Affirm Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2022 (quarter ended December 31, 2022). Amounts are in U.S. dollars unless noted.
Business context and reporting period
Affirm provides buy-now-pay-later installment financing through merchant relationships, originating-bank partners, and capital-markets funding. It reports one operating segment. The filing is unaudited interim reporting; results for the periods are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Three months ended Dec. 31, 2022 | Year-over-year change | Six months ended Dec. 31, 2022 | Year-over-year change |
|---|---|---|---|---|
| Revenue, net | $399.6 million | Up 11% | $761.2 million | Up 21% |
| Operating loss | $359.5 million | Widened from $196.2 million | $647.0 million | Widened from $362.3 million |
| Net loss | $322.4 million | Widened from $159.7 million | $573.7 million | Widened from $466.4 million |
| Basic and diluted loss per share | $1.10 | Compared with $0.57 | $1.96 | Compared with $1.70 |
| Operating margin | Approximately -90% | Compared with approximately -54% | Approximately -85% | Compared with approximately -57% |
For the quarter, GMV increased 27% to $5.7 billion; for the six months, it increased 40% to $10.0 billion. Active consumers reached 15.6 million, up 39% year over year, and transactions per active consumer rose 38% to 3.5.
Quarterly expense growth exceeded revenue growth. Provision for credit losses was $106.7 million, up 103%; funding costs were $43.8 million, up 147%; and sales and marketing expense was $188.3 million, up 31%. Sales and marketing included $128.1 million of expense from vesting Amazon-related warrants. Six-month operating cash flow was positive $22.7 million, versus cash used of $75.1 million a year earlier; investing cash use was $574.9 million and financing cash provided was $869.4 million.
At December 31, cash and cash equivalents were $1.44 billion, restricted cash was $424.5 million, and available-for-sale securities were $914.9 million. Management cited $2.4 billion of cash, cash equivalents and available-for-sale securities, $1.6 billion of remaining warehouse funding capacity, and $205 million available on the revolving credit facility. Total liabilities were $5.29 billion; funding debt was $1.88 billion, securitization notes were $1.31 billion, and convertible notes had a net carrying value of $1.71 billion. Warehouse facilities had $3.4 billion of aggregate commitments, with $1.9 billion drawn; the company reported covenant compliance and no revolver borrowings.
Loans held for investment, net, were $3.47 billion, compared with $2.35 billion at June 30, 2022. The allowance for credit losses was $182.1 million, or 5.0% of loans held for investment as cited by management; six-month net charge-offs were $138.2 million. The company reported $22.7 million of operating cash flow, but did not provide a conventional free-cash-flow figure.
Material changes versus the prior comparable period
- Revenue grew, supported by higher GMV, more consumers and merchants, interest income, loan-sale gains, and servicing income. Expenses rose more quickly, increasing operating and net losses.
- Product mix shifted toward Pay-in-4: it represented 23% of quarterly GMV versus 18% a year earlier. Long-term 0% APR loans fell to 4% of quarterly GMV from 13%; average order value declined to $307 from $365. Management noted that mix shifts can reduce revenue as a percentage of GMV.
- Loans held for investment increased substantially, while funding debt rose from $672.6 million at June 30 to $1.88 billion at December 31. Funding costs more than doubled year over year for both the quarter and six-month period.
- Cash, cash equivalents, and debt securities totaled $2.36 billion, down from $2.85 billion at June 30, 2022. The company’s required equity capital as a percentage of its total platform portfolio increased from approximately 3% to 5%.
- Amazon-related warrant expense and stock-based compensation were significant. Total stock-based compensation expense for the six months was $285.2 million, including $43.6 million capitalized into software and equipment.
Outlook, risks, contingencies, and unusual items
- Liquidity outlook: Management said available liquidity was sufficient for at least the next 12 months, while noting that future access to funding and operating cash flows cannot be assured. Key sensitivities include loan delinquencies and defaults, capital-market access, interest rates, and funding costs. A hypothetical 100-basis-point rate increase was estimated to adversely affect annual financial results by less than $20 million over the next 12 months, after hedging.
- Bank-partner concentration: Affirm said it began reducing Cross River Bank originations in January 2023; as of January 31, a majority of platform loans were originated by Celtic Bank. Celtic’s agreement was scheduled to expire in 2023, and the company had no assurance that new bank partners could be onboarded promptly or at all.
- Merchant concentration: No merchant represented 10% or more of quarterly revenue, but Amazon-related GMV was approximately 23% of quarterly GMV and 20% for the six-month period. The filing identifies dependence on large merchant and platform relationships as a risk.
- Subsequent restructuring: On February 8, 2023, Affirm announced a planned workforce reduction of approximately 500 employees, or 19% of its workforce, and a partial San Francisco office closure. It estimated total costs of $35–$39 million, mostly in fiscal Q3 2023; actual costs may differ.
- Subsequent acquisition: Affirm completed its acquisition of UK BNPL company Butter Holdings on February 1, 2023, for $14.9 million cash, subject to adjustments, plus settlement of $1.5 million of subordinated secured notes. Initial purchase accounting was incomplete.
- Legal and regulatory matters: A new putative securities class action, Kusnier v. Affirm, was filed in December 2022, alleging misleading statements concerning consumer debt and regulatory risk. The filing said estimable legal exposure was not material, but outcomes remain uncertain. Prior related actions were dismissed. The company also cited extensive consumer-finance regulation and CFPB oversight as risks.
- Other unusual items: Six-month other income included a $9.3 million gain from a reduction in PayBright contingent consideration, compared with a $107.6 million loss in the prior-year period. The company remained unprofitable and reported a full valuation allowance against U.S. federal and state deferred tax assets.
Most important facts for investors to verify
- Whether loan delinquencies, charge-offs, credit-loss provisions, and portfolio performance remain consistent with the assumptions behind the allowance.
- Whether Affirm can diversify bank-originated lending beyond its increased reliance on Celtic Bank, and on what terms.
- How funding costs, interest rates, warehouse utilization, securitization activity, and available capital affect loan economics and liquidity.
- Whether continued growth in Pay-in-4 and lower average order values pressure merchant revenue per GMV and margins.
- Whether Amazon and other major merchant relationships remain stable, given the concentration of GMV.
- The actual restructuring charges and savings, Butter acquisition accounting, and any material developments in litigation or regulatory matters.