Affirm Holdings, Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Affirm Holdings Fiscal Year 2022 Second Quarter Earnings Conference Call. At this time, all lines have been placed on mute to prevent any background noise. 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 your investor relations website for a reasonable period of time after the call. I'd now like to turn the call over to Ron Clark, Vice President of Investor Relations. Thank you. You may begin.

Thanks, Operator. Before we begin, I'd 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 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, but not as a substitute for, GAAP financial measures. Reconciliations to the most directly comparable GAAP measures can be found in today's earnings press release, which is available on our investor relations website. Hosting today's call are Max Levchin, a firm's founder and chief executive officer, and Michael Linford, a firm's chief financial officer. With that, I'd like to turn over the call to Max to begin.

Hello, and thank you for joining us on this earnings call. Affirm is just a handful of days away from its 10th anniversary, and this earnings report also marks the first anniversary of our public debut. While the road ahead of us is significantly longer than the one we've traveled so far, the occasion does warrant a moment of reflection on the execution of our strategy during the last 12 months. we feel great about our progress. We remain quite unpivoted and focused on delivering long-term compounding value to all our stakeholders, consumers, merchants, employees, and shareholders. As we introduced ourselves to the public markets a year ago, we talked about several key themes. First and foremost is our mission, which is to deliver honest financial products to improve lives and to do so while delighting the people we get to serve every day. Because the opportunity embedded in our mission is still so vast and open, consumer growth is very important to a firm. We've done very well. Indeed, our active consumer growth accelerated, growing by 150% to provide well north of 11 million people with a smarter way to pay. Growth for us is never just about getting the next million consumers. It's also about the impact we can have on the financial well-being of the folks who rely on our firm. We've also talked about our other all-important constituent, the merchant. Affirm is as much a safe and transparent pay-over-time option for the buyer as it is the ultimate marketing tool for the seller. We help our partners drive meaningful incremental sales without needing to resort to gimmicks or discounting. The number of active merchants on our platform is another key measure for our firm, and over the last year, we've significantly expanded our reach. There, too, we accelerated, with a more than 20x increase from a year ago and a 64% increase from the rolling 12-month tally we reported just 90 days ago. As a company founded by engineers, we focused early on investing heavily in technology, scalable enough to economically support the smallest of businesses all the way up to the world's largest retailers. We've continued this policy of investment and development in pursuit of technological competitive superiority, the strategies working and delivering results. In fact, our technology is what has enabled us to work with tech-savvy giants such as Walmart, Shopify, Amazon, and Target. we estimate that this year a firm processed 1.6% of all U.S. online transaction volume for the Black Friday, Cyber Monday period, another triple-digit increase from last year, simultaneously a momentous number and a signifier of just how early we are in this market. Even a decade in, the ramp up to the holiday shopping rush is an intense yet exhilarating exercise in scalability preparedness. Each year's Black Friday weekend brings by far the greatest number of concurrent transactions we've ever experienced. I'm very proud of our engineering teams for delivering another flawlessly executed, record-breaking Black Friday weekend. And I'm also grateful to our friends at Shopify Engineering who had lent some of their technical expertise to us as we prepped in the days before. It is an oft-repeated adage that product innovation slows down as companies go public. I'm pleased to report that we were able to accelerate our product delivery since the IPO. We've rolled out cashback rewards for participating merchants, delivered the unique adaptive checkout, launched the Affirm Super app and the Affirm Chrome extension, and introduced the beta version of super simple, consumer-friendly crypto savings. You may have noted the announcement of Visa being the launch partner for DebitPlus, which is now in the initial waitlist rollout. Though I will continue to caution you to not yet get crazy forecasting this product's impact on our P&L at scale, I do have fun insight to share. On average, the number of weekly transactions by a DebitPlus consumer, excluding our own employees, is greater than an order of magnitude above that of a regular Affirm user. Of course, these are enthusiastic early adopters, and we fully expect the number to normalize, but it's exciting to see first glimpses of what Affirm as a daily instrument might look like. We remain very excited about the future of this product and expect to talk a lot more about it this year. We had said last year that BNPL is an international phenomenon, and we intend to bring Affirm's unique no-laid-fees, no-gotchas, no-regrets approach well beyond our home borders. Over the last 12 months, we've solidified our industry leadership with Paybrite by Affirm in Canada and launched in Australia our first non-North American market. And the growth of our business continues to accelerate. Affirm had more than 168,000 active merchants on the platform as of the end of calendar 2021, largely thanks to our partnerships with online commerce platforms. In aggregate, Affirm is now present on sites that account for more than half of all U.S. e-commerce, and that number continues to march higher every day. In our second quarter, year-over-year GMV growth accelerated to 115% from 84% in the first fiscal quarter. Moving beyond the testing phase of our collaboration with Amazon before the holidays was a significant driver of this growth. However, if you exclude Amazon, our GMV still doubled year over year. We are highly cognizant of the fact that over 80% of commerce is still conducted offline. Our recently announced partnerships with Verifone and Adyen are just two of the numerous investments we're making with our partners to bring honest financial products to consumers at the physical point of sale. We're also expanding the ability to use Affirm in-store with our own products like DebitPlus. Our focus on using exceptional technology to drive growth and improve efficiency has been a winning strategy for Affirm, and we never stop finding ways to optimize and deliver even more value. This shows up in our results in a number of ways from new partnerships to long-standing relationships. For example, iterating over the last three years, our relationship with Walmart has grown as we proved the value of our products. We expect similarly great things from our other major partnerships with Time. As we develop with and learn from each customer, we are excited to bring these learnings and the products they engender to all merchants, big and small. The strength of our network is measured in merchant coverage and repeat consumer engagement, both of which are rising rapidly. We grew total transactions by 218% and transactions per active user by 15% year over year, even as we added a tremendous number of new consumers. Our momentum is strengthening, our strategy is working, and we are extending our lead. We intend to double down on the three key things that got us here. One. Deliver unique and delightful financial products that align fully with our mission. Two, continue to be the partner of choice for merchants that care about intelligent growth, scalability, and reliability. And three, deepen our underwriting advantage. Speaking of underwriting, we manage risk. Though we are an easy-to-understand tool to maximize one's personal capital and the retail marketer's best friend, at our core, Affirm is ultimately a risk-managing business. We facilitate the transaction, settle with the merchant soon thereafter, and bill the buyer over a predetermined period of time. But wait, there's more. When we charge interest, which we don't always do, we don't compound it into principal. Moreover, we don't compound interest after it reaches the amount we communicated to the consumer at purchase time. We refund interest when the buyer prepays. We don't even charge late fees. These are all deliberate choices. made in the first few days of our company's life. We meant to align ourselves with our consumers in this manner, avoiding the moral hazard of capitalizing on their mistakes for revenue opportunities. These decisions are as on mission and moral as they are self-serving. These policies are an important part of why our consumer satisfaction is so high, and we only want it to go up. With these self-imposed guardrails, exceptional underwriting and risk management frameworks are a requirement. That's why we underwrite every transaction before making a credit decision, unlike some of our competitors in the BNPL space who readily admit they do no underwriting at all. It is also important to understand that unlike many players in our industry, we do not treat delinquencies or defaults as an outcome of our business decisions. Indeed, we choose acceptable delinquency rates as an input into our decision-making based on the pricing our products command with our customers, our view of the macroeconomic conditions, and the demand for our loan volume in the capital markets. This distinction may seem subtle, but I think it really helps understand our approach to risk. We spent the last decade building what we believe to be one of the best-in-class credit underwriting ecosystems. Data, tools, processes, and teams that deliver underwriting models with some of the very best results in the industry. Today, I'll pull the curtain back a little, and while I will keep it very high level in part to avoid giving out trade secrets, feel free to tune out for a few minutes while I nerd out. A firm's underwriting advantage begins before any of our models are interrogated for a decision, with our product design. Because a firm is predominantly offered at the point of sale, we have a natural opportunity to explain our value in transparent approach to the consumer. As a result, we avoid much of the adverse selection that often comes with traditional lending. Coupled with SKU-level data we receive from our partners, our models tend to split the risk far better than those used in traditional consumer loans. Another fundamental structural advantage a firm has is its total separability of transactions. Unlike providers of lines of credit, we underwrite transactions individually, modeling a consumer's ability to pay us back as well as their propensity to do so. This notion of separability is also recursive, a consequence of our product. Because repayment schedules are highly predictable, our models operate at an individual installment level. This separability is a powerful tool for modeling as well as managing risk. We're able to deliver a reliable forward-looking picture of both consumers and our own cash flow. Our proprietary network of directly integrated merchants as well as other sources of non-traditional underwriting data offers us a significant raw data advantage in feature engineering. We maintain a library of over 500 features that we select from as we create new models or update existing ones while continuously looking for and eliminating any potential for disparate impact in our decisioning, both at individual variable and model levels. We train our models using academically well-understood gradient boosting technique. with significant proprietary modifications we've invented that help us approve results. Because from the very beginning, we focused equally on consumer and merchant information, we ended up with a large number of models that are specific to our products and merchants who use them. Moreover, as we launch new products with new and existing partners, we acquire new types of data that we incorporate into the models and, over time, give incremental weight to. Underwriting models decay over time as macroeconomic conditions and consumer behaviors change. Even the very best performing ones can lose a few percentage points of their area under the curve every few months. Over the years, we've built special purpose models that track model decay, the machine learning equivalent of a canary in a coal mine. Our proprietary software and processes allow us to rapidly retrain, retest, and redeploy models where the performance has deteriorated in a matter of days. To illustrate this, let's take a side-by-side look at iTax, one of our longest-serving proprietary models, versus a traditional credit scoring system like FICO. Using iTax, reducing originations by 10% would eliminate a third of all delinquencies in dollars, while using the traditional credit scoring system would only reduce delinquencies by a mere 13%. Let's take it a step further. If we were to reduce originations by 30%, delinquencies, while the traditional score would only catch 36. So needless to say, this model slopes a lot better than a traditional industry standard. These achievements may sound quite abstract, but they have a very real impact. With our superior underwriting capabilities, a firm can approve many more college students buying tickets to see family after months of pandemic isolation and young parents picking up their first stroller. And, because a firm's average loan duration at origination by design is very short, at just 5.2 months, the exceptional precision and recall of our credit models give us great confidence that our portfolio, both retained and sold, will continue to perform well in the future. Any use of advanced technology has both advantages and risks associated with it. As we push our model performance further in pursuit of expanding our offerings, we work just as diligently on ensuring that our models are both compliant with all applicable laws and rules and that our model decisions are both reasonable and are understandable by consumers. We regularly audit our models to avoid correlation with prohibited bases and have them audited externally. We also invest heavily in explainability of model outcomes so that both consumers and regulators can understand our decisions quite easily. None of this, of course, would exist without the extraordinary team of people that make it all possible. I am truly fortunate to have been able to start this company with a group of brilliant minds who in turn attracted more and more talented folks to join our mission and bring their mathematical and other talents to bear. It is this embarrassment of riches among my teammates that makes me so optimistic about the next decade of Affirm. Large as some of these numbers might be, Affirm still accounts for around 1% of U.S. e-commerce, and both consumers and merchants are genuinely excited to get more value from Affirm. And we are excited to deliver it. As usual, I want to thank my team for all their amazing work, and even during some pretty volatile moments for our stock price, for staying truly focused on a long-term value creation for all our stakeholders and on our mission. Now on to Michael for the numbers.