Affirm Holdings, Inc. — Q2 FY2024 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2023. The quarter is Affirm’s fiscal second quarter. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and performance
Affirm provides buy-now, pay-later installment loans and payment services through merchant, card, and consumer channels. It earns merchant and card network revenue, interest on loans, gains on loan sales, and servicing income.
| Metric | Three months ended Dec. 31, 2023 | Prior-year quarter | Six months ended Dec. 31, 2023 | Prior-year six months |
|---|---|---|---|---|
| Revenue, net | $591.1 | $399.6 | $1,087.7 | $761.2 |
| Operating loss | $(172.2) | $(359.5) | $(381.6) | $(647.0) |
| Net loss | $(166.9) | $(322.4) | $(338.7) | $(573.7) |
| Diluted loss per share | $(0.54) | $(1.10) | $(1.11) | $(1.96) |
- Quarterly revenue grew 48%; six-month revenue grew 43%. Quarterly revenue included $288.3 million of interest income, $227.6 million of network revenue, $52.7 million of loan-sale gains, and $22.4 million of servicing income.
- Quarterly operating loss was about 29% of revenue, versus about 90% a year earlier; net loss was about 28% of revenue, versus about 81%. Affirm remained loss-making.
- Quarterly operating expenses were nearly flat year over year at $763.3 million. Lower technology, sales and marketing, and general and administrative costs were offset in part by higher funding, processing, credit-loss, and loan-purchase-commitment costs.
Balance sheet, liquidity, debt, and cash flow
- At December 31, 2023, cash and cash equivalents were $1.037 billion, restricted cash $411.3 million, and available-for-sale securities $914.1 million. Management reported $1.951 billion of cash, cash equivalents, and debt securities available for liquidity purposes.
- Total assets were $9.065 billion and stockholders’ equity was $2.635 billion. Loans held for investment, net, were $4.977 billion; the related allowance for credit losses was $262.2 million, or 5.0% of gross loans held for investment.
- Reported debt carrying values included $1.907 billion of funding debt, $2.741 billion of securitization notes, and $1.416 billion of convertible notes. The $1.4259 billion principal amount of 0% convertible notes is due in 2026. The $205 million unsecured revolving facility had no borrowings outstanding.
- Warehouse and Canadian facilities had $3.8 billion of available capacity in aggregate, excluding other funding sources; Affirm also reported $205 million available under its revolver. It was in compliance with applicable debt covenants.
- For the six months, operating cash flow was $173.2 million, investing cash flow was $(640.8) million, and financing cash flow was $655.2 million. Cash, cash equivalents, and restricted cash increased by $188.0 million to $1.448 billion.
- Management stated that principal liquidity sources were sufficient for operating, working-capital, capital-expenditure, and currently planned growth needs for at least the next 12 months.
Material changes versus prior comparable periods
- Quarterly GMV rose 32% to $7.5 billion; six-month GMV rose 30% to $13.1 billion. Active consumers increased 13% to 17.6 million, and transactions per active consumer rose 25% to 4.4.
- Interest income increased 86% for the quarter, reflecting a larger average loan balance and a higher share of interest-bearing loans. Interest-bearing loans represented 73% of quarterly GMV, versus 67% a year earlier.
- Funding costs rose 93% for the quarter to $84.6 million, attributed to higher benchmark rates and greater funding balances. Provision for credit losses rose 13% to $120.9 million, mainly reflecting loan-portfolio growth.
- Loan-sale gains declined 12% for the quarter, which Affirm attributed to higher benchmark rates affecting sale pricing, partly offset by higher loan-sale volume.
- Quarterly loan-purchase-commitment losses increased 40% to $53.6 million. The allowance for credit losses increased from $204.5 million at June 30 to $262.2 million at December 31.
- Affirm said 30-day delinquency rates for monthly installment loans and allowance rates were comparable with December 2022; management described credit performance as normalized and seasonal.
Outlook, commentary, risks, and unusual items
- The filing provides no specific numerical earnings or revenue guidance. Management identified growth, funding availability and cost, credit performance, product and merchant mix, seasonality, and macroeconomic conditions as key performance factors.
- Management cited persistent inflation, elevated interest rates, possible recession and unemployment, consumer demand uncertainty, and potential pressure on delinquencies and funding costs. It also noted reliance on bank partners, warehouse facilities, securitizations, and loan-sale counterparties.
- A hypothetical 100-basis-point parallel increase in interest rates was estimated to adversely affect cash flows from market-risk-sensitive instruments by less than $40 million over the next 12 months. Affirm uses derivatives to mitigate, but not eliminate, interest-rate risk.
- Unusual items included a $14.1 million impairment of a non-marketable equity investment, $28.1 million of one-time expense acceleration from an RSU vesting modification, and $1.0 million of goodwill impairment. Amazon warrant-related expense was $125.1 million in the quarter and remained a significant component of sales and marketing expense.
- Affirm renewed authorization to repurchase up to $800 million principal amount of its 2026 convertible notes through December 31, 2024; it had made no repurchases under the prior authorization by December 31. A company Rule 10b5-1 plan provided for up to $400 million of note repurchases from February through April 2024.
- Shareholder securities and derivative lawsuits remained pending or stayed; the company said accrued amounts were not material and estimated legal matters would not have a material adverse effect based on current knowledge. The filing reported no material changes to previously disclosed risk factors.
- Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and improving losses translate into sustained profitability and positive cash generation, particularly after significant noncash compensation and warrant-related expenses.
- Loan performance as the portfolio grows: delinquencies, net charge-offs, allowance adequacy, and trends by loan vintage and product.
- Funding economics and availability, including the effect of interest rates, warehouse and securitization capacity, and loan-sale pricing.
- Concentration: the five largest merchants and platform partners accounted for 48% of quarterly GMV; Amazon represented 21%.
- Potential dilution from stock-based awards and warrants, and the terms, execution, and liquidity impact of any convertible-note repurchases.
- Developments in the disclosed litigation and consumer-finance regulatory environment.