Affirm Holdings Inc (AFRM) 2021 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to Affirm Holdings' Fiscal Third Quarter 2021 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I'd now like to turn the call over to Mr. Ron Clark, Head 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, 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.

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

Welcome, everyone, and thanks for joining us on today's call.

We are excited to update you on the performance of our business and the progress we achieved since our call in February.

But before we go through the numbers, I would like to start by sharing a few stories from the past quarter to help demonstrate the power of Affirm.

As many of you know, at Affirm, one of our core values is that people come first.

That means that we constantly consider our impact on people's lives and we strive to put their interest before our own.

That's why we never charge late or hidden fees.

It's also why we're always looking at what consumers have to say about us and how we're helping them get the things they want and need.

In March, we celebrated Affirm's ninth birthday with a giveaway on Instagram.

To participate, we asked consumers to share their favorite experience or purchase using Affirm.

I was inspired by many of the more than 11,000 personal stories that were posted.

One nurse thanked us for the affordable monthly payments that allowed her to buy a Theragun Prime massager, which helped soothe her aches and pains after a 12-hour shift during the pandemic.

A mother of 2 thanked us for helping her take her family to Disney World just before her new baby arrived.

She appreciated that she could book a special vacation without breaking the bank.

I also frequently speak with merchants.

Understanding their needs and how we help them achieve their goals is critical to establishing long-term partnerships.

Recently, I've been spending a lot of time with travel merchants in particular as they focus on meeting consumers' pent-up demand coming out of the pandemic.

Thanks to Affirm, companies like Priceline, which we started partnering with in 2018, have added new customers.

Priceline shared with us that their consumers are booking with greater confidence because of Affirm's flexible and got your free payment solutions.

They also shared that Affirm helps them expand their reach among millennial and Gen Z consumers.

At the heart of the value we deliver to consumers and merchants is Affirm's unrivaled technology.

The speed and accuracy of our technology allows us to instantly elevate consumers' requests and provide them with tailored payment options within seconds.

And the quality and scalability of our technology has led large-scale platforms like Shopify to choose us as their partner.

Today, we're excited to announce that more than 10,000 merchants have gone live with Shop Pay Installments in just April and early May, and we expect this number to grow significantly when we move to general availability for new and existing merchants, which we expect to reach between now and the end of June.

I will come back to the importance of our technology in a moment but let me share an overview of our results for the third fiscal quarter.

Affirm delivered another strong quarter that exceeded the financial outlook we provided in February.

We more than doubled our active merchant count year-over-year to nearly 12,000.

We accelerated year-over-year GMV growth to 83% from 55% in the second quarter.

And excluding Peloton, our GMV grew 100%, up from 54% in the previous quarter.

We also grew active consumers by 60% over the last 12 months.

GMV growth was strong across all categories in the third quarter.

This was driven primarily by consumer demand for Affirm's offerings as well as new and expanded relationships with merchants such as Ikon Pass, Neiman Marcus and Vrbo, among others.

Categories that have fared well throughout the pandemic such as sporting goods, furniture and homewares continued to perform.

Nearing the end of the quarter, we also began to see a sharp uptick in spending in categories that have been pressured by the pandemic.

Travel and ticketing was particularly strong.

GMV for the category nearly tripled for the second quarter of fiscal 2021 and grew by more than 50% versus Q3 of last year, which was our pre-COVID quarterly high mark in travel.

We are encouraged by this momentum and believe that the strengthening economy will provide another tailwind for Affirm.

Americans have significant spending power coming out of the pandemic after paying down a record $83 billion in credit card debt and amassing $1.7 trillion in savings in 2020.

The pandemic has also trained more shoppers to buy online, growing the U.S. e-commerce markets to nearly $800 billion.

We expect this improved financial health, coupled with rising positive sentiment among consumers and the ongoing reopening, to support our continued growth.

We look forward to being there for the consumers as they buy and use suit before returning to work, a wedding dress for the reception they put off or an airline ticket to see their missed loved ones.

Our team also made excellent progress on our strategic objectives over the last few months.

As I mentioned a moment ago, we are continuing to expand our presence into higher-frequency categories by activating our partnership with Shopify.

Over the last several weeks, we have accelerated merchant onboarding, enabling Shop Pay Installments by Affirm for more than 10,000 shop merchants, up from 100 merchants in our pilot that we shared with you back in February.

We believe that scaling our partnership with Shopify will position us to grow our business with a large and diverse set of merchants.

Shopify's team told us that Shop Pay Installments by Affirm has enabled them to offer a solution that will scale with their rapid growth and reduce buy now, pay later checkout times by as much as 30% for both new and returning users.

We also expanded our platform by acquiring Returnly, a technology company that makes returns and exchanges seamless for both consumers and merchants.

Today, Returnly helps more than 1,800 merchants increase return to repurchase rates, drive revenue from returns and elevate consumer satisfaction.

We look forward to delivering returns with offerings to more merchants and introducing their more than 8 million users to Affirm.

Before I turn the call over to Michael, let me briefly come back to my earlier point on our technology advantage.

Affirm is a technology company and we believe our technology is unparalleled among our competitors.

We thrive on solving complex problems for both consumers and merchants that others can't or won't.

The resulting technical expertise serves as an important competitive advantage.

Leveraging our proprietary machine learning, we're able to personalize offers for consumers, more efficiently [improve] on price credit and manage risk in ways that achieve better credit outcomes.

As a result, we're able to offer more flexibility for consumers, allowing them to use Affirm across a range of price points and loan durations.

These advantages differentiate us from buy now, pay later providers and other networks by allowing us to offer consumers much more than a short duration, paid in for solution, which is critical in categories such as travel that have high transaction values.

Our technology also enables us to drive measurable growth for our merchants.

They see this in the volume of purchases we generate for them, increased conversion rates, higher average order values and incremental consumers.

In fact, in the third quarter, approximately 1/3 of transactions were driven from Affirm's app insight.

Our ability to consistently deliver strong results for our merchants is why so many large enterprises, including Walmart and Priceline, choose to partner with Affirm.

Of course, great technology is ultimately about great technologists.

In order to sustain and extend our advantage in technology, we're investing in the people behind it and elevating its leadership within the company.

As a part of that, we announced today that Libor Michalek, Affirm's President of Technology, has been appointed to our Board of Directors.

Libor is one of the most highly-regarded technology minds in the fintech industry and has played a critical role in developing a proprietary technology platform that is a key competitive advantage for our business.

Building world-class technology is critical to our strategy, and we're pleased to have Libor bring his significant software, systems, security, machine learning and engineering experience to our boardroom.

Libor's appointment reflects our dedication to leveraging technology and innovation as competitive advantages that allow us to better deliver exceptional solutions for consumers and merchants at scale.

Before I conclude, let me briefly turn to some additional leadership updates.

Today, we announced that our Chief Legal Officer, Sharda Caro Del Castillo, has decided to step down from her role at Affirm.

Sharda led our legal team during a critical time for our company as we conducted our IPO, navigated an unprecedented market period and achieved tremendous growth.

I want to thank her for her dedication and leadership.

She's been a trusted and valued counselor to me and our whole leadership team, and we wish her all the best.

Katherine Adkins will be assuming the role of Chief Legal Officer.

Katherine has been one of Sharda's deputies, an integral part of our senior legal team and taken on increased responsibility while supporting the important legal needs of the company.

She will play a critical role as we continue to expand the ubiquity of our platform, strengthening, scaling and growing Affirm for the long term, and we're grateful to have her as a part of our leadership team.

In summary, we had a strong third quarter and we made excellent progress on our strategic goals.

We're seeing strengthening momentum in our business as consumers and merchant adoption continues to grow, and we believe Affirm is uniquely positioned to capture the large and growing opportunity in front of us.

None of this will be possible without the hard work of Affirmers.

They have delivered excellent results through the pandemic, provided exceptional service to our consumers and merchants, welcomed PayBright and Returnly teams to the Affirm family and prepared us for success as a public company.

I couldn't be more proud and appreciative of Affirmers' focus and dedication on behalf of our consumers, our merchants and our shareholders.

Together, we have accomplished a lot, but we're really just getting started.

And with that, I will turn it over to Michael to take you through the details of the third quarter and share our outlook for the fourth quarter.

Thanks, Max, and good afternoon, everyone.

As Max noted, we had a strong third quarter.

GMV and revenue exceeded our financial outlook, growing 83% and 67%, respectively, and accelerating from the year-over-year growth rates we achieved in the second quarter of 2021.

We delivered on this growth with significantly greater capital efficiency, reducing equity capital required by 10% compared to the prior year period despite growing the balance sheet by more than 100%.

We also delivered stronger credit performance with our allowance as a percentage of loans held for investment declining to a record low of 5.2%.

These trends are encouraging, and we remain focused on building on this momentum as we move forward.

I'll now walk you through some of the key financial highlights for the quarter and then share some color on our financial outlook, which we are raising today to reflect the strong performance of the business.

Unless otherwise stated, all period-to-period comparative data refers to our third fiscal quarter of 2021 compared to our third fiscal quarter of 2020.

Third quarter GMV grew 83% to $2.3 billion, exceeding our outlook for $1.8 billion to $1.85 billion.

The increase was driven by strong merchant and consumer adoption across all categories.

As of the end of the third quarter, active merchants more than doubled to nearly 12,000 while active consumers, which we measure over the prior 12-month period, increased 60% to 5.4 million.

Transactions per active consumer also rose from 2.1 to 2.3.

While GMV exceeded our outlook, the momentum of the business was even stronger than the 83% headline growth indicates.

Excluding Peloton, the third quarter GMV doubled, driven by growth across all categories that Affirm serves as well as from both new and existing merchant relationships.

The broad-based category growth also served to diversify merchant concentration as Peloton, where fulfillment lead times improved outpacing our expectations, represented 18% of third quarter GMV compared to 25% a year ago.

As Max indicated, travel was the real highlight among our verticals, even though its takeoff began late in the quarter.

Travel accounted for just 2% of September quarter GMV but has steadily grown to 9% in the March ending quarter.

In April, travel growth continued to accelerate, taking its proportion of GMV to 11% of the company-wide total.

Given the investments in partnerships we've made in the category, we expect travel to contribute meaningfully in the fourth quarter and beyond.

Our 0% APR business accounted for 43% of our total GMV, consistent with the third quarter 2020.

Loans with a term length of greater than 12 months accounted for 30%, down from 35% in the third quarter of 2020, reflecting our expanded merchant base and higher velocity and lower average order value categories.

Accordingly, AOV also declined slightly from $612 to $564.

The strong momentum in GMV growth in the third quarter translated into revenue growth that also exceeded the expectations we shared with you in February of $185 million to $195 million.

Third quarter net revenue of $231 million increased 67%, driven by total network revenue, which grew 53% to $112 million and interest income, which grew 80% to $95 million.

Roughly 1/3 of interest income was driven by the amortization of the discounts 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 more slowly, up 42% year-to-year.

Revenue from gain on sale loans of $16 million increased from $10 million in the year ago quarter as a result of more favorable loan sale pricing terms and more volumes sold.

Finally, servicing income of $8 million increased from $3 million in the prior year as the average unpaid principal balance of loans owned by third parties grew year-over-year.

I'd like to call out that our Q3 results include a $3.5 million reduction to total revenue, which we recorded in relation to the estimated financial impact to Affirm of Peloton's announced voluntary recall of their Tread and Tread+ products.

This reduction is split between $3.1 million in merchant network revenue and $0.4 million in interest income.

The estimate was based on projected return rates provided by Peloton for the quarter ending June 30, 2021, in its most recent quarterly filing.

We continued to improve our unit economics in Q3, growing revenue 67% while transaction costs, excluding the provision for credit losses, grew 50%.

Transaction costs, including the provision for credit losses in the third quarter, were $97 million, a 34% year-over-year decrease.

Third quarter results included an $83 million decrease in the provision for credit losses versus 2020.

Transaction costs, excluding the provision for credit losses, were $98 million, up $33 million or 50% from the third quarter of 2020, significantly slower than revenue growth.

Loss on loan purchase commitment was $62 million compared to $44 million in the prior year, driven by the increased volume of 0% APR loans.

Provisions for credit losses was a gain of $1 million compared to an expense of $82 million in the prior year, reflecting the reduction in allowance to a record low of 5.2% of loans held for investment.

Last year, we took an incremental $56 million provision in anticipation of record unemployment, which has been released over time as we have been experiencing stronger-than-expected repayment history in the portfolio.

The reduced allowance that I mentioned reflects materially better estimates on future loan losses and is consistent with our strong credit performance.

Additionally, due to our loss of emerging growth company status, we also adopted the CECL accounting standard retroactive to July 1, 2020, which did not have a material impact on provision for credit losses in this period.

Funding costs increased from $8 million to $15 million in the third quarter of 2021 but grew slower than loans held for investment.

The increase reflects the issuance of securitization trusts, which bear interest at a fixed rate as well as increased average funding debt offset by the lower average interest rates.

Finally, processing and servicing were $21 million, up from $14 million in the year ago quarter but grew slower than total platform portfolio as we realized scale efficiencies.

The combination of strong top line performance and reduced transaction costs resulted in better-than-expected revenue less transaction cost of $134 million compared to our third quarter outlook for $60 million to $65 million.

Looking beyond transaction costs to our investments to drive long-term growth, there was a meaningful impact this quarter from stock-based compensation primarily related to the January IPO.

Technology and data analytics expense grew 193% to $99 million or from 24% to 43% of net revenue, primarily reflecting SBC and higher engineering headcount as we worked to extend our competitive advantage and technology that Max noted previously.

Excluding SBC of $46 million, technology and data analytics expense grew 74% compared to the year ago quarter.

Sales and marketing expense increased from $7 million to $58 million or from 5% to 25% of net revenue, primarily as a result of SBC and the vesting of awards granted to Shopify associated with our exclusive long-term partnership.

Excluding SBC of $10 million and the impact of Shopify warrants of $17 million, sales and marketing expense grew by $25 million compared to the year ago quarter.

General and administrative expense increased from $31 million last year to $147 million or from 23% to [54%] of net revenue, due in part to an increase in the finance, legal, operations and administrative headcount to support the company's long-term growth and public company operations.

G&A also included an $11 million sublet impairment relating to our changing real estate footprint in light of our remote first policy.

Excluding SBC of $82 million, which includes $38 million associated with the grant of multiyear performance-based stock options to our Chief Executive Officer, G&A expenses grew 132% compared to the year ago quarter.

Including these expenses, GAAP operating loss was $169 million in the third quarter of '21 compared to $82 million in the third quarter of 2020.

Adjusted operating income, which excludes depreciation and amortization of $5 million, stock-based compensation of $140 million, the Shopify warrants of $17 million and other nonrecurring items of $13 million, was $5 million, a $76 million improvement from the adjusted operating loss of $71 million in the year ago period.

As a percentage of revenue, adjusted operating margin increased 53 points from the third quarter of 2020 and was 2%.

We continue to deliver on our strategy to grow our business while being very efficient with our equity capital.

On the growth side, total platform portfolio, which includes the unpaid balance of all loans facilitated through our platform, including those loans held by third parties, grew from $2.4 billion as of March 31, 2020, to $4.2 billion at the end of the third quarter or $1.8 billion of year-to-year growth.

This $1.8 billion in growth was funded by $1.3 billion in securitization volume and $552 million in forward flow volume while we were relatively flat year-on-year with the on-balance sheet warehouse financing.

On the funding side, in our third quarter, we executed the 2021-A revolving securitization in addition to a new warehouse facility and new loan sale program.

These deals allowed us to efficiently scale our program.

Despite growing our loans in the balance sheet by $1.2 billion, we were able to reduce the equity capital required from the year ago quarter by 10% from $229 million to $207 million.

As a percentage of total platform portfolio, equity capital required fell to 5% from approximately 10% in the year ago quarter.

Looking ahead, we are encouraged by the momentum in our business, and we believe the strengthening of the overall economy will serve as a tailwind in the fourth quarter.

We are seeing GMV growth across all categories, particularly in those hardest hit by the pandemic as demand recovers.

We are also encouraged by the strong consumer and merchant adoption we saw in the third quarter.

Reflecting these dynamics, we are raising our outlook for the balance of the fiscal year.

For our fourth quarter ending June 30, 2021, we expect GMV of $2.2 billion to $2.25 billion; revenue of $215 million to $225 million; transaction cost of $135 million to $140 million; revenue less transaction costs of $80 million to $85 million; and adjusted operating loss of $55 million to $50 million; and a weighted average share count to 270 million.

As I noted a moment ago, we recorded a $3.5 million reduction to revenue in Q3, which represents the estimated direct revenue impact from Peloton's Tread and Tread+ recall.

While we do not expect any additional revenue impact from the refunded merchant fees in Q4, we do expect an increase in returns starting in the near term, which will negatively impact key operating metrics like GMV.

Our financial outlook takes into account this estimated GMV impact associated with the refunds as well as an estimated impact on lower future Tread and Tread+ GMV.

Additionally, our outlook includes the impact from the acquisition of Returnly, which we closed on May 1 but do not expect to be material in Q4.

For our fiscal year 2021 ending June 30, 2021, we now expect GMV of $8.01 billion to $8.06 billion; revenue of $824 million to $834 million; transaction cost of $460 million to $465 million; revenue less transaction cost of $364 million to $369 million; adjusted operating loss of $55 million to $50 million; and a weighted average share count of approximately 160 million.

The full year guidance and the fiscal year-to-date financials include the impact of the adoption of CECL retroactive to July 1, 2020.

This adoption resulted in a $16 million downward revision to the previously reported provision for credit losses for the first half of fiscal '21 as a result of the reduction in allowance.

In closing, we had a strong third quarter.

Consumers are adopting our product in greater numbers, and our merchant partners are seeing real growth enabled by our product offering, and we believe the best is yet to come.

We are delivering on our mission to improve lives with honest financial products while also delivering results for our shareholders.

With that, we're happy to answer your questions.

(Operator Instructions)

Our first question comes from the line of Dan Perlin with RBC Capital Markets.

I just wanted to kind of make sure I understand all these dynamics that are at play here.

In particular, the merchant take rate in the quarter dropped and it looks like it's implied to kind of stay at these levels in the June quarter.

I'm assuming some of that has to do with maybe Peloton and also bringing on Shop Pay Installments.

But if you could maybe help with that dynamic first, that would be very helpful.

Yes.

So when looking at merchant fee revenue, the first thing that's really important to sum up both the merchant network revenue and the virtual card network revenue lines.

In particular, the virtual card network revenue is a key way we collect merchant fees from our travel merchants.

So as travel continues to gain in importance, it's an important line to look at in combination.

And then, yes, the biggest impact's around just the total take rate, which was actually in line with our expectations is the mix away from longer-term 0% loans, notably Peloton, which declined in concentration.

Okay.

So are you implying that -- I know you don't want to go out to 2022 guidance at this point, but it would -- I feel like the models were set previously to be closer to 500-plus basis points in the 2022 period, and this is kind of suggesting that, that may be accelerating on the downtrend here.

So all I'm trying to, I guess, ultimately get to is, is your expectation that Shopify is going to meaningfully increase the GMV to help offset that?

Or is this kind of the run rate that we should be thinking about even when we combine both the virtual card and the merchant network as we think about jumping on into next year?

Yes.

We're not going to give any guidance into '22 right now.

But the only other thing I'd add is there's a small impact from, obviously, a $3.5 million number you see in Peloton this quarter, and then the interest income dynamic, which definitely affects the merchant fee recognition is also at play here.

But we wouldn't expect there to be a material change from -- on the merchant -- total merchant revenue side from the impact of Shopify.

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

I wanted to ask about the travel and ticketing vertical.

It really seems to be enjoying a pretty rapid recovery, candidly more rapid than I would have expected, given the state of the world right now.

It's up at about 9% in the quarter of total GMV and I think you said 11% in April.

Where can we see that go?

Do you think this vertical will become a larger percentage of your business, presuming that there's still plenty of runway for the travel recovery to kind of play out?

Yes.

So first of all, you're totally right.

Travel ticketing is seeing what could only be described as a resurgence.

So if you look at the comparison to last year, fiscal Q3, which was a high pre-COVID quarterly market, it's really important to note that in general, we are comparing this quarter to kind of a pre-COVID Affirm because obviously, COVID changed everything.

But the growth even versus that number was 50% that we're coming off from a essentially collapsed base.

Now if you sort of zoom in and look at what's happening right now, the month-to-month growth is nearly tripled.

And so it's just an unbelievable resurgence, very, very quickly in that space.

And we're very excited about it.

We're very well positioned.

We have all kinds of exciting partners in places like Ikon Pass, Vrbo, accounts like Expedia, Priceline, some of these folks have been with us for a very long time.

Ikon is our ultimate new partner and then, of course, Delta Vacations, American Airlines are enormous partners as well.

And so we're very well positioned in the space.

It actually speaks a little bit to the fact that we're quite unique among our BNPL brethren in a sense that we play in both low- and high-ticket items.

And obviously, sort of pent-up demand for just getting out of town and going somewhere nice implies higher ticket values and we have to provide our services for both multi-hundred dollar and multi-thousand dollar tickets there.

So we do very well with all of those.

So I think I'll let Michael opine on exactly what we might want to guide to, but the overall economic recovery is just huge in the travel ticketing space and we are super well positioned to benefit.

We're starting to see all the investments that we made over the last year just setting up for this recovery really pay off.

That's terrific.

And I also wonder if I could ask you to give us a little more color on the Returnly acquisition, sort of how it fits into your broad strategy, maybe a bit on revenue synergies and an annualized contribution to the P&L just so we can kind of figure out how to model it next year.

I'll let Michael speak to the modeling part of this since that's certainly his headache.

But in terms of the value to us, it's an amazing synergy.

If you think of it sort of from the product point of view, Returnly literally picks up where Affirm leaves off.

So if you look at -- we bring the consumer to the checkout counter with the confidence and certainty that they will be able to afford this, there'll be no fees, there will be total transparency in pricing.

And off they go and they're happy to buy.

And what will happen if the shoe doesn't fit or if they don't quite like the color, they need it exchanged.

And up until the Returnly acquisition, Affirm said, "Well, great, there will be a really nice, clean refund process for you.

But once the merchant restocks and refunds, then you can come back and shop." And we always saw that as just a huge opportunity for us to step in and say, "Well, what if we know a customer well enough to allow them to shop even before they put the unwanted item in a box so that they can accelerate commerce for them -- give them satisfaction that much faster and help merchants just move the inventory that much quicker?"

And so we saw this long enough ago as we actually invested in Returnly.

So this is not an old friend.

We would track [a history] progress for a very long time.

We're proud investors and at some point realized that the synergies were too great to let them be too far away from us, and we completed the acquisition.

And you will see just an incredible amount of synergies.

First and foremost, just from the point of view of going to markets, when we speak to merchants, we've heard the question, "What do you do about returns?" Often of our standard answer has always been, "Well, we'll be your best return handling partner because consumers love us.

We don't charge fees.

There'll be no hidden gauges.

Now, of course, we can augment by saying, "Actually, we'll make it even better.

Before they even have to put the unwanted item in a box, we will be there, they can start shopping right away and help you sell more."

And so that's why we're so excited about this and it's just close so we have a ton to bring to market together.

We have a massive network of users.

8 million people have used Returnly successfully and that's another -- just a [cross use] for our products on the Affirm side, and there's much more work to do together.

I don't know, Michael, if you want to comment on how to account for the revenue opportunities.

Yes.

We haven't disclosed any revenue or profitability for Returnly.

We will update you guys in September.

What I would note now though is they do have 2 different revenue streams.

They do charge a SaaS model for most of the merchants who use the product, which we think adds stickiness and adds into the fight in the low AOV space.

And there also is an underwriting component, a risk-taking component.

If you think about what they process that Max just outlined, we think we can add a lot of value to that, both on the cost side as well as in bringing that product to our existing merchant base.

Got it.

Sounds like a great fit.

Our next question comes from the line of Matt O'Neill with Goldman Sachs.

I was just curious if you could help articulate a little bit better a couple of sort of time lines for rollouts.

So I was just curious, in the next couple of months, what's going to allow the 100 merchants on Shopify that is now at 10,000 merchants get up to much broader distribution?

Is that on your side or Shopify's side or both?

And then similarly, I found the card announcement very exciting and understand that, that will be a later in the year kind of launch.

But just again, kind of curious what the milestones are on that as far as getting closer to a broader launch.

Yes, that's a great question.

And I'm afraid I have to update the Shopify number for you.

Just since the last we added the press release, the number went up to 12,500.

So we got -- this is not a forward-looking statement.

I [don't] know how quickly it will grow, but obviously, it's growing pretty quickly.

So just to give you a quick breakdown of what's happening at Shopify.

So first of all, we're obviously super excited that we're finally here.

GA for this product will be available sometime in June.

And that means that every new Shopify merchant coming on to the platform will have Shop Pay Installments powered by Affirm enabled automatically.

And so we'll just see, we think, a tremendous amount of uptake on the merchant side.

Now because Shopify is not exactly a small network, in fact, there are hundreds and hundreds of thousands of merchants that are eligible for Affirm's products or collaborative product together, we have been preapproving and inviting existing merchants onto the platform, and that's where these sort of rapidly scaling numbers are coming from.

We're far from done there.

And so we expect this number to continue growing not linearly and I have very little prediction as to how fast it will go, but there's a lot more to add to this 12,500.

And so that's what's happening on the Shopify side of things.

Very excited about where that's headed.

Lots and lots more to do together as well, so we worked very long and hard.

One cool stat about Shopify.

I just wanted to make sure that we're honest when we offer this product to the merchants by way of being, in fact, better as opposed to just an exclusive partner.

And so we had timed the time to complete a transaction using Shop Pay Installments powered by Affirm versus all the other competing products that [may be found] in a while.

In both new and existing customers, we're at least 30% faster in converting.

So not do we only have a prime placement of this product, we also are, in fact, offering the very best product in the market.

And so I think that's a fairly powerful endorsement on the platform.

Card.

So some of you have met us during our testing the waters process before we went out to actually do a initial public offering.

It's roughly what I wanted to do with the card announcement.

It's very different.

And I agree that's very exciting, but it's easy to get excited about what's going on in your own head without getting confirmation from consumers.

So we announced the product primarily to see what would happen to our wait list?

Would we find ourselves surrounded by yawns or people actually saying, "Wow, that's the most exciting thing that's hit the news cycle in the world of already pretty exciting fintech." Very happy to report that the wait list is of excellent length from my vantage point, and we're very excited to bring this product to market.

But it's all in good time.

We're going to [let out] this year.

Okay, got it.

And maybe just one real quick follow-up.

Would you be willing to help us at all think through the composition of next quarter's guidance, specifically with respect to the provision just because that's been a line of outperformance in the 2 quarters as a public company?

Yes.

The last 2 quarters have seen pretty large releases.

We do think that's behind us now.

If you look at the allowance as a percentage of loans held for investment at 5.2%, think that's in the zip code of a pretty safe number but not something we would see materially decline from here.

Our next question comes from the line of Moshe Orenbuch with Credit Suisse.

Congratulations on all the forward progress that you talked about with Shopify.

And just wondering if you could kind of just help us understand how those customers will kind of relate to the Affirm ecosystem.

Are they going to be customers just of that kind of your venture with Shopify or will they be part of the Affirm -- will they get an Affirm account and will you be able to continue marketing to them?

So I guess the easiest thing to serve to make it extremely black and white is that you will be able to service your Shop Pay Installments loan either inside the Shop app or inside the Affirm app.

So I think that should give you sort of quite a lot of the answer.

There's a lot of user interface details that have to [gotten rate].

And so if we see the customer again together with Shopify within the broader Shopify ecosystem, which is quite a bit at this point, of course, it's very easy to recognize them within the Shop Pay environment.

We have prime placement there and that will be the smoothest experience possible.

If and when we find this customer outside of the Shopify ecosystem, we want to make sure we don't sort of say, freak them out by saying, "Hey, we've met you before.

So on you go, you're signed up." But that kind of experience as well will be extremely smooth and they'll be able to reaffirm their identity, if you will, and could become -- be able to use our services on any other merchant.

So there's a slight difference between all those paths, but they're all designed to be extremely simple.

The most important thing that's really worth understanding is that the underwriting cost, the data associated with the -- [know your] customer provisions, all the things that we have to do to make sure that this customer is, in fact, someone we are willing to take the risk with, happens in that first transaction.

And so there's just an enormous synergies financially as well as from the user interface point of view as we bring these customers onboard.

All right.

And then up clearly, then you'd be able to, even in some form, be able to kind of -- or maybe, I guess ask, would you be able to reach out to them at that point and kind of invite them?

Is that something that's possible?

I think depending on the circumstances, I think there's probably a little bit more nuance to the answer than yes, but for the avoidance of doubt, we have no intention of spamming Shopify customers.

If that's the underlying question, that's not happening.

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

Certainly, encouraging to see the recovery in travel and ticketing.

Can you kind of just juxtapose that with any other changes in card-present behavior you see from consumers in reopening?

In other words, is there any shift in consumer behavior in e-comm that might otherwise temper a very strong recovery in that central category, where there seems to be a lot of pent-up demand?

So I think there's a lot of different strands going on.

So in general, we see the economic recovery as a huge tailwind for us, and there's a bunch of different things that are connected to it.

And some of it is in travel and ticketing category, which just sort of coiled up and is now rapidly spitting up as people are able to travel finally to see their loved ones.

There's also all kinds of subcategories that the mind may not naturally go to immediately, but they are quite large and are happening.

For example, 97% of all weddings got postponed and only 5% of that got canceled.

So there's a lot of people that need to buy relatively expensive bridal dresses and also some other things.

And again, playing in the high-ticket items as well as low-ticket items really positions us well for these sort of affordable luxuries as well as everyday expenses.

And so we see a lot of demand in all these categories that just kind of took a break during 2020, if you will.

That said, we are not seeing a reduction in demand in fashion and in home, fitness, outdoor.

All the different categories where Affirm has traditionally been very, very strong are, in fact, continuing strong.

If you actually, again, look at the sort of the pre-pandemic comparison we have in this quarter, ex Peloton, we grew 100%, which is a pretty massive acceleration from the quarter prior.

So effectively, not quite, but almost doubled the second derivative of growth here.

And that is already as the recovery began, still from a small base, but the demand for this product is what's driving our growth.

It's less the sort of trade-off from category to category.

So we're very excited about all of these things and obviously have to believe it will be there in all those places as the demand spins up.

Okay, that's helpful.

And with regard to card-present generally, as you think about that category, can you update us on your thoughts and how important the card is going to be to growth in card-present, and what the trajectory might look like?

I was actually -- I was trying to figure out what you meant by card-present, so now I get it.

So just slight step back, but it could be important for us to provide what we sometimes know as the omnichannel solutions, especially for our largest partners.

We have a very large long-term partnership with Walmart that's been very successful.

A lot of our larger enterprise customers are now setting up for completely new modalities of interacting with their consumers, buy in store, return online, buy online, return in store.

So all these different new modes of transacting is a thing, and it's really important that we are able to meet the consumers where we are.

In part, our card strategy, we think, is kind of one of the best reengagement techniques we have to offer to our consumer.

If Affirm is something that you love and our Net Promoter Score speaks for itself, if we are in your wallet, be it on a screen or in your actual physical wallet, we'll have a chance to remind you that you can use Affirm pretty much everywhere you go.

And so we think of our card strategy and overall omnichannel strategy in store and out of store as a sort of continuous landscape of just being where the customer is and making sure, in this case, the end consumer is making sure that we're able to meet their demands.

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

You mentioned that some of the take rate compression came from, I guess, Peloton and its 0%, coming down as part of your mix.

Did you see any pulling back from other merchants from their own 0% promotions that may have also impacted that at all?

And I'm wondering, as the mix changes maybe to a little bit more interest-bearing, how we should think about that impacting customer acquisition, et cetera?

Yes.

We did not actually see a big change in terms of 0%.

I mean, I think the biggest driver is that long-term 0% program with Peloton, which clearly did come down in total.

But otherwise, I think the 0% business was flat year-on-year for the same period.

And so we didn't see a pullback on 0% programs generally, and I think the biggest impact was from Peloton specifically.

In fact, 0% outside of Peloton accelerated.

Got it, got it.

That's helpful.

And then separately, like you kind of highlighted or called out what you expect the revenue impact from expected returns to be associated with the Tread products.

Do you think that will be fully captured -- or that program will be fully captured in the June quarter?

Or is that, do you think, going to spill beyond the June quarter into the second half of the calendar year or the first half of your fiscal year?

Yes.

So we used Peloton's guidance in their Q around the $50 million estimated return volume and we're a certain percentage of that.

And we -- that's how we got to our $3.5 million number that was actually in the fiscal Q3.

So we don't anticipate there to be any impact in fiscal Q4 associated with further refunds.

I also thought it would be important to put in context that Peloton return number.

We'll do a couple of hundred million dollars in returns in any given quarter.

So for us, this is a much smaller impact than one might think from the outside.

Got it, got it.

And so just to be clear on that, Michael, then, if -- however, returns vary from their estimate, like there could be some future small adjustments to account for that then?

Yes, exactly, but we don't anticipate that to be material.

I mean, when we take even the bulk of that is the $3.5 million number, which again was recorded in Q3 so this should not be an impact in Q4.

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

I just wanted to start with a follow-up question on Shopify, and I'm just wondering how much GMV and/or revenue within the Q4 guide there.

Just any color on consumer uptake of Affirm/Shop Pay Installment that you've seen so far among the merchants that have gone live?

I'll let Michael speak to the guidance, but I don't think we're giving it.

But I think it's a little bit early to speak to the deck numbers, just given the fact that literally, the 10,000 number -- 12,500 number that we quoted, all of this happened in [less than] last 30 days, just to make sure I'm not perjuring myself there.

And so it's a very, very rapidly increasing merchant base.

We'll be able to speak a little bit more clearly as to what this actually means in terms of volume and in terms of consumer adoption.

Obviously, we spent nearly a year testing the product, making sure it's much faster than competition, much better converting, competitive in and of itself and better positioned than the competition.

But we'll -- we have very high hopes for what that actually means in terms of volume generation, but we'll speak to real numbers as we have them.

Yes, okay.

Very specifically for Q4, the focus is getting to GA so that the impact we would expect to be more material in fiscal '22.

Okay.

So you think maybe next quarter, we'll get a sense on what your expectations are for '22 from Shopify?

Yes.

Okay.

And then just a follow-up question.

I'm wondering what trends you guys are seeing just in terms of both consumers and merchants adopting more than 1 BNPL provider and what you think the implications over time might be for industry consolidation.

Definitely hard to speak to industry consolidation since that doesn't include us.

We think we're the best, but obviously, everybody has a bias for their own.

That said, I think last quarter, I said something on the lines of we expect low AOV to have ultimately capacity to offer multiple providers integrated, while higher AOV probably trends to 1 provider.

I think that's still true.

I would say that the momentum towards multiple providers at a single low AOV merchant has not been quite as quick as I'd anticipated, while the ability to retain an ability to serve high AOV merchants has been even stronger than I thought.

I think the complexity of both technical and risk management on the higher AOV side of things, that's what we consider to be our core advantage.

That's very real and it's very hard for our competitors to speak credibly in that area at all.

On the low AOV side of things, I think the -- again, I believe that ultimately, brands will have 1 or 2, maybe 3 providers.

It's a little bit early.

There's so much growth available in every subsegment.

In low AOV, it's fundamentally fashion, beauty.

Some of this are a bit lower.

Hard goods, low-cost hardgoods.

And at the moment, there's so much demand just looking at the numbers that I just quoted on Shopify.

It's pretty clear that there's an enormous amount of pent-up demand on the merchant side.

So at the moment, the competitive overlap is not yet a major topic on our minds, but we'll report back in a quarter.

Our next question comes from the line of Chris Brendler with Seaport Global.

I wanted to ask about merchant adoption of buy now, pay later.

I look at your Affirm app and all the merchants that are in there that currently don't have it on their checkout screens or their website.

And it just feels like with the consumer adoption starting to gain traction, can you maybe give us a little insight on where you think we are in terms of merchant adoption, especially in the travel space?

It seems like you got some great numbers in travel this quarter, but there's a lot of travel sites that don't have buy now, pay later yet, so maybe I can get your thoughts there.

I agree.

That is why we have a sales team.

They are very hard at work fixing that very problem.

So I'll give you a more serious answer.

So in our app, actually even -- there's multiple ways we collaborate with merchants.

One of them, obviously, is the embedded at the point of sale sort of classic buy now, pay later or pay in 6, pay in 12, whatever the merchant suite that we offer at checkout that makes sense for this particular price point.

Beyond that, there's our app and in our app, you can be listed whether you're integrated or not.

The way we get competition from merchants for driving these new incremental transactions, which are very, very powerful, by the way, for them, they're in fact more valuable than consumers that we help close at the point of sale.

These customers actually are starting their shopping journey in our app and are going to a point of sale at a merchant.

In those situations, merchants quite frequently will pay us essentially a bounty or a referral bonus for bringing this consumer to them.

And then within the app itself, we have quite a lot -- and by the way, when I say the app, I use it interchangeably with our sites.

A fair amount of our consumers use our sites just perhaps because they prefer the larger screen format.

But in both those cases, those are potentially advertising opportunities for our merchant partners to bring their offers, new products, et cetera, to the Affirm ecosystem.

And so in all those situations, there is a financial relationship with the merchant.

Sometimes the merchant doesn't have Affirm integrated at the point of sale yet.

They may have already signed an agreement, and we are waiting for the technical piece to become available.

Part of what we pride ourselves on is this ability to be live very, very quickly.

We have a variety of integration modalities.

We have this thing that we've really been leading into called Affirm Lite, which allows merchants to go live literally within minutes of signing a contract.

But there's many different modalities of integration.

Sometimes, it's a [going claim] that's when sometimes you'll find us promoting a merchant in our app and yet the merchant doesn't yet have a point of sale integration.

But all of those things are just ways of delivering value to our merchant partners.

That's what we do all day every day.

Great, that's great color.

And I actually have a related question, speaking of delivering value to your merchant partners.

It seems like the biggest bear case or pushback I get on this story is merchant pricing and the entrance of PayPal and other potential providers who are going to give it away "for free" or credit card interchange rates that could potentially undermine the pricing model that a lot of the buy now, pay later start-ups or, I guess, pioneers have used.

My impression is that Affirm is a little bit different, given your product mix and your ability to do more loan products.

So maybe just comment on merchant pricing and your ability to drive contract renewals that have pricing at relatively similar levels, given the value you're delivering to merchants.

There's a lot in there and I'll try to keep it short although this may well turn into a soliloquy.

So one maybe [good] way of thinking about merchant's perception or merchant's relationship with Affirm, we are not just a payment provider.

We are fundamentally [E-marketing] device for merchants.

And so when you typically talk about price compression, and so why are you outside the interchange box, is a common payment industry slang, it doesn't really apply to us.

We are competing for both the payments budget, but more importantly, for the marketing budget.

When the merchant says, "Do I discount or do I do something else?" Affirm stands up and says, "Don't discount.

Instead, offer 0% rate and maintain your price integrity." That is not something merchants can do without our help but that's what we do at Peloton, that's what we do at almost half of our transaction volume.

The 0% transactions are really powerful converters of consumers that are on the fence.

They're trying to figure out whether they want to transact, or they want to transact right now.

So it's really, really important.

And fundamentally, that doesn't really go against the payments budget, and it doesn't compete with payments so much as it becomes a marketing channel or a marketing accelerator.

There's a lot more where that came from, if you just think for a second about what the app does.

So it doesn't even help consumers convert, it helps them become excited about a product.

They can find out about it as they are spending time in our ecosystem, maybe servicing their loan, maybe they're checking out what merchants we brought on.

But that's another opportunity to tell our consumers that, "Hey, this is a new promotion, this is a new interesting idea," all while helping the merchant maintain price integrity.

And so I think those standpoints really highlight that we're fundamentally not in the same space as credit card players or we're not comparing our pricing to interchange.

I'll actually pause there.

I feel like I've meandered into details.

Michael, keep me honest, what did I not say?

Yes, I think you went into detail on this call.

Maybe Max, that's awesome.

Maybe just fair to say that merchant pricing is not one of your biggest concerns near term?

It's not and probably where it's most apparent is in the high-ticket items.

I think you can really see that -- navigating that becomes a lot more about managing risk and managing the technical integration and just the overall interaction with the consumer also creates -- if you think about buying a Peloton, that's 39 opportunities for me to tell you about all the cool exciting things that are happening in the Affirm space.

And that's really, really powerful.

It's very different from your relationship with PayPal, frankly, or with your credit card provider.

And our next question comes from the line of Bryan Keane with Deutsche Bank.

Really solid quarter.

I also was going to ask about that.

Maybe Michael, just your perspective on a same-store sales kind of merchant take rate because I know that does come up a lot, maybe on renewals, what you're seeing.

And is there a big difference between high AOV and low AOV?

There's not a difference in terms of the trend around renewals.

I think frankly, we're probably still in the early innings on that, and that will bear itself out over the next couple of years before you start to see meaningful pressure on things like contract renewals.

So not really a data point there.

What I would say though, is that we -- it's unquestionably very competitive out there in the low AOV space.

If you're only offering paid for, it is increasingly becoming commoditized and that's why we think it's so important to offer a wider range of average order value solutions and increase the merchant services that we offer beyond just buy now, pay later and hence the acquisition for Returnly.

Got it.

And just a follow-up on the Shopify deal.

How will you guys end up converting more of the existing merchant base, the 12,500 you're at now?

Is there something you're doing to get those guys ramped up quicker?

And then how also do you get more checkout?

Do you push -- is there a way to push the solution more to get them to push the Affirm solution?

I think the short answer is we expect to get a lot more.

I think this deal really only makes sense if this is a pervasive, I guess is the word I'm looking for, a solution across the Shopify ecosystem.

And I think both companies are very motivated to make sure that now that we're finally ready for a GA rollout that it comes to a lot more than 12,500 merchants.

12,500 merchants went live primarily in just the last 30 days or so, and so this is a good test of what demand looks like.

The multiple education opportunities that we have with -- in concert with Shopify.

For larger players, we go to market together, we have our sales teams working side-by-side, making sure that we educate enterprises, making sure that we figure out exactly what solutions they customized for them.

A big part of why Shopify chose us is we're not a one-trick pony.

We're not just paying for and what else do you need.

We've built very, very complex, very interesting systems for our partners from Priceline to Walmart.

And some of the larger players that are on Shopify really have some pretty strict requirements and there's plenty of opportunity to go there.

And then the long tail, Shopify is fairly exceptional at communicating with the merchants, and we are very excited to finally be ready to tell the story to the hundreds of thousands of shops that are eligible for this solution.

And with that, ladies and gentlemen, this concludes our question-and-answer session as well as today's conference call.

You may now disconnect your lines at this time.

We thank you for your participation, and have a wonderful day.