Affirm Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2021; unaudited. Comparisons are with the periods ended December 31, 2020 unless stated otherwise. Amounts are in U.S. dollars.
Business context and results
Affirm provides buy-now-pay-later installment financing through merchant integrations, its consumer app and virtual cards. It earns merchant and virtual-card network revenue, interest on loans, gains from loan sales and servicing income. Loans are originated by bank partners or Affirm and funded through loan sales, securitizations and credit facilities.
Growth was strong: second-quarter GMV increased 115% to $4.46 billion; active consumers reached 11.2 million, up 150% year over year, and active merchants reached 168,030. Management attributed merchant growth primarily to Shopify-related expansion.
Key financial metrics
| Metric | Three months ended Dec. 31, 2021 | Three months ended Dec. 31, 2020 | Six months ended Dec. 31, 2021 | Six months ended Dec. 31, 2020 |
|---|---|---|---|---|
| Revenue, net | $361.0 million | $204.0 million | $630.4 million | $378.0 million |
| Operating loss | $(196.2) million | $(26.8) million | $(362.3) million | $(60.1) million |
| Net loss | $(159.7) million | $(26.6) million | $(466.4) million | $(30.6) million |
| Operating margin | (54.3)% | (13.1)% | (57.5)% | (15.9)% |
| Provision for credit losses | $52.6 million | $12.5 million | $116.3 million | $41.5 million |
Quarterly revenue increased 77%, while operating expenses rose to $557.2 million from $230.8 million. The quarter’s largest expense categories included sales and marketing ($143.5 million), general and administrative ($141.3 million) and technology and data analytics ($95.0 million). No gross margin figure is clearly provided in the filing.
For the six months, operating cash outflow was $75.1 million and investing cash outflow was $819.6 million; financing provided $2.01 billion. Financing included $1.704 billion net proceeds from convertible notes. Cash and cash equivalents were $2.567 billion at December 31, 2021, with restricted cash of $247.4 million and available-for-sale securities of $475.4 million.
At December 31, 2021, loans held for investment, net, were $2.267 billion and the allowance for credit losses was $158.3 million, or 6.5% of loans held for investment. Total liabilities were $4.484 billion. Debt carrying amounts included $1.705 billion of convertible notes, $1.577 billion of securitization notes and $646.0 million of funding debt. The company reported $8.8 billion of total funding capacity across facilities, securitizations and forward-flow arrangements; this is funding capacity, not cash on hand.
Material changes and unusual items
- Revenue growth reflected higher GMV, loan interest income and loan-sale gains. Loan sales with servicing retained totaled $2.512 billion in the quarter, versus $834.9 million a year earlier.
- Revenue mix shifted toward shorter-duration, lower-average-order-value products. 0% APR financing was 44% of GMV versus 46% a year earlier; loans longer than 12 months were 21% of GMV versus 31% in the comparable quarter. Average order value fell to $365 from $541. Management said this mix can increase transactions while lowering revenue as a percentage of GMV.
- Credit-loss provision rose substantially year over year. The allowance ratio was 6.5% at December 31, up from 5.8% at June 30, 2021; management cited portfolio mix changes and growth in newer platforms and partnerships. The prior-year comparison included reserve releases and the adoption of the expected-credit-loss standard.
- Amazon-related warrants drove $70.6 million of second-quarter sales and marketing expense, including $64.9 million of warrant expense and $5.8 million of asset amortization. The agreement also included warrants to purchase 22 million shares, subject to exercise prices, vesting and other terms.
- General and administrative expense included $42.3 million of second-quarter stock-based compensation for the CEO’s performance-based Value Creation Award. Total stock-based compensation recognized in operating expenses was $88.5 million for the quarter.
- Other income was $36.7 million in the quarter, chiefly reflecting a $34.0 million reduction in the fair value of PayBright contingent consideration; for the six months, other expense was $103.6 million, including a $107.6 million increase in that liability. These fair-value movements were driven in part by changes in Affirm’s share price.
- Affirm issued $1.725 billion of 0% convertible senior notes due 2026, with approximately $1.704 billion net proceeds. It terminated its undrawn $185 million revolving facility in December 2021. After quarter-end, it entered a new undrawn $165 million revolving facility maturing in 2025.
- The filing corrected certain June 30, 2021 contingent-consideration and stock-compensation amounts, which management judged immaterial to the previously issued statements.
Outlook, risks and contingencies
Affirm provided no specific numeric revenue or earnings guidance in this filing. Management said existing cash, available funding capacity and expected operating cash flows should cover operating, working-capital and capital expenditure needs, as well as planned growth, for at least the next 12 months, while cautioning that longer-term funding is not assured. Management expects continued investment in headcount, sales and marketing, product development and expansion.
Key risks include consumer delinquencies and defaults, changing economic conditions and interest rates, continued access to capital and loan-sale funding, merchant retention and concentration, product and merchant mix, and competition. Peloton generated approximately 11% of quarterly revenue and 10% of six-month revenue, down from 24% and 27%, respectively, in the comparable prior periods. The filing also identifies potential dilution and cash-settlement demands from the convertible notes, including conversion or fundamental-change repurchase obligations. Legal matters in the ordinary course were described as immaterial at December 31, 2021; the filing reports no material legal proceeding.
Important facts for investors to verify
- Whether GMV and consumer growth can translate into improved operating leverage, given sharply higher expenses and losses.
- How product mix, merchant pricing and lower average order values affect revenue yield and margins.
- Loan delinquency, charge-off and recovery trends, and whether the allowance remains adequate as portfolio mix changes.
- The economics and rollout of the Amazon relationship, and the associated warrant expense, vesting conditions and potential dilution.
- Funding availability and cost under warehouse facilities, securitizations and loan-sale arrangements, especially if rates rise or capital markets weaken.
- The full potential share dilution and cash obligations under the 2026 Notes, alongside the company’s stated liquidity outlook.