Affirm Holdings, Inc.

I think, speaking of maybe the most important and least understood advantage that we have, we have been at it for a very long time. We have built some very, very sophisticated underwriting capabilities. We'll definitely talk a lot about that next week, so I'm going to bite my tongue right there. But we have some very, very cool stuff that we've done, not just recently, but over the years in underwriting. great percentage, maybe the totality of our competitors that have raised their hand and said, sure, underwriting is not that hard. We can do it. One by one found out that it is. It is actually very, very difficult. And by showing a result, we may have fooled the world by, you know, just print a good result quarter after quarter after quarter. And we get yelled at, you know, gosh, why don't you guys already admit that it's always going to be over 4%. It is a difficult balance to strike to print these unit economics day in and day out. And All of that or a lot of that comes from our AI team and the research that they do, and it's hard work. So I think we make it very easy to believe that just isn't that hard, and it really is. And the longer the show goes, the more it becomes obvious that we are pretty good at math and are very serious about it, and the rest of the competitors are not.

And then, Darren, just to your question on the growth rate, Obviously, we're really happy with the growth rate that we posted in Q3. And we're incrementally more positive on the Q4 growth rate in the updated guide. I will just remind everyone that we did sunset a top three merchant in Q1 of this year. So we are comping against, you know, there is a difficult comp in the prior year period. And that comp did step up a little bit from Q3 to Q4. So it's a little bit more of a headwind to growth We're talking sort of a few points of growth in terms of headwind. And as we get into fiscal 27, you know, the comps get a lot easier for us. It's more of a same-store comp for us. So we don't think that the Q4 growth rate will necessarily be a ceiling as we look ahead into fiscal 27. Okay.

Very helpful, guys. Thank you.

Our next question comes from Connor Allen with JPMorgan. Please proceed with your question.

Hi, thanks for taking my question. I wanted to ask about transactions per active. It's been growing above 20% for quite a while, and I was curious, maybe this quarter or somewhat recently, you could just kind of decompose that a little bit for us, and maybe it's a bit duplicative of some of your other comments about just broader engagement, but I don't know, anything you could share around transactions cohorts and their behaviors around this engagement, or how broad versus targeted the improving engagement is? Maybe just a double-click, deeper dive on the engagement side. Thanks.

All of the above. It's really good. There's definitely a few good lines on that one next week, so I won't steal that thunder. But there's actually a really, really good example of network effect, so I'll give you a super brief preview. So Even if we did absolutely nothing to improve product's usability and just converted more and more consumers to cardholders, you would see increase of transactions per user with absolutely no effort on our part beyond that. But we don't just do that. We also sign new merchants, which means that we are visible with our logo at the very least at checkout, but also in other forms of merchant communications, including but not limited to their own advertising. So that creates another push towards the flywheel where more consumers are aware of us, more consumers know that we are in fact real, that our promises of no late fees, etc. are shown up in more and more places. That pushes consumer flywheel along, more consumers sign up, more consumer trust is available. Consumers get to their second or third loan quicker just because of more checkout counters available which makes them eligible for the card, which we, of course, let them know as soon as they qualify, which drives the flywheel of cards. And so the acceleration across the usage, aka transactions per user in the business, is a function of both the merchant side of the network increasing through sales and the consumer side of the network increasing through sales. sign-ups because of the increased merchant reach, but also sign-ups from the occasional use to the card, which is much more frequent use. So those are just the two vectors, and Investor Forum will really break it down into all the various drivers.

Thanks, Bobby. Our next question comes from James Fawcett with Morgan Stanley. Please proceed with your question.

Hey, good afternoon, everybody. Just wanted to ask on, this goes back a little bit to RLTC, and Max, I appreciate it. It's hard to, it may seem easy to stay above where your targets are, but it's really hard. But along those lines, just trying to think about how the 0% APR mixed ceiling can affect that and just how you're thinking about how high that can go. You call out that that typically has lower RLTC margin. And along those lines, I guess I wonder if as merchants become more informed and see the benefits of working with the firm for 0%, if you can actually close that 0% RLTC margin gap with the rest of the business. Thanks.

That's a great question, actually. In reverse order, I think it's another example of the network effects playing out. So to answer directly, I think yes. I think over time, more and more merchants – and part of why we stage these big nothing events and we'll do more is because they act as teaching aids, if you will, sort of the white papers write themselves – If you fund these 0% deals, you will sell more and you'll sell more predictably and there will not be a pull forward. These are actual sales events that work. And so all of that adds up to a product that we think is increasing in value in part because the size of our consumer audience is increasing as well and we're able to sort of shine a concentrated spotlight onto a merchant that wants to fund these deals, et cetera. And we have a lot of really interesting stuff in works for that. I've been monopolizing the airwaves, so let Rob or Michael answer the economic breakdown, but it does remain true that 0% are slightly lighter on the RLDC basis. We are not fussed by that.

Yeah, no, I mean, I think we love all our loan products equally. There's a lot to like about our interest-bearing loans, but to your point, James, I mean, there is slightly less revenue content today and I think as we look ahead as well within the 0% program. But the good news is there's less in terms of credit costs typically as well. So we really like that trade and we think it's a really good complement to the strong and profitable and high growth interest bearing book that we have as well. And so, yeah, I mean, again, we're really here to drive conversion for merchants and we think 0% should be an ingredient in every merchant's financing program. And as we look at the portfolio today, our largest programs are all utilizing 0%, which we think is a really good sign. We're definitely leaning into it within a firm card as well on our own surfaces. So we're doing everything we can to get as much out there and to continue to push that product.

Our next question comes from David Sharp with Citizens Capital Markets. Please proceed with your question.

Hey, good afternoon. This is Zach. I'm for David. Congratulations on another great quarter. I wanted to dig in a little bit on the card side of stuff. Sorry, I don't know if you guys can hear me. There's an echo. But, yeah, I wanted to kind of see what the profile of the average card user is. Obviously, you know, I think there was a kind of a medium term target of $10 billion of GMT and about 7.5 million active card users. And we're kind of approaching that level at about 60% of the card user level. So, yeah, kind of wondering if we can get an update on kind of what the profile is and kind of what the use cases are for those card customers.

Super general terms, it skews a little bit higher credit quality than the average Affirm consumer. for no other reason than we make it that way. We're still at the limit, slightly more conservative as to who gets the card offers and approvals. It's really converging towards this is just the average Affirm consumer, but right now I think the credit quality is slightly better on the card or somewhat better on the card. The usage patterns are broader, more frequent, obviously, than sort of the more casual, a firm consumer that uses us four or five times a year, six times a year now. Card customers start out, I think it's like a 40% higher and goes up from there. The maybe most useful thing is the category usage is more even. Typically, it takes a little while for an affirmed consumer to realize that if they found us or got exposed to us in category X, it takes them some number of months to rediscover us again at another retailer and say, oh, wait a second, it also works for fashion, not just travel. When you get the card, you have a muscle memory for it. This is a general purpose tool. It works everywhere. And so the category dispersion begins a little bit sooner and just stays fairly wide. It still skews more consistently considered purchases than kind of your typical low AOV spend, which is fine with us. That is a much easier value point to drive to merchants. They understand that they wouldn't have sold a $700 thing or a $500 thing unless a firm was involved for this particular consumer, given their preferences, and the card highlights that that much better. Sort of a quick sketch. I think at the investor forum, we'll say a lot about the card as well. We have some nice little surprises there.

Got it. Thank you very much.

Our next question comes from Jacob Haggerty with Baird. Please proceed with your question.

Hey, guys. Thanks. So I was just looking at the loan loss on purchase commitment. And it looks like that came down as a percentage of – like lower than it's been in the last few quarters. Is there anything to that why you're getting maybe better economics from your purchasing partners or something along those lines?

Yeah, that's really driven by the 0% volume in the business. It's not necessarily due to the economics with a single vendor or originating bank or anything in that ecosystem. It's just a function of the sort of discount rate that we apply to 0% loans. So yeah, no economic changes there. It's really a function of mix and term length.

Gotcha. Thank you.

Our next question comes from Kyle Peterson with Needham and Company. Please proceed with your question.

Great. Good afternoon and thank you for taking my question. I want to go back on funding, specifically on the forward flow side, see if you guys could give us, you know, whether it's a rank order, kind of relative sizing. of some of these forward flow buyers kind of as to what they look like under the hood. You know, I understand everyone can be a lot different here, but I think some of the stress seems to be worse than some of these kind of semi-liquid retail vehicles versus, you know, kind of larger, more permanent forms of capital. So I guess like if you could just give us any relative sizing or color on what the forward flow channel looks like, that would be extremely helpful.

Without getting too specific, we're heavily, heavily, heavily weighted away from things that are very liquid and subject to those kind of volatility that you're referring to. You know, our largest forward flow counterparty is our joint venture with Sixth Street. We have large pension funds and large insurance complexes, which obviously don't fit that description. And even among the funds who do participate in our program, they tend to be, again, overwhelmingly not of the kind that I think people are talking about. And that's why we see such a strong renewal and repeat rate while demand continues to be very high for the asset amongst whole-loan buyers. They really do like the ability for firms to generate consistent credit outcomes that they can underwrite to and generate returns for their funds. And And we like the capital efficiency of those partnerships, and so we grow together and have done a really good job of that over the past three years.

Great. Thank you very much.

Our next question comes from Jamie Friedman with Susquehanna. Please proceed with your question.

Hi, thanks for taking my question. I wanted to ask about adaptive checkout. I don't mean to front run the conversation next week, but if you might have any perspective on how that's evolving, it seems like a real opportunity to serve merchants and consumers alike. So any perspective on adaptive checkout would be helpful. Thank you.

It's doing really well. Definitely Don't mistake my lack of name-checking it in this particular letter for any sort of backing away from the strategy. Quite the opposite. At this point, we're basically selling adapt and boost together as a single thing. We have a tendency to be overly literal. Literal?

Literal.

It's been a long day. We tend to be overly literal in our description of our products, and so we're trying to learn how to package and market better. And so very soon you'll just hear strictly about Affirm Checkout, something like that. But it's doing really well. It's becoming more and more understood by our merchant base that that is what you want. I think hopefully very soon it'll just be the thing you turn on and you don't try to Play with the knobs yourself. Our AI will find the optimal setting in real time for every new incremental consumer. So, seeing well, I think we do have a bunch of content on it at the investor forum, so I'd rather not drop any stats on that here.

Understood. Thanks, Matt.

Our next question comes from John Hetch with Jefferies. Please proceed with your question.

Afternoon, and thanks for taking the question. A lot of questions have been asked and answered, but I'm wondering, Max, this is obviously a competitive industry, not only with other buy-now-pay-later companies, but the general consumer credit spectrum. And clearly you guys are taking share in a competitive, maybe even increasingly competitive industry. And I'm wondering, obviously size, scale, brand, all that stuff matters, that stuff that's been around for a while for you guys. what do you think is, is there anything new or what do you think is changing in terms of competitive positioning as the industry, even though it's not mature, but as it generally matures?

I will invite Michael and Rob to comment in a second because I'm going to scrape the bottom of my brain for something incrementally new. But we're very focused internally. I guess that the reason I'm struggling to come up with something particularly clever is I can tell you a lot about what's changing here. It's really hard to see what the outside world is doing when you're that focused on internal effort. It's a little bit easier to do what we do to be completely transparent. The consumer knows who we are. The one thing that is true, and we can see this when we do just consumer surveys as well as sort of more mechanical understanding of consumer preferences, There are people that have decided Affirm is their jam and that's what they're going to use. And it's really compelling. We can tell consumers, hey, you should go and get yourself an Affirm card because Brand X is not yet integrated with Affirm directly, but it's okay. It's accessible. And at some point in the past that felt like maybe they will, maybe they won't, we now have data that shows that they will. Consumers believe, some percentage of our consumers believe that Affirm is a general purpose tool. It works anywhere. You just have to have the Affirm card or the Affirm virtual card on your app screen. And more and more of them understand how it's done. So long as we treat them right and we handle our post-transactional relationship as well as we do in the transaction, they come back. And that just makes repeats a little bit easier. We continue to maintain 90 plus percent of our transactions come from returning users to a firm, which is great. It's a lot easier to get the second and third transaction than the first. So all of that, it's a little bit easier to grow today than it was six months ago and 12 months ago. And every passing quarter or year makes our growth actually feel a little bit easier. There's a great cycling expression, doesn't get any easier, you just go faster. And we still work just as hard as we've ever done. but the results are escalating, if you will.

This is Michael. I think for complicated business with a lot of moving parts, I think about our position in the market a little. It's actually quite simple. This is what you get when you compound results like this over the course of many years without changing your identity. It's who you are. We show up to the capital market the same way we did. When we first shut up, shut up to merchants the same way, offering to drive better conversion, better outcomes, the promises we make to consumers we've kept over the years. And when you compound all that and stay really focused on doing the thing that matters, you end up building a pretty big lead. I think some of our, some of the other players in the space have changed who they are, want to try to enter new spaces and become something that they're not. And it shows with their footballs and doubling on results and Ours is just the benefit of compounding the same awesome thing over and over and over again.

That is very well said.

All right, guys, thank you for the perspective. Thank you.

Our next question comes from Jeff Cantwell with Seaport Research. Please proceed with your question.

Hey, thanks, guys. I wanted just to follow up on that earlier question on the affirm card. You said there's a long list of things you've done and continue to do to increase adoption. I was just hoping to better understand what exactly is on that list of things you're doing. It's driving other increasing cardholders to 4.4 million. Can maybe help us understand the work you're putting in to increase the number of cards in your customers' hands? And then as you look ahead, What are going to be some of the biggest drivers to increase that number by even more? I'd imagine you would expect to see that 17% of cash rate increase further over time. But what would you say are going to be the biggest drivers to increase the number of Affirm card holders? Is it marketing of the product or opening new geographies or other new TAM opportunities? Just in case we can help somebody standing out there for the Affirm card better. Thanks.

Yeah. You know, we don't do performance marketing at Affirm.

We don't have a business model to pay to acquire users. I think maybe that's a bit of a misconception that some people who are less excited about the card than we are have about it. We're not out buying ads, we're not mailing cards, mailing advertisements to people in the mail. That's not how the business works. The reason why the card is such a compelling business for us is it's the best way to re-engage consumers who we already know and have had successful transactions with. And that's really the strategy. The strategy is to continue to scale the network and ensure that the consumers who know us and know us best get access to the card. and that we build a card that they can understand and they can use in as many transactions as possible to continue to take a big share of their spend from other payment devices. And that's the focus and it's really that simple.

Yeah, and just to give you some flavor of the things we do internally, some of these will sound very unglamorous, but given our scale and our attention to numerical detail, I assure you these are very meaningful. So every pixel in the app is at any given time being A-B tested, by which I mean A-B-C-D-E-F, like multi-legged, extremely high-density multivariate testing. And the outcome of that is we just shave down the friction. So if you... It's... It's not super easy to replicate because we're fairly good at keeping our cohort separate, but if you got enough people together, they all opened their app and none of them had the card, they would see a slightly different experience in very subtle ways. And in some number of weeks or days, we will know which one of them is most compelling when someone signs up for the card. But not just signs up for the card, actually uses the card and sticks to it and becomes a no-brainer more compelling or no less compelling credit risk. There's a lot of downstream effects of any form of internal product change that we have to contend with. We can't just say, oh, go do this. It's not like you get a loan, everybody gets a loan. You get a loan and then we have to make sure that the loan you got actually got paid off and it was a good idea to give you the card based on whatever you in this thought experiment is. There's an incredible number of just optimization that happens on our own surfaces and Every time we think we've hit plateau, we find that there's another single or double-digit percentage gain to be had, and we're very far from running out of ideas. To give you a totally different flavor of what we might do at some point, there's painful little going on in store for any of the BNPL players, and we think we're the best. We think we're the farthest ahead in terms of how to use our product inside of a physical retail, but boy, we have some really interesting ideas and we're getting them as quickly as we can. And so that's another reason to use our card. As much as we love our online e-commerce domination, we definitely want the remaining 80% of commerce or 75% of commerce, whatever it is. And so there's just a lot to do with the product. I'll end where Michael started. It is not a matter of external marketing. It's a matter of just making sure the product is as accessible, as easy to understand. We have a running tally of every possible declination when the card does not approve a transaction. And every day, someone's job is to ask the question, was this decline intelligent? As in, this was a bad credit decision. The consumer should not have been approved. Or is it a mistake of the user, a mistake of a firm, a mistake of our underwriting engine, et cetera, et cetera. All of that is an enormous volume of work. It can move as quickly as my agents can code it, but it still has to be tested in the real world and validated and made statistically significant. And there's very little doubt in my mind that we will not run out of things to do there for years.

Great. Thanks very much.

There are no further questions at this time, so I'd like to... turn the call back over to Zane Keller for closing comments.

Okay. Thank you for joining the call this afternoon. We appreciate your time. We look forward to seeing many of you at the investor forum next week. See you there. Bye.