Affirm Q2 2024 Earnings Report

Affirm EPS Results

• Actual EPS: -$0.20
• Consensus EPS: -$0.28
• Beat/Miss: Beat by +$0.08
• One Year Ago EPS: N/A

Affirm Revenue Results

• Actual Revenue: $591.11 million
• Expected Revenue: $523.92 million
• Beat/Miss: Beat by +$67.19 million
• YoY Revenue Growth: N/A

Affirm Announcement Details

• Quarter: Q2 2024
• Date: 2/8/2024
• Time: N/A
• Conference Call Date: Thursday, February 8, 2024
• Conference Call Time: 5:00PM ET

Affirm (NASDAQ:AFRM) is a financial technology company that provides point-of-sale consumer lending and payments solutions for online and in-store purchases. Its core product is a buy-now-pay-later (BNPL) platform that enables consumers to split purchases into fixed, transparent installment loans with no hidden fees. Affirm offers a range of financing options through merchant integrations, a consumer-facing mobile app and virtual card capabilities, and tools for merchants to offer alternative payment methods at checkout. The company emphasizes transparent pricing and underwriting that leverages transaction- and credit-related data to assess borrower creditworthiness.

Founded in 2012 and headquartered in San Francisco, California, Affirm has grown from a single-product startup into a broader payments and lending platform for consumers and retailers. The firm completed its initial public offering in January 2021 and has since pursued partnerships with large e-commerce platforms and retailers to expand the availability of its financing options. While Affirm’s primary market is the United States, it has worked to extend its services internationally through strategic partnerships and expansions with merchants that sell across borders.

Affirm’s management and technology focus on combining underwriting, payment processing and user experience to drive higher conversion and purchase sizes for merchants while offering consumers predictable repayment terms. The company is led by founder and chief executive Max Levchin, who has been a public face of the business since its founding. Affirm competes with traditional credit-card issuers, other BNPL providers and fintech lenders by positioning its products as a transparent, easy-to-use alternative to revolving credit and payday-style options.

Affirm Q2 2024 Earnings Call Transcript

Key Takeaways

• Affirm raised its full-year GMV guidance by $1 billion after Q2 GMV growth beat forecasts by $700 million, emphasizing that the updated outlook serves as a conservative “floor.”
• Revenue-less-transaction-costs margins held in Affirm’s target 3–4% of GMV, underpinned by a favorable macro environment and stable merchant/product mix, with current unemployment and rate curves baked into loss assumptions.
• Affirm Card usage accelerated to around 100,000 new cards per month, driven equally by holiday seasonality and underlying adoption, while the Shopify partnership delivered GMV growth roughly twice the rate of the overall platform.
• Since April 2022, Affirm has maintained a disciplined credit box, applying only marginal adjustments by merchant and product, and credits improved engineering productivity for a faster turnaround in risk and unit economics.
• A recent ABS transaction was priced at an all-in cost of capital about 100 basis points lower than December, highlighting strong investor demand and complementing Affirm’s mix of whole-loan sales and warehouse funding.

Presentation

[Operator]

Welcome to the Affirm Holdings, Inc. second quarter fiscal 2024 earnings call. Following the speaker's 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, Investor Relations. Thank you. You may begin.

[Zane Keller, Director of Investor Relations at Affirm]

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, and the company does not assume any obligation or intent to update them except as required by law. 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.

[Zane Keller, Director of Investor Relations at Affirm]

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

[Max Levchin, Founder and CEO at Affirm]

Thank you, Zane. Thank you all for joining us today. We're excited to share the results of another great quarter. As is our custom, the better the results, the fewer words we use to comment on them. This time around, I feel good enough to go directly to the Q&A. Back to you, Zane.

[Zane Keller, Director of Investor Relations at Affirm]

Thank you, Max. With that, we will now take your questions. Operator, please open the line for our first question.

[Operator]

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue, and you may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Ramsey El-Assal with Barclays. Please proceed with your question.

[Ramsey El-Assal, Managing Director at Barclays]

Hi. Thanks for taking my question this evening. I was wondering if you could help us think through RLTC for the remaining two quarters of the year. Sort of what are the drivers, puts, takes, variables that could impact RLTC and drive underperformance or outperformance? How should we think about those kind of variables?

[Michael Linford, CFO at Affirm]

Yeah. I think, obviously, if you're thinking in terms of percentage of GMV, there's a number of factors, mix and macro, at the top of the list. If you're thinking about total dollars, then GMV on the platform was going to be the biggest driver of results there. In terms of the RLTC rate, the take rate on a percentage of GMV, it's really mix and macro. So the mix of business across our merchant base and the products that we offer there. And from a macro perspective, everything going on with consumers and rates would be there. We really like the environment we're in right now. That's why we've updated our full-year guidance like we have. And so we feel good about the back half of the year, RLTC margins as a percentage of GMV, and feel good about that because of the macro environment that we're in.

[Michael Linford, CFO at Affirm]

As per the usual, we take the current macro signals, current levels of unemployment, current forward curve, and make those into our assumptions. But obviously, there's scenarios where those could move one way or the other that would change the outcome for us.

[Ramsey El-Assal, Managing Director at Barclays]

Okay. A follow-up from me. On slide 10, where you list out your GMV vertical mix, it looks like general merchandise has picked up quite a bit from travel and ticketing. Or travel and ticketing has gone down and general merchandise gone up. Are there any drivers to call out there? I guess more broadly, can you just comment on performance across key verticals in there?

[Michael Linford, CFO at Affirm]

Travel and ticketing is a very seasonal category. A lot of folks book summer vacation travel in the first two calendar quarters, last two fiscal quarters of our year. It tends to be lowest in terms of bookings in calendar quarters like Q2. We think there's a huge seasonality factor there. For general merchandise, some of our largest merchant enterprise partners fall in that bucket. As we continue to scale those, we will see lots of purchases there. It's not unusual for that to be a category that spikes in and around holiday season as a lot of holiday shopping is done in those channels.

[Ramsey El-Assal, Managing Director at Barclays]

Got it. Makes perfect sense. Thank you.

[Operator]

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

[Andrew Jeffrey, Managing Director at Truist Securities]

Hi. Appreciate you taking the question. Max, brevity is indeed the sister of talent. He makes that very clear. So I've got a couple of questions just on GMV growth and tender share. As I recall, you've tightened the credit box about a year ago. And obviously, the back half of the fiscal year looks strong. Can you comment, either Max or Michael, just on kind of how underwriting and risk are factoring into that strength? And then the corollary, I guess, or the follow-on would be around tender share, your enterprise customers. And it appeared to be elevated during the holidays. And I just wonder if that's a sign of accelerating tender share to come or aspirational tender share growth.

[Max Levchin, Founder and CEO at Affirm]

Appreciate the comment, first of all. The underwriting settings so the single most, I would say, accelerated change we've conducted to our, as they call it, box was really more of a year and a half ago than a year ago. April of 2022 is when we saw real stress on the consumer. We reacted to that sort of within the next 60 days or so. We've since really not done an enormous amount of significant steering. We change marginal cutoffs on a merchant-by-merchant, category-by-category, product-by-product basis all the time and also change things like allowed terms, as in durations, required down payments, etc. We've managed credit very, very actively since sort of the beginning of time for us. There's not been a major change to our posture in the last year and a half. The numbers that we printed just now are not an accident.

[Max Levchin, Founder and CEO at Affirm]

We drove them to be what they are very, very deliberately. I don't want anybody to sort of assume that we're hands-off and the numbers just print themselves. It's a lot of work. We care quite a lot where they end up. We have certain expectations we've set with capital markets. We intend to continue delivering those expectations. So that's first and foremost. That governs a lot of our metrics as output to that. The tender share, share of wallet as we call it internally, has done really well over the holidays. We've generally been gaining wallet share, although the stories are different category to category and in some cases, merchant to merchant. We feel very good about some of the things that we announced. Obviously, offline, we were not a noticeable player until recently.

[Max Levchin, Founder and CEO at Affirm]

And between the card and some of the offline self-checkout kiosks was really powerful. And then just to sort of call out one particularly strong performance, over the holidays especially and overall in the last quarter, Shopify has just continued to perform extraordinarily. The growth of that particular partnership is accelerating 3+ years into the partnership. That set of products grew about twice the speed of the rest of Affirm. And so it's just been a story of success to success. And we still have a lot of things that we have not scaled out. They have their own offline aspirations that we're obviously very excited to be a part of, etc. And so it's a little bit of a and I'm giving a very long-winded answer here. But frequency for us is being where consumer shops.

[Max Levchin, Founder and CEO at Affirm]

Share of tender comes as a consequence of being available and being able to support the various consumer needs as we encounter them. The only thing I'd add is we did with the 36% APR caps that we were able to get in place, we were able to be more expansionary in a number of places. That is completely done now. So we wouldn't expect any more volume benefit there, although there is still some margin benefit we think that will come as the program continues to roll out and scale. But we wouldn't expect any more volume there because of 36.

[Andrew Jeffrey, Managing Director at Truist Securities]

Thank you. Appreciate it.

[Operator]

Thank you. Our next question comes from the line of Reggie Smith with JP Morgan. Please proceed with your question.

[Reggie Smith, Executive Director of Equity Research at JP Morgan]

Hey. Good afternoon and congrats on the quarter. I guess you kept your comments short. But I guess where were you most surprised? Because this was a pretty big beat. And then add a follow-up after that.

[Michael Linford, CFO at Affirm]

We try to run a tight ship. So surprises are rarely a welcome thing if they are to the good. I mean, I already called it out. But I thought Shopify as a company appears to have done a fantastic job with their products. And we stand to support our partners there and have done well together. Let's see. What other surprises? Don't like surprises, Reggie. I feel like anytime somebody surprises me there, I'm not going to like the outcome. Actually, I'll give you one very surprising fact, which is a little bit of an inside view. But we have very noticeably accelerated our ability to ship software. And I had anticipated some of that. But I'm quite surprised by how productive the teams have been on the engineering side, on the product side, on the design side. Sort of percolates down to revenue, etc.

[Michael Linford, CFO at Affirm]

Generally speaking, I expected that we would rally around the goals, especially from sort of the low point of this time last year. But if it's a turnaround, it's a much faster and more aggressive turnaround than I myself expected.

[Reggie Smith, Executive Director of Equity Research at JP Morgan]

Got it. And then just looking at the seasonal patterns of your margins, the back half of the year tends to be better than the front half of the year. And when I look at your full-year guidance for your operating margin, I guess it implies and even third quarter, I think it implies a pretty substantial sequential increase in expenses below the RLTC line. What's driving that? And kind of where should we see that show up? Is it a marketing thing? Is it technology? My rough math was almost like $20 million in sequential increase there. I'm not sure if that's right or not. But if you can comment on that a little bit, that would be helpful.

[Michael Linford, CFO at Affirm]

Yeah. We don't provide a specific guidance number for there. So sometimes the way in which we build our guidance can lead to a little bit of exaggeration on that as you calculate it. But that's right. There's a couple of factors to think about. Firstly, we and this will sound very trivial, but I promise you it does actually end up becoming pretty big. We do expect there to be a lot more payroll tax associated with stock-based compensation in our first quarter, both because people have reset their tax obligations with the new year, but also because the share price is higher. And both those two things will create a little bit of the sequential bump from quarter to quarter. And then we remain really excited about the opportunities that are ahead for us.

[Michael Linford, CFO at Affirm]

And so we're continuing to be thoughtful around where we should be adding resources to go build new products and chase the new opportunities. And I think the strength in this quarter's results with respect to our unit economics and operating efficiency give us license to be willing to add a little operating expense, whereas I think we've been very cautious to do that until we could demonstrate it.

[Reggie Smith, Executive Director of Equity Research at JP Morgan]

Understood. Well, congratulations. Great quarter.

[Michael Linford, CFO at Affirm]

Thank you.

[Operator]

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

[Dan Dolev, Senior Analyst of FinTech Equity Research at Mizuho]

Hey, guys. Great results. Congrats, Max and Mike and the team. I have two questions. The first one is on the guide. Obviously, the knee-jerk reaction, which we disagree with, was that the GMV guide is conservative. You "beat" by $700 million. You're increasing the guide by $1 billion for GMV. You sound very upbeat about the macro. Is it just conservatism?

[Michael Linford, CFO at Affirm]

Yeah. I mean, just like we have all year long for the full year, we're only providing a floor for our full-year guide. And so we did take our floor up by $1 billion, which we think is a pretty big step up in what we would expect for the year. We remain very upbeat and excited about the opportunity.

[Max Levchin, Founder and CEO at Affirm]

Got it. Yeah. No. That's what it seems like. And then maybe one other question on kind of the direct deposit opportunity. You've had tremendous success with the card. Can you maybe talk a little bit about what you're seeing in terms of the usage and frequency for the people that are doing the direct deposit into the card or into the Affirm app?

[Michael Linford, CFO at Affirm]

It's a little early. We gave the feature a name about 60-something days ago. So it's a little early to brag about the results. But I feel very good about it. It's done in the early versions that it is about as well as we could hope for. We have a lot more things coming for that product. We're working on a couple of very specific things that are just required before you can really call yourself an account. But feel great. It's definitely and I think I mentioned this before. But there's kind of 3 stages of Affirm usage. If you are a not cardholder, not account holder, regular user, your frequency is 4.5 transactions a year. It grew again 20%+ year-on-year. But if you have a card that goes up quite a lot, it goes up about 4x.

[Michael Linford, CFO at Affirm]

Then it grows again, again, fairly significantly if you are an account holder. Very excited to give more accounts to people because that's ultimately a frequency driver for us as well.

[Dan Dolev, Senior Analyst of FinTech Equity Research at Mizuho]

Got it. Well, it sounds like a huge opportunity. And congrats again.

[Michael Linford, CFO at Affirm]

Thank you.

[Operator]

Our next question comes from the line of Rob Wildhack with Autonomous Research. Please proceed with your question.

[Rob Wildhack, Director and Equity Research Analyst of Consumer Finance, Fintech, Payments at Autonomous Research]

Hey, guys. Maybe I'll ask a question on volume in a different way. I think the shareholder letter called out three quarters of accelerating volume growth. And then within the December quarter, each month accelerated too. The updated outlook for the rest of the year seems to point to a pretty healthy slowdown in the second half, half over half. So I wanted to get your thoughts on what might be driving that slowdown, if there's anything specific that you're seeing.

[Michael Linford, CFO at Affirm]

Again, I think the full-year outlook for us is just a floor. We've not given even a range or a ceiling to where we'd expect. Any calculation being done on Q4 is probably not getting to midpoint. Any Math you're doing on that number, inclusive of our Q3 range, is probably squeezing that number quite a bit. Separate from that, we had a really good Q2, right? The really strong second quarter isn't something that we would ever take and say, "That's a fundamental change in the business. That's something we would take credit for, be very happy with." We'd be pretty cautious about how we would build up the outlook for the balance of the year and want to be mindful of all of the factors that can go into that.

[Michael Linford, CFO at Affirm]

But there's nothing in our business that would suggest that we're slowing down right now.

[Rob Wildhack, Director and Equity Research Analyst of Consumer Finance, Fintech, Payments at Autonomous Research]

Okay. Thanks. And then, bigger picture, and appreciate that this may not be in play for this fiscal year. But how would you expect potential interest rate cuts to flow through to funding costs? And then, strategically, would you want to drop those savings to the bottom line via higher RLTC margin or do something different?

[Michael Linford, CFO at Affirm]

That's a great question. So whenever we think about a change in rates, we need to understand why the rates are moving. Certainly, if the rates are moving in response to other stress in the economy, specifically employment, then it's not our one-for-one benefit. But if you hold all other factors constant, then a decline in rates would help us on the RLTC line. We would seek to continue to run the business in the 3%-4% range that we've talked about really since we've gone public. And if we were able to be earning at the high end or above that, we would seek to reinvest that in products to acquire new users and reengage them.

[Rob Wildhack, Director and Equity Research Analyst of Consumer Finance, Fintech, Payments at Autonomous Research]

Okay. Thanks, guys.

[Operator]

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

[Jason Kupferberg, Senior Equity Research Analyst at Bank of America]

Thank you. So you highlighted in the shareholder letter, I think, that two-thirds of the revenue growth in the quarter was from interest income. Is it fair to say that's also the revenue line item that surprised you most to the upside relative to your guidance? And just curious how much of the revenue guidance range for the fiscal year is coming from the interest income line. You guys have obviously been doing a really good job on that side of the equation.

[Michael Linford, CFO at Affirm]

No. Certainly, we're happy to have the unit economics we do have. But I think we were probably more surprised with the healthy merchant fee growth. Whenever merchant fees outpace GMV growth, it creates a pretty good flow-through to the full P&L in a way that's outsized. So I think some of the strong performance we had above our expectations around RLTC and the flow-through for the full P&L was actually driven by the really healthy merchant fee line. Yes, the total aggregate revenue growth wasn't there. But remember, against that, interest income growth is a pretty steep rise in funding costs. And that's driven by both the balance sheet growth as well as the higher benchmark rates that we're in this year. And in fact, funding costs grew faster than interest income.

[Michael Linford, CFO at Affirm]

And so while that was important for us to be able to get the business where it is, it's also the case that we don't see that as the real tailwind here. We're still managing through a rate environment that's substantially lower last year than this year. And as those things abate, then we will begin to see the benefit of that into the future.

[Jason Kupferberg, Senior Equity Research Analyst at Bank of America]

Okay. No. That makes sense. And then just like a two-part question on GMV, what's your latest expectation for Affirm Card GMV this fiscal year? And then any comments you might have around January GMV trends? I'm kind of curious because we heard from others that card present volume suffered because of the severe weather. So just wondering if your business benefited at all from that. Thank you.

[Michael Linford, CFO at Affirm]

So we've not given any outlook for the card. And I won't now. What I would say in the letter, we talked briefly about the seasonality of the card. And I think this is a really important thing for everybody to pay attention to, which is the card had really strong growth from Q1 to Q2. We would estimate that about half of that growth in card volume was actually underlying seasonality. And the other half was growth in the card, which just means as you think through where the volume should be for the card in the balance of the year, just keep in mind the Q2 starting point is benefited by a pretty big step up from Q1 to Q2 from seasonality as consumers do spend more in the holiday season. And we're still early enough with the card, fortunately.

[Michael Linford, CFO at Affirm]

We're not seeing things like weather impact our card performance.

[Operator]

Thank you. Our next question comes from the line of Jill Shea with UBS. Please proceed with your question.

[Jill Shea, Equity Research Analyst at UBS]

Good evening. Thanks for taking the question. I was wondering if you could provide us an update on the Shopify partnership and any stats that you could share with us? That would be great. Thanks.

[Max Levchin, Founder and CEO at Affirm]

It's one of the highlights of this last quarter. It's going unbelievably strong. It accelerated for the fourth consecutive quarter. The program is over three years old. The fact that it's still picking up steam is just great. They've been extraordinary partners to us. Nothing but wonderful things to say about Tobi and Kaz and Harley and his hard team there. They've just been nothing but excellent in both their execution and the partnership that we had. I think I already dropped that stat. The program at Shopify grew twice the speed of the overall Affirm growth on the GMV side of things. They have aspirations offline that they're going after quite strongly. There's a lot of synergies in what we're doing now there. We have a whole host of programs we're contemplating going forward. Lots of wood to chop, feeling very good.

[Max Levchin, Founder and CEO at Affirm]

The fact that it's accelerating suggests that there's just more growth to be had for both of us.

[Jill Shea, Equity Research Analyst at UBS]

Very helpful. Thank you.

[Operator]

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

[James Faucette, Managing Director at Morgan Stanley]

Great. Thank you very much this afternoon, guys, for all the time. I wanted to ask on 0% promotions. It seemed like, at least anecdotally, those increased some, particularly towards the end of the December quarter. I think in your supplements, you showed that 0% long-duration merchant rates had picked up. Can you talk a little bit about what's driving that merchant rate tick-up? Is it just longer duration generally within that long group? And how should we think about that both in terms of impact on RLTC margin but also just in terms of the type of customer that you're bringing in with those promotions? Just wondering if that's enough to move the needle on some of these other metrics.

[Michael Linford, CFO at Affirm]

Yes. That's a good question. As rates have gone up, any of our longer-term 0% programs have needed higher merchant fees. I really think there's really not much more to it than that. It's the mix and tied to benchmark rates. In terms of the customers that we bring in, it does skew a little bit higher on the credit spectrum when you do those kind of products. Given the high levels of repeat, it's not really going to change the average as much at Affirm. We, of course, have been very active. We're meeting our merchant partners where we could in providing anything promotionally in the second quarter. We'd continue to do that. It didn't change an awful lot from the prior quarter in terms of its total mix. I don't really think there's a fundamental trend there.

[James Faucette, Managing Director at Morgan Stanley]

Got it. Got it. And then I wanted to ask maybe it's a little bit convoluted question. But you're obviously growing the Affirm Card really nicely. Kind of that run rate that you talked about seems to be around 100,000 cards a quarter or, I'm sorry, a month. How should we think about it? A, I'm wondering how we should think about the availability or the credit pool available and how that's growing by comparison, right? Because as you send out cards, people will use it. You said most of that is interest-bearing. So some of that available credit gets absorbed. But then there's new credit growth in that pool as you add more cards. So just how should we think about that potential to buy pool growing vis-à-vis the growth in cards? Hopefully, that question makes sense.

[Max Levchin, Founder and CEO at Affirm]

I'm going to try to answer. But feel free to tell me that I'm answering the wrong question, James. So I think you're asking I mean, I guess the way I'm interpreting this or I'll at least try to answer is, does the card availability to consumers create new pools of available transactions for us to take on? And the answer is yes.

[James Faucette, Managing Director at Morgan Stanley]

Yeah. That's a good question.

[Max Levchin, Founder and CEO at Affirm]

Yes. Our offline usage with the card versus without the card is drastically different. And so all of those transactions are entirely incremental. It's not really all that magical why transactions of the cardholders are significantly higher than average transactions for non-cardholder Affirm user. It's because these people are first of all, they're more committed because they requested a card. And two, they're bringing it to stores. So it just touches a larger open field of opportunity. In terms of underwriting and sort of our exposure on the credit side, etc., there's no change in the sense that we and we've talked about this before. But for the longest time, our sort of calling card in the underwriting world was this thing called ITACS, which is the Internal Transactional Affirm Credit Score. And that allowed us to do really precise underwriting at the transactional level.

[Max Levchin, Founder and CEO at Affirm]

Some number of quarters ago, we have augmented that with a user credit score, which allows us to underwrite both sort of a more holistic consumer in addition to every individual transaction. We still underwrite every transaction. We still reserve the right to say, "We cannot lend money to you." But we have a score that we feel very good about in our ability to say, "What's the overall capacity to borrow and pay us back and willingness to do so?" And we lend on the card and off the card using the same set of scores and the same set of variables and limits. And so you can borrow from Affirm using an integrated point-of-sale solution. You can borrow on the card with two different modalities of borrowing on the card.

[Max Levchin, Founder and CEO at Affirm]

But all of it goes against the same set of variables and same set of observed behaviors that governs our ability to approve the next transaction. The thing that's great about the card is that it's optimized for convenience in everything like multi-layer checkout environments all the way to online shopping. So it's an expansion of opportunity but not an expansion of our willingness to take on more risk. I think that answers it. But I'm happy to provide lots more details if you feel like.

[Michael Linford, CFO at Affirm]

I think the other thing to say is I don't think we're anywhere near the limits on what we think we would think about exposure limits for these users. We're nowhere near some sort of cap there for the population. We think there's a lot of frequency that we can drive with the existing users.

[James Faucette, Managing Director at Morgan Stanley]

Yep. Great. Great. Appreciate that, Max. Thanks, Michael.

[Operator]

Thank you. Our next question comes from the line of John Hecht with Jefferies. Please proceed with your question.

[John Hecht, Managing Director at Jefferies]

Afternoon, guys. Thanks for taking my question. Just thinking about kind of the appetite for selling versus retaining the loans that you guys generate this year. I mean, you have interest rate. At least the curve is going down. It looks like sale execution is getting better. You guys had an ABS transaction, I think, yesterday. The execution there was good. So how do we just think about kind of balance sheet movement versus marketplace movement over the course of the year?

[Michael Linford, CFO at Affirm]

Yeah. Thanks for the question. So we did price an ABS deal. And we did so at an all-in cost of capital 100 basis points lower than a deal we did in December. So in a very short period of time, you're seeing the market really give us credit for that. And that, we think, is a really healthy sign for the capital system and ecosystem overall. And we think it's a reflection of both an improved macro outlook for everybody. But for us more specifically, the disciplined approach to credit that we've taken over the past year is getting valued, we think, in the debt capital markets. And so we feel very strong about that. When we do the revolving ABS deals like the one we just did, our 24A deal, those do end up on the balance sheet.

[Michael Linford, CFO at Affirm]

And so while we do think about that as a really important funding channel, it isn't off-balance sheet. Our off-balance sheet strategies involve mostly selling whole loans, although we do some non-revolving, some term securitizations. With respect to the whole loan sales, we feel really excited about both the existing partners expanding and the pipeline of new opportunities that we have. Those conversations have gone very well, I think, very consistent with the reaction that the ABS market has had. There's real value being given to us for the kind of credit outcomes that we've driven. And frankly, the yield that we've put into the asset has allowed us to continue to be able to sell at prices that are really good for us. As is always the case - and we've said since day one - we don't have one strategy that's better than the other.

[Michael Linford, CFO at Affirm]

The things that we do are, first and foremost, enable the growth in the business. I'm extremely proud of the way the team has been able to support the capital program over the past year through all the volatility, enabling all the growth that we've delivered. The second priority is to deliver our unit economics. Clearly, if we're running in the 3%-4% range like we did this past quarter, we feel very strong about that. Then we begin to want to manage the capital efficiency of the program. That's the third piece. Obviously, whole loan sales are more efficient. It's the third of the three priorities. So we wouldn't really want to overuse that lever. Then the last comment is each of our capital strategies really exist and reinforce one another.

[Michael Linford, CFO at Affirm]

So you really won't see us pivot to one or the other. We're going to continue to scale all of our channels. That means continued ABS execution, continued forward flow, and continued use of our warehouse lines.

[John Hecht, Managing Director at Jefferies]

Okay. My other question was asked and answered. I appreciate the color. Thanks very much.

[Operator]

Our next question comes from the line of Kevin Barker with Piper Sandler. Please proceed with your question.

[Kevin Barker, Managing Director and Senior Equity Research Analyst at Piper Sandler]

Thanks for taking my questions. So there was a little bit of a tick-up in that charge-off rate in the quarter. It seems like you built reserves last quarter that may have preempted the charge-off coming through. Or it could be partially seasonality as well. Is there anything to point out there? And would you expect that charge-off rate to drift lower just given you're seeing a larger portion of GMV being driven by Affirm Card? Thanks.

[Michael Linford, CFO at Affirm]

No. I don't think the card is going to drive different credit outcomes for the whole portfolio. I think the level of repeat usage might where you do see better credit outcomes on repeat users overall. But I don't think the card is big enough really to affect the total portfolio numbers yet. Obviously, when it gets much larger, it will begin to have a more material impact. But for now, I think it's small enough. And yeah, there's really nothing to point to specifically on the charge-offs. Again, to think about our charge-off policy, we charge off at 120 days. Delinquencies, once they get to past 60 or 90 days, are overwhelmingly likely to go towards charge-offs. So we have a pretty good sense of that and full allowance at all times to handle the future charge-offs that we estimate.

[Max Levchin, Founder and CEO at Affirm]

I think you mentioned that you were leaning in a little bit last quarter. Are you opening up the credit box to attract more users? It seems like it's an opportune time to do that just given your acceleration here and profitability that's being generated.

[Michael Linford, CFO at Affirm]

Yeah. I think the strong units give us permission to do that more than anything. So we talk about 3%-4% in the Revenue Less Transaction Costs as a percentage GMV. That's the real constraint for us. And so if we're in that range, we can continue to be very aggressive about acquiring and reengaging new users. And that's really the constraint much more so than anything else.

[Max Levchin, Founder and CEO at Affirm]

Thank you.

[Operator]

Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from the line of Michael Ng with Goldman Sachs. Please proceed with your question.

[Michael Ng, Managing Director of Global Investment Research at Goldman Sachs]

Hey. Good afternoon. Thanks for the question. I just have two. First, a housekeeping question. Could you just help explain the uptick in the merchant fee rates for the long core zeros? And are there any initiatives or mixed dynamics that may affect that going forward? And then second, just a bigger picture question. Transactions per active have obviously been growing 4.4 this past quarter. You're also seeing really strong repeat customers. What does that tell you about the loyalty or engagement of customers and the durability about the install base of users? Are these customers using this because it's become more habitual and it's a better experience? Or is it out of a necessity of credit? Thank you.

[Michael Linford, CFO at Affirm]

On the first question, it really is just a function of the mix in our business. That's always been true for merchant fee rates. We always talk about merchant fee rates as being mix-driven. That's why we began breaking it out in the supplement. The slight tick up you see on one of the categories is really just a function of mix within that category. Also as duration goes up, so does the price, especially in this rate environment where it's pretty duration-sensitive in terms of the prices that you charge. Again, I don't think there's a broader trend to be read into there. On the frequency question, I'll let Max answer that.

[Max Levchin, Founder and CEO at Affirm]

I think it's a reflection of the fact that the product is becoming more widely available more than anything. I think as we sign up some of the partnerships and expand them, like the Shopify reference I made earlier, it does result in wider availability. The product is popular. It's well-liked by the users. One of our top questions in customer service is, "Why isn't brand X supporting Affirm right now?" And we work very hard to make sure there are fewer and fewer of those. And so as we become more available, also as we become available offline in the form of the card as well as some of the integrations that we've done, you'll naturally see more transactional velocity and frequency increase. The product is a better product in my highly biased opinion than that of a credit card.

[Max Levchin, Founder and CEO at Affirm]

As credit utilization goes up broadly, I think we are the unfair beneficiaries of that usage. Given a chance or choice, consumers opt in for more Affirm spend than credit card spend. They're rewarded by having no late fees, no compounding interest, all the good things it would bring.

[Michael Ng, Managing Director of Global Investment Research at Goldman Sachs]

Thanks, Max. Thanks, Michael.

[Operator]

Thank you. Our next question comes from the line of Andrew Bauch with Wells Fargo. Please proceed with your question.

[Andrew Bauch, Director of FinTech Equity Research at Wells Fargo]

Hey. Thanks for taking the question. Excuse me if this has already been asked. I just want to get an update on what you've seen with Affirm Card usage and anything that's surprised you another three months into its evolution around behaviors or categories. Just anything broadly around that would be great.

[Max Levchin, Founder and CEO at Affirm]

It's going really well. You can see in the supplement that we are continuing to grow it. From my point of view, for what it's worth, we're growing it cautiously for a couple of good reasons. One, it's a new mode of operation, which means that the downstream services such as customer service, dispute resolution, merchant disputes, etc., also have to scale. And so we're going to grow it deliberately for a little while longer before we feel that we've learned all the important muscle memories of how to handle various conflicts that inevitably occur in commerce, etc. And so I feel very good about the growth. We'll have many, many more turns on potentially increasing that. In terms of surprises, I think it's all generally gone to plan. There is plenty more to do on reasons to use the card more often.

[Max Levchin, Founder and CEO at Affirm]

We talked about at the investor event last year, we're dangerously close to actually making good on it. We have reward programs in mind that give people reasons to use the card for all transactions, not just considered purchases. There's plenty to do with tighter integration between Affirm Card and Affirm account, which we've done a couple of things with. But there's still more features to come. And so from my point of view, the card is still very, very early. There's just a long roadmap of things to do there, both on the frequency of use basis as well as modalities but making sure that consumers really understand the full power that it brings. And then once we feel that that's really all figured out, we have a lot more growth to enable there when we see that it's the right time to do it.

[Andrew Bauch, Director of FinTech Equity Research at Wells Fargo]

Is that next leg of growth just a function of then you finally get the green light to put the extra leg of sales and marketing dollars into the card and into really the solution in order to kind of find that next leg of growth? Or is it just moving further into that type of customer?

[Max Levchin, Founder and CEO at Affirm]

No. I don't anticipate any marketing dollars allocated towards distributing the card in any foreseeable future. It's not in any budget. That is not how it's going to get grown. So today, to get the card, you have to have been an Affirm transactor before. You have to be in good standing. You have to be fairly far down the Affirm journey. And then you have to react to one of the now fairly visible sort of adverts when we say, "Hey. Do you want to use the Affirm Card? We really think you should try it. You're eligible." So we've marketed it without too much restraint, although it's still being kept to a higher credit quality standard than the overall Affirm.

[Max Levchin, Founder and CEO at Affirm]

So we're still tilting the scale a little bit in our favor in terms of consumers that get the card offers are not quite at the same level of cutoff as everybody else. And so that's one obvious way of opening up the funnel. But you can imagine a much more aggressive approach where, for example, right now, you have a choice between taking out a loan on a one-time virtual card number. Or you can go down the rabbit hole of applying for a card. Obviously, taking away the former will naturally increase the latter. So there's several kind of non-dramatic but meaningful levers of growth that we have chosen not to pull on just yet. And then ultimately, if you sign up for Affirm, at some point, you're just going to get a card. And that's certainly not a thing we're going to do tomorrow.

[Max Levchin, Founder and CEO at Affirm]

But that is a meaningful trajectory changer.

[Andrew Bauch, Director of FinTech Equity Research at Wells Fargo]

Still sounds like it's going to be pretty targeted for a while here. Great. Thank you.

[Max Levchin, Founder and CEO at Affirm]

Not forecasting any time that that stops or goes. But I feel very good about the card growth for now.

[Operator]

Thank you. There are no further questions at this time. I would like to turn the floor back over to Zane Keller for closing comments.

[Zane Keller, Director of Investor Relations at Affirm]

Well, thank you, everybody, for joining the call today. We look forward to speaking with you again next quarter.

[Operator]

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

Participants

Executives

• Max Levchin, Founder and CEO
• Michael Linford, CFO
• Zane Keller, Director of Investor Relations

Analysts

• Andrew Bauch, Director of FinTech Equity Research at Wells Fargo
• Andrew Jeffrey, Managing Director at Truist Securities
• Dan Dolev, Senior Analyst of FinTech Equity Research at Mizuho
• James Faucette, Managing Director at Morgan Stanley
• Jason Kupferberg, Senior Equity Research Analyst at Bank of America
• Jill Shea, Equity Research Analyst at UBS
• John Hecht, Managing Director at Jefferies
• Kevin Barker, Managing Director and Senior Equity Research Analyst at Piper Sandler
• Michael Ng, Managing Director of Global Investment Research at Goldman Sachs
• Ramsey El-Assal, Managing Director at Barclays
• Reggie Smith, Executive Director of Equity Research at JP Morgan
• Rob Wildhack, Director and Equity Research Analyst of Consumer Finance, Fintech, Payments at Autonomous Research