Affirm Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 12 speakers on the call.

Operator

Afternoon. Welcome to the Affirm Holdings Third Quarter 2023 Earnings Conference Call. Following the speakers' remarks, we will open the lines for your questions. As a reminder, this conference call is being recorded and a replay of the call will be available on our Investor Relations website for a reasonable period of time after the call. I'd now like to turn the call over to Zane Keller, Director of Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Thank you, operator. Before we begin, I would like to remind everyone listening that today's call may contain forward looking statements. These forward looking statements are subject to numerous risks And uncertainties, including those set forth in our filings with the SEC, which are available on our Investor Relations website. Actual results may differ materially from any forward looking statements that we make today. These forward looking statements speak only as of today, The company does not assume any obligation or intent to update them except as required by law.

Speaker 1

In addition, today's call may include non GAAP financial measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures. For historical non GAAP financial measures, Reconciliations to the most directly comparable GAAP measures can be found in our earnings supplement slide deck, which is available on our Investor Relations website. Hosting today's call with me are Max Levchin, Affirm's Founder and Chief Executive Officer and Michael Linford, Affirm'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 questions and answers.

Speaker 1

On that note, I will turn the call over to Max to begin.

Speaker 2

Thank you, Zane. Thanks everyone for joining and I hope you had a chance to read our quarterly letter as it Pat, lots of great information, but I will offer a very quick summary for you. We had an excellent quarter, Beat across all of the important metrics we track, while continuing to maintain excellent credit results. On the execution side of things, I'm really proud of how the team performed this quarter. We shipped well over 100 projects from pricing to new credit model To dozens of user interface improvements, in isolation, each of these wins is probably relatively small, but they compounded to huge gains.

Speaker 2

One major project this quarter was our continued effort in rolling out Debit Plus. We delivered Debit Plus into the main Affirm app. And while it's still quite early, we continue seeing strong signals of consumer demand. Dividend Plus user transaction frequency After 90 days from activation, it's about 7 times that of a regular Affirm user. I'm truly excited about this product And what the team has planned for it, and we intend to give you a significantly more fulsome update on DevOp Plus in the quarters to come.

Speaker 2

Seems that there's a once in a century event that happens every week lately, rattling capital markets, But we continue to deliver great returns for our capital market partners and it was rewarded by Incremental addition to our funding capacity in the quarter as well as in April after we closed. So in short, we had a great quarter. We compounded many small wins into big gains. We're very excited about Debit Plus and the overall outlook for Affirmative as a company. Back to you Zane.

Speaker 1

Great. Thank you, Max. With that, we will now begin our question and answer session. Operator, please open the line for our first question.

Operator

Thank you. A confirmation tone will insert your lines in the question Our first question comes from the line of Masha Orenbuch with Credit Suisse. Please proceed.

Speaker 3

Great. Thanks and congratulations. I saw in your letter, Michael, that You had 110 basis point increase in the interest bearing GMV in the quarter and more than that if you went back 6 months. Could you Talk a little bit about how much that will have risen by the time this is fully phased in? And Also, just strategically, how does that impact your both your willingness to serve certain types of merchants and Your credit decisioning and what impact that could have on GMV?

Speaker 4

Thanks. Yes, we are proud of the progress that we made in our pricing initiatives. Just to recap on how this works. The first step for us is getting any caps in the way getting the caps out of the way, allowing us to price Where we think we need to price always underneath 36%. We were subject to a number of 30% APR caps.

Speaker 4

And so One potential way to read that is there are 6 points. However, we don't intend to price every loan out that amount. And so there is a reasonable limit That being said, we're about halfway rolled out and we've got about a point. So I think a fair rule of thumb would be to Double our progress today and that's a good ending spot. In terms of the impact of those pricing initiatives have on approvals, it's It's absolutely the case that we get to approve more consumers, drive better conversion for our merchant partners and grow our business faster By being able to price loans in that zone.

Speaker 4

And that is our intent. Our intent would be to leverage that to protect asset yields for our investors And still, approve more volume. And part of the reason why we've Seeing the acceleration in our direct to consumer business is because it's how we've been operating it, frankly, since we've been able To get that moved first ahead of any sort of virtual interaction.

Speaker 3

Thank you. Our

Operator

next question comes from the line of Bryan Keane with Deutsche Bank. Please proceed.

Speaker 3

Hi, guys. Mike, maybe you could just give us your thoughts on the guidance, in particular, revenue less transaction Margin, just looking at that. And then the net take rate, I know there's always some puts and takes there when I look Sequentially, well, actually just gross take rate and then net take rate. Maybe you can just help us walk us through between 3Q to 4Q?

Speaker 4

Yes, thanks. We had obviously a really strong quarter on revenue less transaction costs in Q3, Driven in large part by our outperformance in credit. That resulted in a pretty Large beat ahead of our expectations in the provision for losses, and that was despite operating And a very volatile capital markets. We assume that Q4 will remain volatile. That's not to say that it It isn't a spot where we can add capacity.

Speaker 4

We do intend to add capacity like we do almost every quarter, but it does mean that we're being very thoughtful around What we assume as we prepare our forecast and the guidance that we don't aren't overly reliant on things getting better in Into our Q4, and as you see in the GMV guidance, we're showing pretty strong sequential GMV growth From Q3 to Q4, in fact, from a seasonality perspective, I think even faster than what we saw last year. And as we saw during our Q2, when you have that kind of sequential growth in GMV or that acceleration quarter to quarter, It can sometimes push some of the economics for loans originated in the quarter and the subsequent quarters. And the reason why Q3's outperformance was so strong Was in part because of the both the volume and balance sheet strategies we had used in Q2. So All the markets that we think we're going to be able to continue to navigate to fund and scale the business, but it will change the shape of the earning a little bit. And what we saw in Q3 versus Q2, we kind of expect to see in Q1 of next year against Q4 this year.

Speaker 2

Got it.

Speaker 3

No, that's really helpful. And just as a quick follow-up, the initial rollout of Debit Plus, how do we Think about the modeling for that and the impact, probably obviously not much in 4Q, but when should we start to see an impact? And how do we think about the modeling?

Speaker 4

Yes. We haven't broke anything out because it's not big yet. We do intend to give Better tools to model it when we have it becoming a more material part of our business. And because we're not providing any guidance in 2024, we're not doing that today. But as we talked about before, there's really 2 different pieces to that product.

Speaker 4

One is, will look more like Our direct to consumer product that we have today just looks like an installment loan, whether that's a paying for or a monthly installment loan. The other will be a Pay Now volume, which of course will have a very different margin structure. And later this calendar year, we plan on Walking everyone through how to think about modeling it and the impact it has on the P and L.

Speaker 3

Okay, great. Thanks for taking the questions.

Operator

Our next question comes from the line of Ramsey El Assal with Barclays. Please proceed.

Speaker 5

Yes. Thanks so much for taking my question. I was wondering if you could update us on credit reporting and buy now pay later Seems to be an area of growing interest. Just wondering if you could share your latest thoughts on that topic.

Speaker 2

So first of all, I encourage everybody to look at the Report Consumer Financial Protection Bureau published just about a year ago actually, just under a year ago. Were they Highlighted what they like and dislike or have concerns rather about in Buy Now Pay Later. The headline was really, hey, this is a really good product better than credit cards. That said, there are concerns specifically around stacking And furnishing, which is a fancy term for reporting credit performance back to the credit reporting agencies. And CPB expressed strong desire to see the industry figure out a way to help folks Build the credits and also have accurate reporting of performance of these loans.

Speaker 2

Actually quite proud to share that We at Affirm are partnering with FICO, which is the maker of preeminent scores, out there to build a first of its kind Credit scoring model that would enable buy now pay later loans to be consistently transparently factored into credit and lending decisions, And to be reported to the credit reporting agencies. I'm a big fan of Will Lansing, who runs FICO. And I really appreciate his partnership on this. So we're quite excited to talk more about it when we're ready, but we intend to step into the leadership role and help the industry report Binocular loans and make sense of them in the broader context of borrowing.

Speaker 5

Thank you. That's super helpful. A quick follow-up from me. There's been some media chatter about some potential consolidation in the sort of broader buy now, pay later space. What is your sort of house view on exploring strategic alternatives for the business?

Speaker 5

Is it something that you'd be open to at this point or Maybe not at this juncture in the cycle.

Speaker 2

I'm very focused on things that I love doing versus Speculating on such complicated things as strategic matters, we're very, very much heads down on just Building out the product and in particular Debit Plus, which is as everybody knows is my baby. I think that's where my mind is at.

Speaker 5

Fantastic. Thank you so much.

Operator

Our next question comes from the line of Jason Kupferberg with Bank of America. Please proceed.

Speaker 6

Thanks,

Speaker 2

We lost Jason. Operator, I think we need another

Operator

Jason, Jason, you're back in.

Speaker 4

Okay. Good.

Speaker 2

Can you

Speaker 6

hear me?

Speaker 7

We lost you. Please repeat.

Speaker 2

I think we can hear you now. Try asking again.

Speaker 6

Can you guys hear me?

Speaker 2

Yes.

Speaker 6

Sorry about that. I wanted to ask about the reserve ratio. It's declined for, I think, 6 straight quarters. And can you talk about some of the drivers of the trend of that Could it move lower from here? And then maybe just remind us what drives the seasonally higher delinquencies in Q4 that you touched on in the shareholder letter?

Speaker 6

Thanks.

Speaker 4

Yes. We're really proud of the credit results in the business. And Given the very short duration of our asset, the real time performance of the portfolio drives the allowance Calculation for Affirm. So what we're not doing is making estimates of where the economy will be in a year and building balances for that Because by the time we get there, of course, our asset turns over too fast. There'll be very little of any principal left, on the balance sheet We're outstanding with even Ford Co Partners by the time you get there.

Speaker 4

And so we don't think about credit as a long term estimate. Instead, we think about it as a more near term reflection of the actual performance of the credit that we have out. And given our really strong delinquency performance, Measured however you'd like, the allowance rate has continued to come down and we would expect that to be In line with historical patterns from here. The seasonal factors that come into play are a little bit It's a little bit inverted. The biggest seasonal factor is the depressed delinquency numbers you see in and around tax return season.

Speaker 4

And so as you get past that, you Start to normalize up a little bit, and we would expect to follow the seasonal trends pretty much directly on our regular credit monitoring shows Being right on top of the historical patterns here and feel very confident about staying within those bands.

Speaker 6

That's helpful. And I'm curious if you can share with us, GMV growth, if we exclude not only Peloton, but Amazon. I mean, if not Number just directionally what it looked like perhaps versus last quarter?

Speaker 4

We're not going to provide any numbers broken out, but what I can say is that we had exceptionally strong growth And a couple of pockets. Our largest partners grew really quickly, including our partnerships with Platforms like Shopify, where we actually saw an acceleration in the business. We also had a real acceleration in our direct to consumer Business, which is obviously away from merchants like Amazon. And yet, We showed really strong growth with Amazon as well.

Speaker 6

Okay. Thanks for the color, Michael.

Operator

Our next question comes from the line of Andrew Jeffrey with Truist Securities. Please proceed.

Speaker 7

Hi. Appreciate you taking the question. It looks like some good momentum in Debit Plus, Max, which is encouraging. And I think you called out in the letter 5% card present spend today. Where do you think that number can go?

Speaker 7

And is grocery still the primary category? Because it seems to me, if you have a lot of success in card The whole nature of the business model changes. I know you're not talking about the economics of card present transactions yet, but How should we think about it? Is this going to be a steep ramp, a longer term trend change? How are you thinking about that?

Speaker 2

So just to quibble a little bit maybe with the grocery point, I never said grocery is the primary use case. It just happens to be the thing that most of us buy a lot. So I think that's necessarily a Common purchase, if it's a top of wallet card. The goal for Debit Plus is to become the top of wallet. If you ask any affirmer, What is the most common word out of my mouth in the last 3 months?

Speaker 2

Everyone will probably tell you frequency. Like what we want is consumer frequency. 88% of our transactions are coming from repeat consumers. That's an accident. We will continue putting lots and lots of wood behind that particular era.

Speaker 2

The ramp of Debit Plus, I think it's something that's probably premature to talk about too much right now. I'm incredibly Where the product is, which was not the case 6 or 9 months ago, I'm really glad we took the time to build it the right way. I think We need to do it right to roll it out correctly, make sure that we continue Delivering on the overall company goals while ramping up Data Plus, I think it's Probably a little too early to declare the shape of the curve of DevOposs adoption. That said, I am finally now putting it in front of every one of our users that qualify for it and quite excited about that.

Speaker 7

Okay, helpful. And then Michael, we're watching equity capital required as a percent of the platform funding sort of creep up here. Can you comment on that? I assume we're not going back to 10%, maybe clarify that and also just discuss Sort of how you think about life of loan profitability given some of the shifts in funding?

Speaker 4

Yes. So with respect to equity capital, it is creeping up and above our long term goal of 5% And, nowhere near 10%. We don't intend to run the business anywhere near that number. I think we said that Last quarter, I'll just keep repeating it and thank you for the question, because it's I know it's on people's minds. We don't want to run a business with that much Equity Capital.

Speaker 4

Today, we have a pretty low leverage, let's say, a low advanced rate funding strategy with Our warehouse lines, for example, and that's a lever that we could pull in the future if we continue to Feel like we're operating in this environment and need to use balance sheet. But today, it hasn't been a priority for us because Firstly, we have adequate liquidity with over $2,000,000,000 of cash and securities available for sale. And Obviously, our economics on loans that we put on the balance sheet actually do return higher to us overall. And so with those two factors, we're not really Too worked up around it today, something that the team will get work on in the future if the current market continues To operate, I guess. In terms of the total loan economics in this funding environment, we feel really good about it.

Speaker 4

You saw this quarter's Revenue less transaction costs being a little over the midpoint of the 3% to 4% range that we've talked about. We're going to oscillate quarter to quarter with an admittedly high degree of volatility, None of that takes away from our confidence in that 3% to 4% range. If you think about the question that was asked at the very top of the call, Our ability to get those pricing initiatives over the line and realized will offset a healthy amount of the headwinds that we're Experiencing in the capital markets broadly.

Speaker 7

All right. Thank you.

Operator

Our next question comes from the line of Eugene Simoni with MoffettNathanson. Please proceed.

Speaker 8

Hi, guys. Thank you. Thank you for the question. I wanted to ask a relatively high level question. Great to see strong credit performance over the last Couple of quarters, I think it kind of gives the evidence to what you guys have been always saying, your ability to really control credit outcomes.

Speaker 8

So that's great to see. So if that's sort of where that you pull, I think the natural question becomes, is there an opportunity to to make the credit performance a little bit worse, but volume growth, which Perhaps it's something that would be desirable. So would lots of you can give us your latest kind of philosophy on that? What opportunity Do you see there, especially as we exit the volatile times, hopefully, that we're in today and maybe gives you a little

Speaker 2

Great question. First of all, I hope The world is listening because they're saying the same thing for a very long time and printing quarter after quarter of good credit returns. And At some point, I think people will believe us, but until they do and well after it, credit is always job number 1, probably through number 5. I think as a non depository lender, it is our responsibility to deliver good returns to our CALA partners To make sure that they never have a second thought about partnering with us. That's philosophically at the very, very top What matters to us?

Speaker 2

We have a mission. That mission has everything to do with delivering honest financial products to improve people's lives. But the only way we can achieve that mission is By having strong capital markets partnerships and the way we get that is through having consistent and really strong credit performance. So that's Ultra important, no compromise there. The question around is there pockets of growth, if I can put words in your mouth with the Credit as a sort of chip to cash in.

Speaker 2

The short answer is, I think we'll know a lot more in the coming Few quarters. On the positive side of things, the economy is basically fully employed. The inflation, knock on wood, Tomorrow's news or one of the next CPI print is not negative, but it does feel like the Fed is actually Seating, if maybe not as quick as they would like in doing their job in tamping inflation down. Meanwhile, the labor market held up. And if that continues, That maybe does look like soft landing and that would be quite excellent for all involved.

Speaker 2

There are lots of things that could go wrong. For example, The student loan repayment is going to hit us sometime July August timeframe impact a lot of consumers and we want to make sure that we are prepared for either side Of that equation, good news is that the reason we have such control over our credit outcomes is because we are structurally Just really, really short duration. So as we see the next change in the weathervane, we know how to tune credit Approvals to make sure that we stay within the bands that we must stay. The slightly unrelated, but or Related to slightly different answer to your question though, I said it last quarter a little bit and sort of try to highlight it in the letter this time around. We have an enormous amount of opportunity in growth that has nothing to do with credit.

Speaker 2

A lot of the acceleration you see in consumer, Some of the really successful performance we're seeing with our partners, Michael mentioned that our business was Shopify accelerated this quarter. A lot of that has nothing to do with Credit. In fact, it has everything to do with optimizing every little bit we can. Like you would be Either bored to tears or excited by the pipeline of projects that we've put forth on just every possible metric of the business. That has nothing to do with credit performance.

Speaker 2

And I promise I'll keep this short as I can, but just a very, very quick walk through of what it means to actually apply And get approved for a loan with Affirm. So you find us typically a funnel. There's a thing we call as Slow as, which is basically an opportunity to pre qualify, that's about 3 screens, then you get to checkout, that's a apply for a loan, you get Your selection of terms, you select 1, then you go to, if it's a new sign up, identification, if not Behind the scenes identification, then you see a truth in lending disclosure, then you have to agree, then you sign up for autopay or type in your Payment credentials. Every one of this, it's a huge amount of steps. It's actually a product that needs to be simplified more and we're Tirelessly on it.

Speaker 2

That's also why I'm so excited about this card because a lot of these steps are completely disappeared with the card product. But online, Each one of these steps has a conversion rate. And I am not kidding what I can tell you, I can rattle off every one of these steps conversion Great. What it was and what it will be when we're done with the work. And it's something that keeps me excited and up at night because there's so much opportunity to just get more people Through the funnel.

Speaker 2

And so we'll continue investing in that relentlessly. Credit is not for playing games with.

Speaker 8

Got it. Got it. Very helpful. And then for a quick follow-up, very interesting to see direct to consumer highlighted kind of at the top Of the letter this time, sounds like great progress in Debit Plus. Can you talk a little bit about direct to consumer sort Strategically and the way you laid it out in the shareholder letter, it sounded to me like the sequence of Consumer engagement is still going to be merchant through merchant first and sort of direct to consumer then second.

Speaker 8

Am I interpreting that correctly? Or Are you also going to be focusing on finding merchants who just engage directly through direct to consumer?

Speaker 2

You're 100% right. It is exactly so what I attempted to do in the shareholder letter is to lay out the flywheel. One of the greatest things about Affirm Since the very beginning of time is we have no cost of user acquisition. Merchants promote our product to their shoppers that they hope to turn into buyers Because we're able to approve the right number of shoppers and help them buy. As these consumers come back to us, we have a chance to introduce them to new products.

Speaker 2

Card is the single most important one. That is the thing that we've been working so hard on and we're now seeing real fruit of our labor With an Affirm card, debit plus in their physical wallet, in their electronic wallets, in their browser autofill, everywhere we can possibly put it, These consumers come back to other merchants whether they are integrated or not. One of the really, really important things that I think I ultimately edited out Letter was getting longer than I wanted to, but it's really worth highlighting the card will work, all the Affirm functionality will work at any merchant, even if it has Absolutely nothing to do with Affirm integration. So pick a favorite brand where Affirm is not yet offered. All you need to do is sign up for the card, which is now basically available to anyone, Bring your card to that site or to that store and you suddenly have both pay now and buy now pay later functionality on a single payment device.

Speaker 2

But the flywheel is Merchant integration, consumer transactions, consumer repayment gives us a chance to market Debit Plus to these consumers. Debit Plus becomes the universal

Operator

Our next question comes from the line of Rayna Kumar with UBS. Please proceed.

Speaker 3

Hi. This is Karn Sinanya dialing in for Reena. Hi. Thanks for taking my question. So can you just tell us a little bit about What's going on with the capital markets?

Speaker 3

Any updates there? And any change in investment demand for securitized consumer credit assets?

Speaker 4

Yes. So the good news about the capital markets is that we demonstrated in our 23A deal and the recent reopening That when structured correctly and timed correctly, we're able to access the ABS markets, I think, really constructively. Qualitatively, the investor sentiment was exceptionally positive in our 23A reopening. Our team did a really good job in working with investors and executing in that market. Quantitatively, that particular transaction was 3 times oversubscribed.

Speaker 4

And those are all really positive signals. But it's important to put that transaction in context of the broader Capital Markets and Macroeconomic Conditions. We did that transaction in between the failure of Silicon Valley Bank and the sale of First Republic. And I think that it is the case that these things do not impact us directly on a first order basis, But credit spreads for all asset classes, including ours, are going to widen in times of These moments have pretty peak economic dislocation. It is just an unfortunate reality of the world right now that Things are extremely volatile.

Speaker 4

That being said, we did execute those 2 transactions I mentioned in between, these pretty severe Economic events and we are confident that we can continue to do so, but nonetheless, it will remain volatile. We're also adding Net new partners in our funding ecosystem, adding warehouse funding capacity from net new institutions and expanding existing Relationships with our existing funding partners. And I would just leave you with the idea that it's volatile and Obviously, spreads are widening and that will offset some of what we expect to be a declining rate environment going forward. But nonetheless, Still able to fund the business, which is always job 1 for our capital team and we've done that excellently.

Speaker 3

Hi, yes. And maybe just as a follow-up, can you comment on what's driving the uplift in the debit trust Is it just simply consumers are resonating with the pronounced value proposition or is there something else?

Speaker 2

We built a really great product that we've put in front of, At this point, lots of consumers who many of whom have told us over and over again that they would love to use Affirm At their favorite grocery, at their favorite offline store, at a website where a competitor might be integrated, but they prefer Affirm. Debit Plus is the unlock to use Affirm anywhere you like online and offline. It's gaining popularity, and we're very excited. And by the way, just to be very clear, This is very much V1. The roadmap for Debit Plus spans years.

Speaker 2

We have a lot to build. So this is not even remotely the final movement of that particular thing.

Operator

Our next question comes from the line of Dan Dolev with Mizuho. Please proceed.

Speaker 9

Hey, guys. Excellent quarter. I love the acceleration in revenue less transaction costs. Great job there. Quick question, guys and Max.

Speaker 9

I think you're guiding to a slightly lower revenue less transaction cost In the Q4 and long term, you're still saying 3% to 4%. Can you maybe bridge us kind of that how to To that long term, what do you envision to get to that sustained long term? Thank you.

Speaker 4

Yes. We still feel very confident about 3% to 4% in the long run. This quarter was, again, in the higher end of that range And also ahead of our expectations that we had provided guidance for in February, and yet we do Forecast a sequential reduction in that as a percentage of GMV into next quarter. But again, I think that two factors to think about are We have a sequential growth in GMV and we use our warehouse funding. That means that we provide the provision for the loans that originated up And we are a little bit back end in how those earn.

Speaker 4

And that is very similar to what you saw in Q3. We were benefiting in Q3 from the origination and balance sheet Adji, in Q2, and we anticipate a similar trend to play out for Q4 versus Q3. And then separately, it is just the case that we have a very volatile capital markets. So our guidance is always going to try to Assume what we think we have high degree of confidence in, and we have a lot of sensitivity to our ability to execute there. And so when we think about building guidance in our forecast, we're pretty careful about making sure we have in the model The deals that we expect to be able to complete in the quarter.

Speaker 9

Got it. Thank you. Great results. Appreciate it.

Operator

Our next question comes from the line of James Faucette with Morgan Stanley. Please proceed.

Speaker 10

Hey, everybody. Thanks a lot for all the color and questions today. Given your APR cap increases, I think you said across half of roughly your merchants. Two things associated with that. When do you expect that to be complete?

Speaker 10

And How much incremental application demand is that allowing you to convert? Any metrics you can share there?

Speaker 4

Yes. On the first, I don't think that we're ever going to get to 100%. So Complete is probably like never. I mean we're going to keep moving forward and try to continue to expand it. We don't expect to ever be at 100% of our merchants for a variety of reasons we can go into.

Speaker 4

But we do anticipate continuing to make progress with Respect to merchant amendments to allow us to go up to 36%. We have a lot of wood left to chop and we're going to keep working on that between now And the rest of this calendar year. When you think about what that does for approvals, it's It's a very simple answer. It's really complicated math. But the simple answer is we try to maintain the same level of unit profitability.

Speaker 4

And so The extra revenue allows us to approve proportionately more, and offsetting the associated Credit losses you'd expect in those marginal populations. And we do think about it on a portfolio basis. And so it is obviously something that Allows us to create a lot more economic yield across the portfolio and approve more consumers as a result. It is also the case that we need some of that to offset the rising cost of funding and The unit economics that we need. So not all of it will go to expanded approvals.

Speaker 4

And certainly, there are a set of approvals that we simply can't And don't want to approve, right? We don't consumer defaulting on loan is a bad outcome that we seek to avoid. And so we'll never get We approve a consumer who we think will. That being said, it is the current posture of the business given the credit tightening that we've done do allow us to be Expansionary with any 36% cap.

Speaker 10

Got it. Got it. And then appreciate that. And then just quickly on Friends, I know that you kind of mentioned, that you'd seen strong services and travel, although a little bit of weaker performance in discretionary. Has that changed at all or worsened maybe for discretionary through April and the 1st few days of May?

Speaker 2

I think the short answer is no. We're not seeing particularly Seem to be a movement in either direction. Travel remains very strong.

Speaker 4

Yes. And The other color on the quarter, we mentioned our strength in direct to consumer. Our guidance definitely Point to that trend continuing, where we also have strength in some of our largest partnerships that are Either accelerating or still growing at very, very fast clips. And travel and ticketing remains a real bright spot. We continue to see weakness in sporting goods overall, although as we get through the next quarter, We do have what used to be our largest partner will now be less than 1% of our GMV going forward and becomes very Trivial and so some of the sporting goods headwind will become a lot less of an impact in the GMV growth rate of the business.

Speaker 4

And then obviously categories like home and lifestyle and electronics continue to be in a pretty Suppressed levels when thinking about their comparisons. We do think that as you get to Q3 of next fiscal year, when we get to about 9 months from now, you will begin to lap a lot easier comps. And so we're Optimistic that by the time we get there, some of those businesses will return to some solid growth. But for now, the headwinds there continue.

Speaker 10

Great. Thanks for

Speaker 2

that.

Operator

And our next question comes from the line of Rob Wildhack with Autonomous Research. Please proceed.

Speaker 11

Hi, guys. With Debit Plus Out in the wild now, can you give us some additional color on the unit economics there and how they fit into the 3% to 4% RLTC See as a percentage of GMV that you have in the core business?

Speaker 4

We do plan on giving a very detailed breakdown for investors later this year, not today. But, again, and think about the products GMV, the Stuff that looks like installment loans will fit within our frameworks today because they are very similar loans and they should have similar Economics and more funding requirements, similar it's more of what we do every day. The volume that, we call Pay Now that comes out of the consumers' accounts a few days after they swipe the card, Those will have different economics. Today, that's not the majority of the volume running on the card, but we'll watch that closely and give

Speaker 2

investors a way to think about

Speaker 4

modeling that as it becomes material. There's a way to think about modeling that as it becomes material.

Speaker 11

Okay. And then Notice that you reaffirmed the commitment to positive adjusted operating income exiting this year. As you think about or look to that over the medium term, what's the current line of thinking on The level of reinvestment you need to continue to scale versus your ability to generate real operating leverage and start to drop some of that more and more to earnings?

Speaker 4

It's a good question. So, as you saw in this quarter and our guidance kind of implies, We expect to continue to drive real leverage in G and A. Sales and marketing on a non GAAP adjusted basis We'll continue to be slightly volatile in that. Some of our co marketing commitments are a little bit more episodic. So you'll see that number kind of Bounce around a little bit, but over time still showing real leverage.

Speaker 4

But the area of the business that we do intend to continue to invest in is tech data analytics. That enables growth in the business both in the near term and enabling us to add infrastructure and acquire more data, but also Hire engineers and product managers to build product to change the world. And so we are going to keep doing that. And we intend to keep our foot On the gas with the technology side of the business and showing leverage in the other parts, we've not given a framework for what that means in terms of Bottom line profitability growth or the trend of adjusted operating income, but we do intend to update investors on that later this year.

Speaker 10

Okay. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the call back to Zane Keller.

Speaker 1

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

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for

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Earnings Conference Call
Affirm Q3 2023
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