uptick in prepayments and so we take that as a pretty positive credit signal actually.
Speaker Change: It is there is some tax seasonality, but even adjusting for that we saw an increase year on year in prepayments. So we think thats a modest positive in that that does on the margin.
Speaker Change: Change the mix of loans that are still on the balance sheet and we still feel like the allowance rate while up marginally is still in a really healthy place and I think delinquencies are a good leading indicator of where the where they are.
Speaker Change: Box is and how the book is performing.
Speaker Change: Okay.
Speaker Change: Helpful. Thank you.
Speaker Change: Next question obviously.
Speaker Change: Sorry, I just wanted to comment that it is really important to the <unk>.
Speaker Change: Actually honest about.
Speaker Change: Credit.
Speaker Change: In the current moment, the snapshot looks fantastic.
Speaker Change: Things could change we are very attentive, we will change with things.
Speaker Change: The good news are the most important property of our business, we have a very very short term length and so as.
Speaker Change: The book goes through we adjust our required credit quality on the front book as the backlog mix is out and we will always get to the numbers that we need to have for our for us and for our capital partners.
Sam: Sam <unk> with BTG. Please proceed.
Speaker Change: Hi, good afternoon, thanks for taking my questions.
Speaker Change: Wanted to get a update on <unk>.
Speaker Change: Two topics so I'll just ask both of them now so.
Speaker Change: The first one about competition, so kind of related to that.
Speaker Change: And earlier.
Speaker Change: Related to Walmart.
Speaker Change: And this.
Speaker Change: Environment, where maybe.
Speaker Change: Competition willing to get back to the economics of wind merchants, just wondering if youre seeing a lot of that sort of competition.
Speaker Change: Second.
Speaker Change: Update if you could talk about your funding structure and actually specifically.
Speaker Change: If you had any updated thoughts about becoming a bank and the reason I ask because it does seem like the regulatory environment is more conducive to becoming a bank whether it's still thereby.
Speaker Change: So just wanted to see if there is any updated thoughts there. Thank you.
Speaker Change: So I'm going to make Michael answer the competition question, because I feel like I've been completely monopolizing airtime, but I'll answer the bank question first.
Speaker Change: Sure.
Speaker Change: Three distinct things, having to do with bank charters.
Speaker Change: Number one that really does not apply here and it's important to just get that out of the way.
Speaker Change: Even if we woke up tomorrow morning, with a bank charter in our back pocket.
Speaker Change: We would not be able to lend from deposits at the bank had it would take a long time to gather deposits would be regulatory encumbered in what's called the de Novo period, where you really wouldn't be able to do all that much at all with it.
Speaker Change: So it's a bank charter is just not a solution for our funding strategy.
Speaker Change: And if we had a bank charter tomorrow five years from now we could have a conversation about what is that doing for your funding cost and even then probably not.
Speaker Change: That's not a thing.
Speaker Change: Two other things Theres regulatory certainty, where if you have your own charter.
Speaker Change: You can have a little bit more clarity as to how the regulators think of you. The bank partner model gets interrogated by the regulators, both federal and state level fairly frequently.
Speaker Change: We have done really well obviously it doesn't hurt that we look our bank partner and make our bank partners look good by not charging any late fees by not doing any questionable anti consumer things. So our partnerships have been strong and we've enjoyed a plurality of bank partnerships over the years.
Speaker Change: That said there is some argument to be had there the most important thing and I've said, it before and I'll say it again.
Speaker Change: Our regulatory driven or motivated towards features or buy features in other words. If there were a feature that we just couldnt build without a bank charter.
Speaker Change: Absolutely consider pursuing one and there is a handful of those theres no point into rattling them off but you could construct a strawman around.
Speaker Change: You would want to do this because it's great for consumers. It's on mission firm would be good at it and yet you can't because Theres No bank charter if and when we prioritize one of those things. Thanks, Carter will become part of the consideration.
Speaker Change: And that's where we've been in that mode for quite some time and you're totally right that the current regulators I think publicly called for wanting to see more application. So it's not lost on us but.
Speaker Change: We would do it if we felt the need to pursue it for a product construct that we had in mind.
Speaker Change: Michael now on competition.
Speaker Change: Yes look on competition. The first thing I'd say is very competitive today as it's been since the day, we went public.
Speaker Change: The category will we believe remain competitive.
Speaker Change: Well into the future.
Speaker Change: Anytime a category is being defined like ours.
Speaker Change: There is mean.
Speaker Change: Meaningful adoption of a new category you attract competition from pure players, but also attract competition from the comments and the broader consumer credit space.
Speaker Change: We'd like to compete that has been true for the past five years.
Speaker Change: We include in our supplement a chart that shows the trend of our merchant fee rates over the past five years over the past several years sorry.
Speaker Change: The thing that jumped out to me and hopefully to investors is how consistent our pricing has been despite the extremely competitive environment.
Speaker Change: The reason why is we don't win on price.
Speaker Change: Obviously, you have to put forward competitive pricing and our cost structure and ability to do things that we do in the capital markets allows us to be aggressive, but it is really important given the risk management mindset that we have in our business that we can generate in the profit.
Speaker Change: Great the business the way we want to operate it.
Speaker Change: Means we don't.
Speaker Change: Do the same thing that some competition might do with respect to pricing. We went on conversion. We went on impact we went on.
Speaker Change: Putting ourselves out there for the consumers of the brands that we work with and I think the track record we have on our distribution is evidence of that and I think.
Speaker Change: The more successful we are improving there is a really good business to be had here. The more competition that will attract we've never thought about our contracts or our distribution as being something that.
Speaker Change: Cement our leadership, we have to earn it every day by driving real impact for our merchant partners and Thats, where our focus certainly lies.
Speaker Change: But make no mistake, we think the market is competitive and we will remain competitive for for as long as we're out no change in the world.
Speaker Change: Yes.
Speaker Change: Okay. Thank you.
David Scharf: Next question, David Scharf with <unk> capital markets. Please go ahead.
David Scharf: Hey, good afternoon, thanks for taking my questions as well.
David Scharf: I just wanted to circle back to.
Speaker Change: Does the route percent loan.
Speaker Change: Focus in mix I appreciate the commentary that.
Speaker Change: It's been more reactive to what partners are asking for as opposed to proactive.
Speaker Change: I guess the.
Speaker Change: Main question I have is maybe you can give us a little more color on just why I mean, what what do we generally takeaway in periods, where you see.
Speaker Change: Particularly some of the larger enterprise partners.
Speaker Change: Want to lean into it is it a statement about what they're seeing in retail sales and worries and concerns trying to drive more volume is it competitive in terms of playing you off of let's say another competitor.
Speaker Change: What should we basically take away from kind of this uptick in interest in promotional activity.
Speaker Change: Let me, let me try to maybe add a little color here.
Speaker Change: I think it is.
Speaker Change: Important to think about.
Speaker Change: The statement condition of our merchant partners. When we think about these kind of programs.
Speaker Change: And in our experience merchants who are.
Speaker Change: Wanting to do zero present promotions tend to be the ones, who are most growth oriented.
Speaker Change: Reflection of strength in those merchants, where they really want to go out and be front footed and grow their businesses. It is an incredibly powerful growth tool for them.
Speaker Change: I think the truth is when we were dealing with a surge in rates.
Speaker Change: And associated pressures to the merchant partners it became very difficult to make the economics work for these but when youre in a scenario that would be where most of this quarter and certainly the prior couple of quarters, where the market conditions were favorable for the provider and a firm.
Speaker Change: The brands really wanted to invest dollars in growth its a great lever to pull where I think merchants pull back on zeros as when they feel like they need to be less growth full and more focused on the cost structure of the business and so I've always thought about it as a real sign of strength for the merchants knowing that that's a great way for them to.
Speaker Change: So their business, there's nothing defensive about it but the last thing to note is really important.
Speaker Change: Our merchant partners are reactive I think there is some of the best retailers in the world, but even even with that they don't react in minutes and days that these things take months to think about and plan and execute and as a result, I think it would be a big mistake to look at what we saw this quarter and associated with anything Youre reading in the news.
Speaker Change: And I would just add to what Michael said some of the largest merchants that chose to run zero. This quarter really have business models, where they're both selling direct to consumer and then they are also selling into a distribution channel and when you look at the unit level economics for that merchant selling direct as the Moe.
Speaker Change: Profitable action, they can do and so while the MTR is that theyre paying to affirm might be higher than the credit card processing rate that they are paying on the direct channel. If they can drive more volume through direct it's still really accretive to their gross margins versus selling into wholesale or selling into a channel.
Speaker Change: Yes that is it really.
Speaker Change: Really important I just want to underline what Rob just said that as like a.
Speaker Change: A very very key thing to understand about the business.
Speaker Change: No that's terrific color. Thank you.
Speaker Change: Okay.
Speaker Change: Next question Giuliano Bologna with Compass point. Please go ahead.
Giuliano Bologna: Hey, good afternoon, congrats on the.
Speaker Change: Yes.
Speaker Change: The lower results.
Speaker Change: I was curious about asking you is when I look at the outlook it kind of implies a continued acceleration and GMB growth.
And.
Speaker Change: Im curious to ask you. If there is any if you have any sense of any potential pull forward that may or may not have happened.
Speaker Change: The whole tariff discussion liberators Andrew.
How do you think about that because you probably have a lot more insight.
Speaker Change: Amongst plus beyond that and I'm curious, how you're thinking about that when you're thinking about the outlook for the rest of the year and what that implies for Jimmy growth acceleration.
Speaker Change: Yes. Thanks for the question. So I think at the high end of the <unk> range, we're calling for 34% year on year growth and Thats down ever so slightly from the 36% growth that we saw this quarter. So we're not calling for an acceleration on that basis in the guide and then we alluded to it in the letter.
Speaker Change: But we did see elevated growth rates in.
Speaker Change: In April are those were those are roughly in line with what we saw in March, which we which we had called out is 40% year on year growth in the month. So we are expecting that.
Speaker Change: <unk> will moderate from the levels that we've seen quarter to date.
Speaker Change: That's very helpful and then.
Speaker Change: You've obviously got it okay.
Speaker Change: Putting thermal funding structure.
When you think about.
Speaker Change: The percent of the loans that you might sell on a quarter to quarter basis.
Speaker Change: Think about that running at the high end of the historical range for a while in the near future.
Speaker Change: Just because of the.
Speaker Change: The volume of partnerships are out there and the demand for private credit.
Speaker Change: How about you.
Speaker Change: So through at least.
Speaker Change: Near term.
Speaker Change: Yes, I mean, I think when you think about the funding mix the biggest variable in any given quarter is whether or not we're going to do.
Speaker Change: Consolidated ABS deal, we did just price non consolidated ABS deal last week, and so that will have an impact on the mix of off balance sheet funding that we see intra quarter, but we've also had really strong execution with.
Speaker Change: On balance sheet ABS too so.
Speaker Change: And we're fortunate to have a really great funding partners in all of our channels forward flow included so.
Speaker Change: Yes, I think there will be a modest uptick in off balance sheet funding as a result of the ABS deal that we did but otherwise we really haven't commented on funding mix.
Speaker Change: That's very helpful. I appreciate it I'll jump back in the queue.
Roger Smith: Next question Roger Smith with Jpmorgan. Please go ahead.
Roger Smith: Hey, guys.
Roger Smith: You're taking the question I've got I guess, one more in I hate to beat a dead horse, but I have a question about zero.
Roger Smith: Coupon offers and I'm, specifically interested in the ones, where you guys are doing to funding I was hoping you could share typically want to think about those zero financing my model, which goes back to kind of the peloton Biogen I'm guessing that's net.
Roger Smith: Tied to the price point for the duration for those loans. So maybe can you talk a little bit about.
Roger Smith: Those loans in particular, the zero zero coupon loans that you guys are financing yourselves and then again just reading the note. It sounds like those are primarily showing up in your App, maybe talk about where Mike.
Roger Smith: Mike how are you deploying them a little bit thank you.
Roger Smith: Yes.
Roger Smith: To your question.
Roger Smith: 10% of the zero percent volume would come on what I would consider our surfaces either.
Roger Smith: The affirm card is the Best example, and the largest example in the quarter, but also some of the wallet partnerships right. We can dictate what the financing program is there and we're not.
Roger Smith: There is not a merchant necessarily that's part of the equation in that function.
Roger Smith: So those are the two best example, again that was that was only about 10% of the zero percent volume and we can dictate the exact cut offs for when the zero percent is presented and we can filter there either based on the credit quality of the consumers maybe obvious but I'll.
Roger Smith: Say it any way higher credit quality consumers Theyre typically are lower costs for us elsewhere in the transaction and so we can lean in by foregoing. Some of the interest revenue that we would get in an interest bearing loan and present more zeroes as a result.
Roger Smith: But yes, that's really how we're thinking about it I mean, we do we've typically had some zero percent.
Roger Smith: All of our own services card again, it's the Best example, and we can we can play with the mix of zero that we want to run in any given quarter and be thoughtful about the consumers. We presented here is two and when and why.
Speaker Change: Okay. So it sounds like for those zeros in particular those are people that you know they already have the card.
Roger Smith: Almost like a reward to them as opposed to.
Roger Smith: In the case of you self funding of those or are those arent acquiring new customers is primarily people that you already know.
Roger Smith: That's right and again.
Roger Smith: I want to make sure we address the self funding piece because when we look at the top 20 merchants that drove zero percent volume I mean, those are those are mostly negotiated zero percent programs, where there is a healthy FDR to cover the costs.
Roger Smith: To the peloton point that you raised peloton was obviously, a very long dated loan program and it had a very very high percentage of zero percent loans and so it's altogether just a different equation.
Roger Smith: Zero is that we saw this quarter clustered around roughly 12 months interval length, and so the MTR that we need to make the math work. There. It's just it's different than a three year loan program like we had with peloton.
Speaker Change: Maybe just your expansion I think we are making.
I think we have maybe.
Speaker Change: We talk about self funding these things a little bit too much. It's not a binary thing of is it a firm funded or not we look at the merchant fees that we get either through the merchant discount rate negotiated deal or the interchange on the card, including visa flexible credential interchange and we make a financing offer based upon that revenue mix.
Speaker Change: There is always revenue in the picture when we talk about self funding at what we mean is that we can intentionally direct.
Speaker Change: A higher mix of offers that consumer and maybe that means we're intentionally accepting slightly lower margin, but we're not walking into situations and saying, let's go acquire users by.
Speaker Change: Offering 24 months here present promotional financing that's just not the business model, yes, and again, we tried to be really transparent with the merchant discount rates that we collect by product and you can see the consistency that we've we've driven there across each of the product lines in the earnings supplement.
Speaker Change: No that makes sense I am glad you guys clarify that because they may have been confusion about that.
Speaker Change: Thanks.
Speaker Change: Next final question comes from Jeff with Seaport Research.
Jeff: Hey, Thanks for allowing me to join these calls.
Most of my questions have been asked I just have a quick one maybe for Rob.
Jeff: How are you thinking about that sales and marketing line going forward. It looks like it's stepped down this quarter was $74 million just trying to get a sense of.
Jeff: <unk> got into that number this quarter and B, what the right level is for your sales and marketing and maybe just touch on qualitatively any initiatives that are worth calling out. Thanks.
Jeff: Yes, I think the biggest change there with just debt.
Jeff: The amortization of warrant expense from one of our large partners.
Jeff: Came to the end of its amortization period in the December quarter, and so this was the first quarter without that expense flowing through that line. So there was a step down in the noncash warrant amortization and that'll be the case.
Jeff: Going into this current June quarter, as well that that was the biggest changes.
Speaker Change: Got it and so that flows through going forward or how should we think about that I'm just trying to get a sense.
Jeff: Amortization period has ended there so.
Jeff: The run rate that you saw this quarter will be roughly what you should expect in the June quarter.
Jeff: Got it great. Thanks very much.
Zane Keller: I would like to turn the floor over to Zane for closing remarks.
Jeff: Okay. Thank you everybody for joining the call today, we look forward to speaking with you again next quarter.
Jeff: This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
Jeff: Okay.
Jeff: Yeah.