Affirm Holdings Inc (AFRM) 2021 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Affirm Holdings Fiscal Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to Ron Clark, Vice President of Investor Relations, to 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, and 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 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, Affirm's Founder and Chief Executive Officer; and Michael Linford, Affirm's Chief Financial Officer.

With that, I'd like to turn the call over to Max to begin.

Welcome, everyone, and thank you for joining us on today's call. Before we get into the results, I want to start by talking about what we're actually building at Affirm. Around 10 years ago, we founded Affirm with a simple mission: to deliver honest financial products that improve lives. We started by reinventing payments to make them transparent, simpler, smarter and more delightful. Our core insight was that the generations coming of age after the financial crisis of 2008 were no longer willing to tolerate getting into permanent debt by putting it all in the card or getting burned by late fees and deferred interest.

These young consumers and many like-minded older ones grew fundamentally suspicious of credits and retreated into the simplicity of their debit cards. This created no less than a once-in-a-generation opportunity to transform credit and thus began the great unbundling of the credit card. The credit card was the ultimate buying bundle, a single product allowing you to put purchases of all sizes together in one basket with the freedom to pay for them later. Unfortunately, if you couldn't pay for them later and in full, endless debt became nearly inevitable, and that credit card could quickly become the financial equivalent of a ball and chain.

That's where Affirm came in. We -- deconstructed or rather we unbundled the credit card, starting with the largest purchases. We made these easier, more transparent and helped consumers be smarter about buying now and paying later. In order to do all of this, we built proprietary technology from the ground up and developed sophisticated capital markets expertise.

Our game plan was always simple: obsess over consumer happiness and use superior tech to give more people confidence to buy without resorting to the kind of dirty tricks the credit card industry is infamous for, late fees, fine print, deferred interest to name a few. We believe this would earn us the right to partner with the best, most important online and offline retailers.

After creating, in my personal opinion, the best imaginable alternative to using a credit card for the kind of larger purchases that are most likely to get you into long-term revolving debt such as plane tickets, homeware, sporting goods, auto parts, we sought to bring the convenience and flexibility of our longer-term pay-over-time solutions to shorter-term lower-priced transactions.

Consumer demand for simpler, more transparent payments was growing rapidly in these new segments such as fashion and apparel. These purchases naturally happen more frequently and are great opportunities to meet consumers where they shop and offer them a smarter alternative. By partnering with merchants and e-commerce platforms to offer these solutions, Affirm is able to deliver meaningful incremental sales volume via increased card sizes, improved checkout conversion and new customer acquisition, thus enabling our partners to achieve more predictable and sustainable revenue growth.

Today, we offer both the long-term pay monthly and short-term pay later solutions to our merchant partners, often as a bundle. And unlike our competitors that only offer the latter, we are neither constrained by the amount the consumer wants to spend nor the time they need to pay us back, thanks to our investments in technology and capital management. We leverage this technology as well as our deep merchant partnerships to bring forward the best options to a consumer, always with an eye towards the fact that they will never offer a loan that we don't believe can be repaid.

Our breadth of offerings enables our partners to offer their specific shoppers the right payment solution for the right item at the right moment. Our consistent results, the culture of engineering excellence, focus on intelligent risk management, depth of capital markets execution and relentless search for opportunities to delight our shared consumers have earned us the trust and partnership of some of the world's largest commerce platforms. These businesses depend on having the best technology to support their needs, and that is why they overwhelmingly choose Affirm.

Our technology enables superior experiences, provides unrivaled flexibility and customization and can address the most complex requirements. And we're constantly adding to those services. In fact, Affirm's road map for new merchant services is very long. We see natural product expansion opportunities wherever access to capital, risk or complex engineering requirements prevent merchants from delighting their consumers.

Our acquisition of Returnly and its unique returns management capabilities is a great example of one such idea. Another is the merchant marketplace built directly into the Affirm app and website. Purchases originating on these Affirm owned and operated services amounted to nearly 1/3 of transactions we facilitated in the fiscal year 2021, and these transactions are particularly valuable to our merchant partners.

Merchants love our marketplace because the reach can be highly targeted and effective in driving conversion. In this use case, Affirm is both the provider of purchasing power to the consumer and the demand generation platform for merchants. We expect to continue to find many more opportunities like these to build and buy and offer these high-value services for our merchant partners.

Meanwhile, the great credit card unbundling continues to accelerate in both the United States and internationally. The next frontier of unbundled payments is daily spend: groceries, restaurants, incidental purchases. This is why we're so excited to be rolling out the very first card of its kind, the Affirm Debit+ card. I will tell you a lot more about it in a moment.

As we speed into our fiscal year '22, I believe Affirm is strongly positioned to capture much more of the vast opportunity in front of us. We will do that by remaining obsessively focused on our 2 constituents, the merchant and the consumer, and by leveraging our core strengths to continue building products that delight both sides of our network.

As we look back upon our fiscal year 2021, we made great progress on executing our strategy. We facilitated purchases for more than 7 million consumers, nearly twice the number of consumers we served in the prior fiscal year. At the same time, we delivered a fivefold increase in our active merchant base. That is merchants that transacted on our platform over the prior 12 months, thanks to several large partnerships, including Williams-Sonoma, Dick's Sporting Goods, Neiman Marcus as well as the launch of Shop Pay Installments, all of which helped to add over 23,000 active merchants to our platform.

We also expanded our product offerings. The savings product we introduced at the start of the fiscal year demonstrated the power of our platform to drive consumer engagement. By simply adding savings to the Affirm app, we attracted total deposits of approximately $300 million with no fanfare and no promotion, simply through organic engagement and a great product offering. Many of Affirm's savers have gone on to use our platform to also discover great deals with our affiliate partners and manage their financial lives.

On the merchant side, our recent acquisition of Returnly has meaningfully expanded our addressable market. Not only does Returnly solve one of the merchants most critical pain points. It also provides us with another unique offering for higher-velocity merchants, especially in categories such as fashion and apparel, where returns are quite frequent.

And of course, we extended our presence in North America by closing the acquisition of a leading pay later brand in Canada, PayBright, in January. PayBright has not only expanded our presence in Canada. It is also winning exciting new business with powerful consumer brands and delighting Canadian consumers.

And we are developing deep connection with our consumers. Brand awareness increased approximately 70% in fiscal year 2021 and was particularly strong among Gen Z and millennial consumers, whose awareness increased 94% and 68%, respectively. All these wins help us create a more valuable 2-sided network for our consumers and merchants as we facilitated more than 16 million transactions totaling more than $8 billion in GMV in fiscal year '21.

So what comes next? We have an ambitious plan for the fiscal year and more importantly, for the decade ahead. To fuel the expansion of our business and to increase our share of the growing market, we are focusing on 3 key areas for fiscal year '22: increasing our consumer reach and frequency, growing our merchant and partner network and extending our product offering.

Our partnerships with enterprise merchants and platforms like Shopify introduce more consumers and high-velocity merchants to Affirm's honest and transparent offering. In our current fiscal year, we have continued to ramp merchant activation of Shop Pay installment. When we reported earnings back in May, we shared with you that we had onboarded 12,500 Shopify merchants at the time. And today, that number stands at hundreds of thousands. Our focus now is to drive more consumers to experience Shop Pay Installments. To do so, we're activating both Shopify and Affirm's consumer networks via a range of marketing channels.

Through our host of integrated partnerships with the largest merchants in e-commerce and brick-and-mortar retail, Affirm will be offered as a payment option for merchants representing more than half of U.S. e-commerce, which we believe will ultimately enable us to demonstrate Affirm's powerful value proposition to millions of new-to-Affirm consumers and grow active consumers meaningfully in fiscal year '22.

What excites me the most about the year ahead is the Affirm Debit+ card. Currently in hands of several hundred people, we've worked very hard to create a product designed to meet the bar of convenience set by the best cards people have in their wallet today. But we didn't stop there. Our team has designed and developed the most meaningful innovation to the debit card since its inception more than 50 years ago, putting unparalleled choice and flexibility directly into the hands of the consumer.

A consumer can use the Affirm Debit+ card in place of their regular debit card. It connects seamlessly to their existing bank account, and no new checking account is required. Once you swipe or tap your card, you can use the intuitive Debit+ companion app to turn any eligible transaction into an Affirm pay-over-time product. All it takes is a couple of taps within a day after the transaction occurs. It's just that simple. This effortless access to a smarter, more transparent way of paying over time at brick-and-mortar and online is very close to being indistinguishable for magic. But as always with Affirm, there are no magic tricks or tricks of any kind, just excellent technology.

The beauty of our card is that it's powered by software, which means that you can expect us to regularly add new features and functionality via app update. I believe Debit+ is a revolutionary idea that can truly help millions of people enjoy life with a lot less angst about spending and saving money. With the beta test wrapping up this month, we're very excited to bring this card out to nearly 1 million strong waiting list of existing Affirm customers and then to the general public. I invite you to sign up for yours at affirm.com/card. It's pretty awesome. But don't take my word for it. Try it yourself.

On the merchant side, expanding our solutions drive greater monetization by providing cross-selling opportunities designed to also increase retention. Following the acquisition of Returnly, in the coming year, we plan to accelerate its adoption among existing Affirm merchants through our cross-selling efforts.

We believe the combination of Affirm's flexibility in terms and duration and Returnly's elegant solution to returns problem will deliver significant value to retailers, particularly in higher-velocity categories. Beyond Returnly, we believe we can do a lot more to expand upon our strong merchant relationships and are working on additional opportunities to leverage our technology chops and underwriting expertise to address more of our merchants' needs.

Combined with the momentum we generated in 2021, we believe these initiatives will deliver yet another year of strong growth at scale in fiscal year '22 with expected year-over-year GMV growth of at least 50% based on our outlook. And as we launch unique new offerings such as Affirm Debit+ and activate exciting new merchant partnerships, we see a very bright long-term future for Affirm.

In closing, I've never been more excited about how well Affirm is positioned to win. Even at our blistering pace of growth, the opportunity before us is vast. Adoption by consumers and merchants alike continues to accelerate. Yet at the same time, we're just getting started. With our company's deep roots in product development and engineering, we are at our happiest and most productive when building and innovating. With so many new ways to delight consumers and solve merchants' problems planned for the coming years, we're poised to expand our addressable market to grow Affirm and deliver on our ambitious mission to improve lives.

I want to thank our team for continually delivering for our consumers, our merchants and our shareholders. '21 has been a monumental year for Affirm. From preparing us to go public to integrating with some of the largest players in U.S. retail and e-commerce, the Affirm team has surmounted countless challenges with the flow. Without Affirmers' hard work and continued dedication, none of this would be a reality, and I'm truly grateful for the hustle and the sacrifice.

Before I turn it over to Michael, I have a quick announcement that I want to make. On September 28, Affirm will hold a virtual investor event after the market close. We plan to share more detail about our business, our strategy and our product plans at this special event, including and especially the Affirm Debit+ card. I would like to invite you to join us. Please look out for more information at our Investor Relations website at investors.affirm.com.

And with that, I will turn it over to Michael to take you through the numbers.

Thanks, Max, and good afternoon, everyone. We delivered another set of strong results to close out our fiscal year. In the fourth quarter, we accelerated year-over-year growth rates, both GMV and revenue, for the second consecutive quarter to 106% and 71%, respectively. Excluding our largest merchant, Peloton, which saw GMV growth of over 328% in the fiscal fourth quarter of 2020, our fourth quarter GMV grew 178%.

We also delivered strong unit economics. Excluding the provision for credit losses, revenue less transaction costs reached 7% of GMV. And even as we deliver these strong results, we continue to improve the capital efficiency of our business. The equity capital used to fund our loans decreased by another 19% to $178 million despite more than doubling GMV and nearly doubling total platform portfolio.

We also continue to deliver excellent credit performance. Our allowance as a percentage of loans held for investment declined to just 5.8%, down from 9.2% last year, even as we expanded credit availability within our multi-installment and Split Pay loan offering. And while we are pleased with the progress we've made in the fourth quarter, we are even more excited about how our product road map and recent merchant partnership set us up for another year of expected strong growth in the fiscal year ahead.

I will discuss our financial outlook for the fiscal year '22 in a moment, but let me walk you through the key highlights of the fourth quarter first. Unless stated otherwise, all period-to-period comparative data refers to our fourth fiscal quarter of 2021 compared to our fourth fiscal quarter of 2020.

Fourth quarter GMV grew 106% to $2.5 billion, exceeding our outlook. The momentum in GMV was strongest in categories leveraged to the reopening of the economy, while we began to anniversary this deep acceleration in the growth of categories that benefited from social distancing. For the first time, fashion and beauty was our largest category, thanks to our focus on expanding into lower AOV segment, while travel and ticketing continued to grow rapidly, contributing 14% of GMV, up from 9% in our fiscal third quarter of 2021.

Owing to the strong growth of our business, merchant concentration continued to decline as Peloton contributed 9% of fourth quarter GMV compared to 32% in the prior year's fourth quarter. GMV growth came from both new and existing merchant relationships as well as our direct-to-consumer virtual card product.

Merchants signed in fiscal year '21 delivered 15% of our fourth quarter GMV, excluding PayBright and Returnly. Merchants launched prior to fiscal '21 also grew quickly, delivering more than 100% dollar-based merchant retention. And excluding Peloton, our GMV from these merchants grew 92% in fiscal Q4. Additionally, our nonintegrated virtual card product grew 462% this quarter.

More and more consumers are choosing Affirm's honest and transparent payment alternatives. Growth in active consumers, which we measure over the prior 12-month period, accelerated, effectively doubling to 7.1 million. Not only are we seeing strong growth in new consumers, we are also seeing encouraging trend among existing consumers. And while we've expanded to higher frequency and lower AOV categories, transactions per active consumer has increased by 8% from 2.1 to 2.3.

At the end of the fourth quarter, active merchants, those merchants who have transacted on the platform over the prior 12 months, increased to almost 29,000 compared to just 5,700 in the prior year, thanks in large part to our partnership with Shopify, even though Shop Pay Installments only became generally available to Shopify merchants in the last 20 days of the fiscal year and quarter. As Max indicated, with hundreds of thousands of merchants now enabled for Shop Pay Installments, we are working closely with Shopify to drive consumer awareness and get even more consumers to try Shop Pay Installments. I would also note that the overall active merchant count includes roughly 3,000 incremental PayBright and Returnly merchants following the close of those acquisitions in January and May, respectively.

Turning to the mix of our offerings. We derived 38% of GMV from our 0% APR product, down from 54% in the fourth quarter of 2020, while the GMV contribution from interest-bearing products increased to 62% from 46% last year. The mix shift was primarily driven by the strong growth in categories like travel, which have fewer 0% merchant, and the moderation of Peloton volume. Loans with the term length of greater than 12 months accounted for 22%, down from 43% last year, while AOV declined from $672 to $495, driven by the same category mix shift.

As Max noted, we continue to drive a large portion of our GMV on our platform to our merchant partners from our owned properties. In the fourth quarter, 29% transactions originated on the firm's owned and operated properties or 32% if you exclude Returnly and PayBright.

Strong fourth quarter GMV also helped accelerate growth in revenue. Fourth quarter net revenue of $262 million grew 71% year-over-year, up from 67% in our fiscal third quarter and 57% in our fiscal second quarter. These results reflect the diversity of our product offering, which enable us to deliver consistent revenue growth by giving merchants and consumers greater flexibility in terms, duration, and of course, purchase size.

Our ability to offer a wider range of options is one of the many reasons why so many merchants, especially many of the retail's largest enterprises, choose Affirm. That flexibility, including being able to pivot from 0% APR offers to interest-bearing offers, has also enabled us to quickly adapt to major changes in the environment on behalf of our merchants over the past 1.5 years.

Total network revenue grew 23% to $108 million in the fourth quarter. However, excluding Peloton, total network revenue grew 106%. As a percentage of GMV, total network revenue declined 300 basis points year-over-year, was roughly consistent on a sequential basis and reflects our growth in our interest-bearing product, especially in the travel category and our direct-to-consumer virtual card product.

Revenue as a percentage of GMV, our total revenue take rate, was 10.5% ahead of our expectations. While down versus last year, the overwhelming majority of the year-over-year change was due to the mix of loans originated on our platform. Last year's take rate also benefited from temporary increases in MDRs as certain high AOV merchants elected to pay increased MDRs in order to secure additional revenue in the early days of the pandemic. Excluding these 2 factors, revenue take rates were roughly stable year-over-year.

Interest income grew 111% to $104 million. However, it is important to note that 40% of the increase of interest income was driven by a 212% year-on-year increase in the amortization of the discount on loans held for investment on the balance sheet rather than from consumer interest payments. The portion of interest income related to consumer interest payments grew 77%, which is roughly in line with the total revenue growth we reported in the period.

Revenue from gain on sales loans of $43 million increased from $12 million in the year ago quarter as a result of more favorable loan sale pricing and increase in the volume of loans we sold to third parties and our 2021 nonconsolidated 0% securitization transaction. Finally, servicing income of $7 million increased from $5 million in the prior year as the average unpaid principal balance of loans owned by third parties grew year-on-year.

Now turning to expenses. Total transaction costs of $114 million came in better than our outlook of $135 million to $140 million in the fourth quarter. While transaction costs grew 149% year-over-year, nearly all of the increase was related to a $58 million year-to-year swing in the provision for credit losses, which I will discuss in a moment. Excluding the impact of provision, we continue to drive the improvement in our unit economics. Transaction costs, excluding the provision for credit losses, grew just 14% compared to the total revenue growth of 71%.

Looking at the components of total transaction costs. Loss on loan purchase commitment was $51 million compared to $55 million in the prior year. Loss on loan purchase commitment directly correlated to the level of longer-duration 0% APR GMV originated. Provision for credit losses was $25 million compared to a gain of $32 million in the prior year, reflecting better-than-expected repayment and reduced stress multiples in the year ago quarter in the context of sizable loss allowance that was established at the end of the third fiscal quarter of 2020 in the very early days of the pandemic.

Funding costs increased from $8 million to $16 million in the fourth quarter of 2021, consistent with the growth of loans held for investment. The increase reflects the issuance of securitization trusts, which bear an interest at a fixed rate as well as an increase in average funding debt, offset by a lower average interest rate.

Finally, processing and servicing costs grew 48% to $22 million despite total platform portfolio growing 88%, reflecting the ongoing scale efficiencies we are achieving. The combination of strong top line performance and reduced transaction costs resulted in much better-than-expected revenue less transaction cost of $148 million compared to our fourth quarter outlook of $80 million to $85 million.

Looking beyond transaction costs to operating expenses, our strong growth in the fourth quarter enabled us to invest in the long-term growth of our business. Technology and data analytics expense, which is primarily composed of personnel expenses in our product and engineering organization, grew 124% to $71 million. As a percentage of total revenue, technology and data analytics increased from 21% to 27%. However, excluding the impact of stock-based compensation, technology and data analytics as a percent of revenue declined by 50 basis points compared to last year. The year-over-year cash increase in technology and data analytics was driven by higher engineering headcount dedicated to deliver the exciting slate of products and technology initiatives that Max discussed.

Sales and marketing expenses, which include both personnel and our marketing activities, increased from $5 million to $64 million or from 3% to 24% of total revenue. The majority of the dollar growth was driven by consumer branding to drive awareness and adoption, while SBC contributed $6 million of year-over-year increase, and the warrants we issued to Shopify in conjunction with our commercial agreement contributed $17 million.

General and administrative expenses increased from $31 million last year to $138 million or from 21% to 53% of total revenue. However, excluding stock-based compensation, G&A was 21% of net revenue compared to 19% in the year ago quarter. The cash increase in G&A was primarily the result of increased headcount to support the company's long-term growth and public company operations.

Including these expenses, GAAP operating loss was $125 million in the fourth quarter of 2021 compared to a GAAP operating income of $39 million in the fourth quarter of 2020. Despite making these significant investments in our long-term growth, we delivered positive adjusted operating income. Adding back D&A, stock-based compensation, the amortization of Shopify's warrants and other onetime expenses, adjusted operating income was $14 million compared to $47 million in the prior year or 5.4% of total revenue.

Turning to our balance sheet. We delivered triple-digit GMV growth while driving even more efficiency from a capital perspective. Total platform portfolio, which we define as the unpaid principal balance outstanding for all loans facilitated through our platform, including those loans owned by third parties, increased $2.2 billion from June 30, 2020, to $4.7 billion at the end of the fourth quarter. Half of the $2.2 billion increase was funded on a nonconsolidated basis through a combination of forward flow and our first unconsolidated securitization transaction. The rest was funded through consolidation securitizations and warehouse facilities.

In terms of our overall funding mix, warehouse financing continued to shrink from $1.0 billion to $0.7 billion at June 30, 2021. We expect to fund future growth primarily through a combination of loan sales and securitization transaction, which continue to garner strong demand in the ABS market from a diverse array of large institutional investors. As alluded to previously, during the quarter, we successfully closed 2021-Z1, our first unconsolidated securitization transaction. In addition, we recently issued our sixth ABS transaction, 2021-B, at a very attractive financing terms, resulting in minimal equity capital required by Affirm.

By establishing ourselves as a programmatic ABS issuer, B securitization in conjunction with our committed forward flow agreements and warehouse facilities, provide us with financial flexibility to support our GMV growth aspirations by creating meaningful capacity to efficiently fund billions of dollars of loans with negligible incremental equity capital requirements.

A material noteworthy result of our approach to funding optimization across these channels is the reduction of equity capital we used to fund our business. Equity capital required declined by 19% from the year ago quarter from $221 million to $178 million, despite growing our loans on the balance sheet by $1 billion. Accordingly, as a percentage of total platform portfolio, equity capital required fell to a low of 4% from 9% in the year ago quarter.

Now turning to the year ahead. We expect the strategic progress we've made in the fiscal year 2021 and the accelerating consumer and merchant adoption of our offering to drive strong growth once again in fiscal year 2022.

Before I dive into the numbers, let me share some color on our outlook. After a year of explosive growth, we expect a moderation in Peloton GMV in fiscal year 2022. Our Peloton business benefited from strong pandemic-related tailwinds last year as well as the introduction of new products, including the highly successful Bike+ and lower price Tread in September of 2020.

Additionally, we have not included any GMV or revenue from the Amazon partnership we have recently announced. We are currently in the early stages of integration, and we will update you on the progress and the incremental impact to our outlook each quarter.

Finally, while we are very excited about the rollout of the Affirm Debit+ card, our outlook for fiscal year '22 also does not include a contribution from this new product. GMV and revenue from this new product would also be incremental to our outlook.

With that context in mind for our fiscal year ending June 30, 2022, we expect gross merchandise volume to increase between 50% and 54% for fiscal year '21 to between $12.45 billion to $12.75 billion. Excluding Peloton, we expect GMV growth of 70% to 75%. We also expect our Split Pay offering to contribute 10% to 15% of our fiscal year 2022 GMV, the largest contributor of this volume coming from the Shop Pay Installments program.

Accordingly, we expect revenue of $1.16 billion to $1.19 billion, representing year-over-year growth of 33% to 37%. Owing to the ongoing mix shift, we expect modest contraction in total revenue as a percentage of GMV in the fiscal year 2022 as implied in our outlook.

Turning to expenses, we expect transaction costs of $605 million to $620 million. As a percentage of total revenue, we also expect modest deleverage in transaction costs as a percentage of revenue. As a result, we expect revenue less transaction cost of $555 million to $570 million.

As Max said in his comments, we plan to deliver an exciting slate of consumer and merchant product offerings in fiscal year 2022 as well as over the next several years. To drive the success of these initiatives, we are investing in engineering and product talent here in the United States and deploying a new engineering center in Poland. As a result, we have significant investment in technology and data analytics in the fiscal year '22. We are also increasing our spending in marketing to drive consumer awareness and adoption. Accordingly, we expect an adjusted operating loss of $145 million to $135 million. Finally, we expect weighted average shares of approximately 290 million for the year.

For our first quarter ending September 30, 2021, we expect GMV to grow 64% to 67% to $2.42 billion to $2.52 billion. We expect the growth to drive total revenue of $240 million to $250 million. Our outlook for the first quarter also contemplates transaction costs of $145 million to $150 million, revenue less transaction cost of $95 million to $100 million, adjusted operating loss of $68 million to $63 million and weighted average shares outstanding of 275 million.

In closing, we have made another year of excellent progress on our mission to bring consumers and merchants together with honest financial products. Like Max, I'm extremely proud of the team's accomplishments over the last year. We are shaping the future of finance for the better. And every day, more and more consumers and merchants are coming to Affirm for honest, transparent and delightful product experiences. I have never been more confident in our competitive position nor more excited about the future that lies ahead. Here's to another year of the extraordinary achievements to come.

And with that, we're happy to answer your questions.

(Operator Instructions) Our first question is from Ramsey El-Assal with Barclays.

Congratulations on these impressive results. Can -- I wanted to ask about your Shopify relationship. And in terms of signing new merchants, I mean, the quarter saw such a huge step-up in active merchants. How far penetrated do you think you are at this term in terms of the merchant base available to you? Sort of what inning are you in with the process of rolling out Shopify?

Asking me about innings will immediately...

Any sports metaphor you want to...

I'm only good for one. We are like the day before the rest day -- first week of Tour de France, the only sport I'm good for. I have no idea how many innings exist in any baseball sports, if I'm honest. So I would say early. So I'll (inaudible). So just to give you a sense how the process actually works, so you first have to educate the merchant base. Then you have to onboard them. Then you start activating them both for marketing and just exposure to consumers and then eventually start processing volume. So you can kind of think of it in these 4 stages.

The number we highlighted in both Michael's remark and mine is the tens of thousands of actives across our entire base. But obviously, Shopify's question here, if you look at the onboarded, which is the stage before, that number is in hundreds of thousands now. And so we will start ramping the next stages of that process for onboarding merchants, but it will take time. And so it's early. Very happy with how it's going. Lots more to cover.

Okay. And then I wanted to ask you kind of a higher-elevation question about all the M&A we've seen in the space over the last few months. It seems like there's a kind of an accelerating trend towards bundling buy now pay later and with other financial services. And I know you guys are sort of embarking on that from sort of the other direction. But can you give us your thoughts on industry consolidation, what maybe the end state of the industry looks like and sort of the different strategic paths available to you guys?

I can certainly try. I think there's a lot to speculate. So first of all, just to level set, the e-commerce is $800 billion in the U.S. or so. And I think buy now pay later -- the various names I'll refer to, in my mind, unbundled credit cards. So I really tried to make that point in my little speech, but the whole idea here is the industry is very rapidly unbundling the credit card product into a bunch of different connected services.

All that said, it's still like in the 3% to 4% of the overall e-commerce and then, of course, non-e part of commerce. And so it's a long road to go, but that's not -- that's really the important thing to understand. So I think companies like Affirm that have a vision that since past handful of years really just have a lot of growth and a lot of product building to do.

So from that point of view, we are very keen observers of the industry. We think ourselves great acknowledgers obviously, really careful risk managers and really thoughtful builders of things, and we're not bad at all in capital markets. Those are kind of the key notes in our core that we're trying to strike with the industry. Wherever we can build or buy more merchant services that speak to those strengths, we look -- that's what we're looking for.

And Returnly is kind of a great highlight. It's just a beautiful complementary service that fits all those strengths, instantly benefit from cross-sell to merchants, instantly benefit from our [depth of] capital markets. They're not bad growth managers themselves. But obviously, we have to share those now.

So that you will see us do more and more of. And we think there's just a lot to do there. Not necessarily always buying, but we are very keen on creating this ultimate merchant bundle with those 3 key areas as the guiding principles. The industry itself, I think, to be completely honest, I'm a little surprised by the leanness, if that's a word, of the consolidation. But that said, [future calculations], the Afterpay team specifically, I think those guys are -- built a really cool barriers to the product, and I'm pleased to see that the market really value them for it.

We are obviously in a much, much, much wider impact surface. We cover both the short-term payment for in -- all the way out to multiyear monthly payments, both interest-bearing and interest-free. We involve manufacturers in subsidizing some of the interest payments for consumers. I think just a much, much, much broader around that offering. And so the opportunities for us to extend well beyond sort of plugging our point solution into someone else's larger vision will decide on their own.

That said, I do think that the entire financial ecosystem well beyond the start-ups really everyone has now fully woken up to the idea of that buy now pay later. Unbundled credit card is a huge opportunity, and consumers are driving that change. And so that's just really important. It's happening very, very quickly, and we happen to be surfing that wave. But there's a lot more companies that are now playing there as well, and that's really, really good to see.

Our next question is from Jason Kupferberg with Bank of America.

Congrats on the numbers here. I wanted to start with a question just on the revs less transaction expenses. For '22, I think it's going to be 4.5% of GMV. And I know that that's materially higher than the low to mid-3% range that I think you had historically targeted. So should we think of the mid-4s as kind of a new normal? Or are there some anomalies that you would call out for fiscal '22? I mean I know the number was even higher the last couple of quarters, but just wanted to see how we should think about it on a more normalized basis.

Yes. I think there's a couple of things to think about here. It has been higher recently, although we have benefited from continued improvement in the credit outlook that has contributed nicely. When you look forward, as you model out the Split Pay, low AOV business, you will see numbers coming down there, just start with a much smaller revenue base. So as a percentage of GMV, you do have less revenue less transaction cost of those transactions. We've indicated that we expect 10% to 15% of next year's number to be there. Over the longer term, we do expect that to continue to grow faster. And so I think we'd like to maintain that kind of longer-term indication we've given everybody.

Okay. So we should still think about that low to mid-3 just based on mix over the longer term?

That's right.

Got that. Okay. Okay. And then just following the Amazon announcement, can you give us a sense of how your pipeline looks for other potential large merchant wins? And then maybe as part of that, can you just talk a little bit about the availability on Amazon? I mean I think the press release had said kind of the coming months, but would you encourage us to think about that as the next quarter? Or is this more like 2 to 3 quarters out?

So I think we try to be as disclosive and as careful as we can be when we talk about such large important partnerships. The testing is ongoing, which is really day and night. So we are in that phase of a partnership. And I think the opportunity itself is enormous. The exact contours availability, both where and when, a little bit beyond the scope of this particular conversation.

In terms of enterprise pipeline, we won't -- I don't want to toot my horn too much here, but we have become sort of the undisputed provider of the service to the enterprises because we are really that good. We think that any enterprise thinking about offering buy now pay later or pay monthly looks at Affirm as the gold standard, and we intend to provide those services to people that would like them.

Always a terrible idea to preannounce deals or preannounce deals that aren't closed, so shouldn't really be commented in the pipeline, but certainly have extreme conviction that what we've built resonates with folks that care about technology, scalability, availability, just delivery of full suite of products as opposed to point solutions. So in that sense, I think the market is meeting us where we are with our suite of services.

Our next question is from Dan Perlin with RBC Capital Markets.

Let me add my congratulations as well. I actually wanted to maybe dive in a little bit to that last question a bit. And the question really is the nature of which Amazon chose you guys. You threw off a couple of things there. But I mean is it ultimately the breadth of product? Is it that you saw kind of the sweet spot for them and helping them convert? And is it also that there's this parallel kind of road map that you might share with them? So just any, I think, incremental color in terms of maybe why that relationship was born would be very helpful.

Again, I think it is important to say that as announced, it is a test. We are working very hard to make sure the test is successful. The reason companies of the scale and customer obsession, which -- by the way, one reason why companies just perhaps choose us, everything I said, technology, risk management, conversion, all of that is true. But at the very core, it is with the end consumer. We want to deliver the best possible service -- sorry, I'm getting feedback that it's very hard to hear me. Is this any better?

I can hear you fine.

Great. Sorry about that. I'll try to add more microphones, too. So the punchline is we are obsessed with consumer delight. We want to make sure that we are driving sales, increasing conversion, improving the size of the card, over that while being on the consumer side, without charging them late fees, without bearing gotchas and fine print and things like that. And I think that is typically the cornerstone of our most successful partnerships. That is where these enterprise merchants that expect to live for hundreds of years and have lots of repeat transactions, they want to know that we will treat their consumers right, that their consumer doesn't become just a footnote in chase for revenue, et cetera.

So I think that's really, really important. And that's where a lot of these relationships are forged. That's what we bring, and that's -- we take that very seriously. And so certainly as do they. The -- yes, sorry, I'll stop ranting, but I...

No. No. All good.

The other thing perhaps worth noting, I think that's -- the important thing here is I think the way of the industry that I highlighted is what's driving a lot of these relationships as well. We are the best of technology. We are -- we're the most scalable provider here. As these very, very large retailers say, you know what, this isn't going away. It's not a cool feature. It's a real product. They look to us to provide it.

And then my follow-up, just briefly kind of as an extension to that. As you aptly noted, you're winning a lot of these enterprise and platform deals. The question, I guess, longer term is how do you think about -- and this is a high-quality problem, obviously, but how do you think about the potential concentration risk at a company like Shop and Amazon? Peloton will come back, and you probably will win other large-scale enterprise relationships. I'm just wondering how you think about that. And what are those discussions like internally about how to mitigate some of those risk concerns?

It's a great question. If I'm honest, I think our job is to build exceptional products and maintain our leadership both intellectually and at the product level. [And in these] enterprises, you inevitably run some level of concentration risk. I think we've demonstrated simply looking at Peloton that we're quite good at diversifying those concentration risks. So I can't say we don't know what to do about risks in general, but at the very core, our success depends on our ability to build great products and run it successfully at great unit economics, et cetera. So that's what we'll do.

Our next question is from James Faucette with Morgan Stanley.

Great. Max, I want to kind of build on the theme of adding new merchants, et cetera. In our own research, we saw a bit slower growth among the largest online merchants, which is probably understandable, and the largest online ones outside of Amazon. But that's understandable given the push to bring shop merchants on, et cetera. How should we think about just more generally merchant growth dynamics going forward? And I think this builds a little bit on the last question. Should we expect a lot more bigger merchants near term? Or is it still like building up a broader base? Just kind of help us think through what you're targeting and where you're putting effort.

Yes. We think this product makes a lot of sense for consumers, first and foremost. And we are, at this point, the premier provider of the services to platforms of various kinds. We intend to bring products to market with them, and that is really important to us. That's fueling a fair amount of our excitement here.

That said, we very much care about smaller merchants. In fact, we are investing in areas of merchant self-service, making sure that we can bring someone live from mere interest in Affirm to accepting transactions as quickly as possible. One of the core metrics we review literally every week is, hey, how long did it take to go from uninterested in Affirm to taking first transaction. And that's something that we are constantly trying to minimize. It really matters for these little shops that do not have a legal team and so on and so forth.

So we see ourselves as providers not just to the very largest but also to everyone, mid-tail, long tail. All those are great customers. And frankly, the impact that we have on the long-tail base is really staggering. That's where you can have a share of cards that can number in sort of the staggering high double-digit numbers.

Now we are so interested and so invested in these platform partnerships is because a lot of them carry enormous amount of long tail. And so building our service in a way that's consumable and installable is really easy, really high converting both at the consumer end but at the really small merchant, and it's really important to us. Merchant self-service pipeline works really well by way of integrating with, I think, all the platforms, all the e-commerce platforms out there at this point. I can't think of one where we're not supported, but -- and also through these partnerships. And so we intend to go after every imaginable merchant out there, both online and then also we have our designs offline.

That's great. And just as a quick follow-up, this is for you, Michael. Can you give a little bit more color on, I guess, kind of the activity mix during the quarter? I asked because number of users was a lot better than we had modeled, and things like virtual card network revenue was better as well as gain on sale. But on the flip side, like the merchant network revenues were a little less. So just wondering how we should think about like what caused that during the course of the quarter perhaps and then how we should kind of think about that mix volatility, if you will, going forward.

Yes. So the change in which income statement lines the revenue hits is very much a function of the product. And so as we mix away from longer-term 0% loans, you'll see loans that are coming into the interest-bearing side. As we talked about, we did have a higher mix of interest-bearing this quarter. And when we put those on our balance sheet, we are in interest income. And when we sell them, we get the gain on sale. And you saw that big growth in gain on sale there.

And the underlying reasons are related to the segments that saw the strongest growth. And so we had segments like travel and ticketing, which obviously has early stages of the reopening. It's all explosive growth. But also we had our direct-to-consumer virtual card product, Affirm Anywhere, grow substantially. And that product has a little bit of virtual card network revenue and then obviously, interest-bearing activity behind it.

And so really, it's the mix of products that shows up with driving those results. And as we've said many times before, we really don't look at or try to manage those sublines. We target a total revenue number and try to deliver that. And we keep a keen eye on that revenue less transaction cost number to make sure we're delivering really strong unit economics. So we can generate the revenue and generate the unit economics. The rest of itself sorts it out.

Our next question is from Andrew Jeffrey with Truist Securities.

Max, I'm intrigued by the Affirm Debit+ product and recognizing that you're not including any GMV or revenue in your guidance. I wonder if you could just flesh out a couple of things for us. One, what do you think is the most likely use case mix of Affirm Split Pay purchases or Affirm loan purchases versus sort of broad use? And then also, how do you think that product affects repayment tender? Does it definitionally result in a debit-based loan repayment? Or is there more of an ACH characteristic? I'm just trying to think through the dynamics as this product takes hold and gains traction.

That's a great question. I'm not sure if I can hit them all. But this is like -- first of all, it's going to be awesome. I guess I want to tell you that.

Sorry, too long-winded.

No. No. No. It's a great set of questions, but I am tempering my excitement for the product because I know our company lawyers are watching. But it is hard to temper [my excitement] because it's a great product.

And first of all, the use case that we envisioned is the one -- so I've been testing the product more or less daily for the last month or 2. And I bought an incredible amount of coffee. Public service announcement, do not buy pre-ground beans. I buy whole beans only, but it's in the tens of pounds at this point. That is my closest (inaudible) debit card.

And it's pretty cool. It works with my existing checking account. So when I do nothing, it just settles against that in a period of time. And when I feel like swiping left, turning it into a pay-over-time transaction, that's what it does. And it's super smooth, very important to physical cards. So it's no different from one that your bank gave you. And the expectation and the intent that we have for this product is that it really takes place as your top of wallet, primary transacting device.

Sort of stepping back, and I'll allow myself a little bit of storytelling. One way of analyzing this whole BNPL revolution is actually just like 100 million-plus people that basically said, "I'm just going to use my debit card because I don't understand credit cards, but I know they're not good for me." And those of you can disagree, but I generally take the side that if you put it all on a piece of plastic and that revolves and you pay interest on your lattes and your coffee beans and your more expensive purchases, you're doing it wrong. Like you shouldn't be paying interest in those things.

And as a result of all these, people basically said, "Yes, I kind of get it. I don't have a better alternative. So I'm just going to look within my means and use my debit card." And every once in a while, somebody like Affirm or one of our competitors have come along and say, "Hey, you're buying this thing and it doesn't fit into your debit card budget. That's cool. You can use this pay-over-time solutions we've developed. It's available at the point of sale." That's what they call in Math Olympiads a partial solution. Like yes, it's great, but you don't get full marks for that.

What you really want is a ubiquitous tool that allows you to say, hey, any time I want to use a debit, I'm just going to use my debit. And anytime I want to turn it into a pay-over-time transaction, it's got to be very easy. It can't be harder than using a credit card. It has to be as simple and really, really convenient. And that's what we built with Debit+.

And so that's the most important thing to understand. We've fundamentally connected the dots between this partial solution of buy now pay later at the point of sale by moving it into the hands of the end consumer, built right into a debit card without asking them to change their accounts, et cetera. And so that's why I'm -- so we talked about it, probably partially to do with just the sheer amount of coffee that I bought. But that's our part 1.

I would like -- I told you that I know exactly what's going to happen with all the different payment modalities, et cetera, still in early beta. A lot of its consumers are telling us it's awesome, and we're learning a lot about how they're using this. But generally speaking, the goal is to delight the end customer. This is a -- there's a big group of people that says, "Hey, I love the idea of having very tight control, sense of financial responsibility, insanity by just paying for things with this really, really simple pay-over-time instrument and mostly not." And what we have built is something that marries the 2 really elegantly. That's what we're launching and sort of bringing to market.

Over time, we think there's a lot of other cool stuff to add. And I sort of use this software-defined payments as a jargon thing that I came up with, but that's the idea. We will continue to add features to the card and the app via software updates. There'll be a lot of fun stuff to add to it. Not announcing any of those yet, but you can imagine how the app has infinite possibility.

Our next question is from Moshe Orenbuch with Credit Suisse.

Great. Maybe to follow up on that and some of the previous -- some of the previous questions. As you expand -- as Affirm is able to expand its marketplace and the consumers that shop there and now with the debit card, can you talk about how -- I mean, the expansion of the TAM that, that would provide essentially? And how often can you earn an affiliate fees? How often not? Like how do we think about the underlying economics perhaps as these -- as you're able to expand in those ways?

That's a really good question. So again, without -- I realize that I'm sounding a little bit like a child high on a pile of sugar, but I think this Debit+ thing is pretty awesome. And we wanted to be the primary transactional device for our consumers. So the TAM is expanding 20x a month on food and things like that. So it's shopping or purchasing whatever you call it. So in that sense, we have near infinite ambition.

In terms of affiliate fees, I think the important thing there is, obviously, we've done pretty well. We can see it in our numbers or at least inferred from our numbers there. We're not yet focused on that to be completely transparent. We're trying to build an amazing experience. We're trying to convince our consumers that this is a far better way of buying things.

Over time, obviously, it's of a tremendous value for our merchant partners or whoever our consumers choose to go to shop. If we brought that customer to them, it's a service that we bundle, if you will, with the transaction itself, and there's plenty of sort of advertising or marketing revenue to compete for there. But it served the -- that's part 2.

Part 1 is we want the consumer that picks up Debit+ to say, "This is the best thing ever. I don't really need to use my real debit card anymore because this is better, and I certainly don't have to touch my credit card ever again." But assuming we hit that, we were -- I was going to say hit that out of the park, but I realized that I don't know what I'm talking about again. Assuming we deliver on that, I think affiliate fees will come. We'll start forecasting that as we as we measure the actual penetration. But the TAM itself is [expanding].

Got it. Okay. And just as a quick follow-up on the Amazon relationship or test. Could you talk about how that will be presented to the consumer? Like -- because there are multiple products that Amazon does offer from a payment standpoint. Anything that you can kind of tell us as to whether -- how Amazon is going to be choosing to do that or how that process works?

I'm afraid that's what tests are for, to figure out the best presentation, best user interface. And ultimately, we will know what works best, and then we'll all see it.

Our next question is from Rob Wildhack with Autonomous Research.

Just a question on funding. Michael, you called out drivers in gain on sale for this quarter. But just wanted to get your latest outlook for the demand and pricing trends on whole loans from here and how that could potentially flow through to the level of equity capital required going forward.

Yes. So we fund our business with now 4 different funding tools, securitizations that both get consolidated and then are nonconsolidated, forward flow and on the warehouse side. In our earnings supplement, we show a pretty good breakdown of the funding mix by channel. And the growth that you saw this quarter was predominantly in securitizations, both not consolidated and consolidated. When the securitization is consolidated, it does show up on the balance sheet as an asset, but it's really efficient.

If you look at the last 2 deals we've done, we're kind of borrowing 97% or 98% on average of the consumer balances, which is obviously just an extremely efficient way to fund it with respect to equity capital. But to answer your question specifically around the market and the reaction in pricing around forward flow, it remains very strong. I think the demand for Affirm paper in the market is really high. They desire the asset type, which is really short in duration. And they acknowledge that we've been really good at underwriting, and so they really like the credit quality we can generate.

We have reached the end of our question-and-answer session, and this does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.