Affirm Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended December 31, 2020. The interim financial statements are unaudited. Dollar amounts below are in millions unless noted.
Business context
Affirm provides point-of-sale installment financing through merchant integrations, virtual cards, and its consumer app. It earns merchant and virtual-card fees, interest on loans it retains, gains on loan sales, and servicing income. Most loans are originated by bank partners; Affirm purchases many of those loans and funds its portfolio through warehouse facilities, securitizations, and loan-sale arrangements.
Financial and operating performance
| Metric | Three months ended Dec. 31, 2019 | Three months ended Dec. 31, 2020 | Six months ended Dec. 31, 2019 | Six months ended Dec. 31, 2020 |
|---|---|---|---|---|
| Revenue, net | $130.0 | $204.0 | $217.9 | $378.0 |
| Operating loss | $(32.6) | $(31.7) | $(65.6) | $(76.3) |
| Net loss | $(31.0) | $(31.6) | $(61.8) | $(46.8) |
| Operating cash flow | Not presented by quarter | $(34.6) | $(50.0) |
- Quarterly revenue increased 57% year over year; six-month revenue increased 73%. Quarterly GMV rose 55% to $2.1 billion; six-month GMV rose 61% to $3.6 billion.
- For the quarter, merchant network revenue was $99.6 million, interest income $73.9 million, gain on loan sales $14.6 million, virtual-card revenue $10.8 million, and servicing income $5.2 million.
- Quarterly operating expenses rose to $235.8 million from $162.6 million. Sales and marketing increased to $39.1 million from $7.7 million, including $17.0 million of Shopify agreement asset amortization. Loss on loan purchase commitments was $67.8 million, up 59%, mainly reflecting increased purchases of loans above fair value, including 0% APR loans.
- Quarterly provision for credit losses fell 42% to $17.5 million. Management cited stronger-than-expected credit performance; net charge-offs as a percentage of average loans held for investment were 0.6%, versus 2.2% a year earlier. For the six months, provision rose 5% to $57.7 million.
- Quarterly net loss was nearly unchanged year over year. Six-month net loss improved partly due to a $30.1 million gain from extinguishing convertible debt, a non-recurring item. The filing reports basic loss per share of $0.45 for the quarter and $0.69 for the six months.
- Calculated operating-loss margin was approximately 15.5% of revenue for the quarter, compared with 25.1% a year earlier; six-month operating-loss margin was approximately 20.2%, compared with 30.1%. These are calculated from reported figures.
Financial position and liquidity
- At December 31, 2020, cash and cash equivalents were $520.7 million and restricted cash was $116.0 million. Loans held for investment, net, were $1.76 billion; the allowance for credit losses was $131.2 million.
- Funding debt was $805.0 million net of issuance costs, and securitization notes were $818.4 million on the balance sheet. Warehouse facilities had $1.625 billion of aggregate capacity, with $813.5 million drawn and approximately $811.5 million available. The company reported covenant compliance.
- Six-month operating cash use was $50.0 million and investing cash use was $906.7 million, principally reflecting loan purchases and the $113.6 million PayBright acquisition escrow payment. Financing provided $1.265 billion, including preferred-stock proceeds and securitization funding. Cash and restricted cash totaled $636.8 million at period end.
- Management said existing cash, financing capacity, loan-sale arrangements, and operating cash were expected to cover operating, working-capital, capital-expenditure, and planned growth needs for at least 12 months, while cautioning that future funding availability and cash generation were not assured.
Material changes, outlook, and notable items
- Active consumers reached 4.5 million at December 31, 2020, up 24% from June 30, 2020; transactions per active consumer were 2.2. The merchant base expanded 39% from June 30 to approximately 7,890.
- Peloton accounted for approximately 24% of quarterly revenue and 27% of six-month revenue. A change to Peloton’s transaction capture timing left approximately $83.9 million of facilitated transactions uncaptured at quarter end; the filing said this would delay GMV and revenue recognition, primarily affecting the quarter ending March 31, 2021.
- Management highlighted COVID-19-driven shifts in merchant demand, including declines in travel, hospitality, and entertainment and strength in home fitness, office products, and furnishings, while warning those patterns might not persist. The company described seasonal revenue strength in the December quarter and historically strong home-fitness revenue in the March quarter.
- No quantitative earnings guidance is provided. Management expects continued investment in growth, higher headcount, and increased sales and marketing spending; it also expects revenue growth rates may decline and states that profitability is not assured.
- On January 1, 2021, Affirm completed its PayBright acquisition for approximately $113.6 million cash plus shares, including shares held in escrow subject to revenue milestones. On January 15, it completed its IPO at $49 per share, raising approximately $1.3 billion before expenses. On January 19, it entered into an undrawn $185 million unsecured revolving credit facility.
- Management reported disclosure controls were ineffective as of December 31, 2020 because of an unresolved material weakness in general IT controls, including user access and change management. Remediation was ongoing; management said additional procedures supported the fair presentation of the interim statements.
- Ordinary-course legal matters were described as immaterial, with no material adverse outcome expected. Key risks include loan performance and credit estimates, funding availability, merchant concentration, reliance on Cross River Bank, regulation and licensing, competition, and COVID-19 effects.
Important facts for investors to verify
- Whether the Peloton capture-date change caused the expected timing shift in GMV and revenue, and whether merchant concentration declined.
- Subsequent loan delinquency, charge-off, and allowance trends, especially as the loan portfolio grows and COVID-19 conditions change.
- Available and committed funding capacity, covenant compliance, securitization performance, and the cost and renewal terms of warehouse and loan-sale funding.
- Progress in remediating the IT-control material weakness and the timing and implications of any change in emerging-growth-company reporting status.
- PayBright integration, purchase accounting, milestone-share exposure, and the effect of the IPO proceeds and new revolving facility on liquidity.