Affirm Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2022; comparative period is the three months ended September 30, 2021. Figures are unaudited.
Business context
Affirm provides buy-now-pay-later payment options through merchant integrations, virtual cards and its consumer app. It earns merchant and network fees, interest on loans, gains from loan sales and servicing income. Loans are funded through bank partners, warehouse facilities, securitizations and third-party loan sales.
Financial and operating performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue, net | $361.6 million | $269.4 million | +34% |
| Operating loss | $(287.5) million | $(166.1) million | Loss widened |
| Net loss | $(251.3) million | $(306.6) million | Loss narrowed 18% |
| Net loss per share, diluted | $(0.86) | $(1.13) | Improved |
| Gross merchandise volume (GMV) | $4.39 billion | $2.71 billion | +62% |
| Active consumers | 14.7 million | 8.7 million | +69% |
Revenue growth reflected higher GMV, more active consumers and repeat usage, as well as increased loan-sale gains and servicing income. Network revenue rose 25%, interest income 17%, gain on loan sales 105%, and servicing income 126%. Operating expenses increased 49%, led by sales and marketing (+156%), processing and servicing (+116%), and technology and data analytics (+86%).
Operating loss was about 79% of revenue, compared with about 62% a year earlier; net loss was about 69% of revenue, compared with about 114%. The filing does not present a conventional gross-profit or gross-margin measure.
Credit-loss provision was $64.3 million, broadly flat year over year. The allowance was $153.0 million, or 5.7% of loans held for investment, versus 6.8% at September 30, 2021. Net charge-offs were $64.2 million, up from $26.7 million. Loans held for investment, net, were $2.53 billion at quarter-end.
Cash and cash equivalents were $1.53 billion and restricted cash was $383.4 million. Cash, cash equivalents and restricted cash totaled $1.91 billion. Cash, cash equivalents and debt securities totaled $2.77 billion. Affirm reported $2.6 billion of remaining capacity across primary funding channels and $205 million available on its undrawn revolving facility. Funding debt was $792.6 million net of issuance costs; securitization notes were $1.72 billion; and convertible notes were $1.71 billion net. Warehouse facility commitments totaled $3.42 billion, with $770.7 million drawn. The company reported compliance with applicable debt covenants.
The cash-flow statement reports $51.2 million of cash provided by operating activities, $117.3 million provided by investing activities, and $199.5 million provided by financing activities. However, the MD&A narrative describes operating cash flow as $51.2 million used; the filing text is internally inconsistent on this point. Cash-flow comparisons are also affected by changes in working capital and loan funding activity.
Material changes and unusual items
- Amazon-related warrants drove $119.1 million of sales and marketing expense, including $108.7 million recognized for warrants vesting in the quarter and $10.4 million of commercial-agreement asset amortization.
- Other income was $36.0 million versus other expense of $140.4 million a year earlier. The change mainly reflected a smaller fair-value loss on PayBright contingent consideration and a $30.7 million gain on derivatives.
- GMV grew faster than revenue. Long-term 0% APR loans, which typically carry higher merchant fees, fell to 5% of GMV from 13%; average order value declined to $331 from $402, partly reflecting greater Pay-in-4 adoption.
- Funding costs rose 50%, driven by higher interest rates and larger average funding balances. Management said the average reference interest rate increased 239 basis points year over year.
- Available-for-sale securities had $27.1 million of other comprehensive loss, including foreign currency translation and unrealized securities losses.
Outlook, risks and contingencies
No specific earnings or revenue guidance is provided in the supplied filing text. Management said existing cash, securities, borrowing capacity and other liquidity sources were sufficient for at least the next 12 months, while noting longer-term funding is not assured. It cited customer delinquencies and defaults, access to capital markets, loan demand and financial performance as factors that could affect liquidity. Management also noted historical seasonality, with revenue typically strongest in the fiscal second quarter due to holiday retail spending.
Key risks include rising rates and inflation affecting funding costs, loan-sale economics, consumer spending and repayment; credit deterioration and charge-offs; dependence on funding partners and capital markets; and competition and regulatory requirements. Affirm estimated that a hypothetical 100-basis-point rate increase would adversely affect annual financial results by less than $35 million over the next 12 months, after considering hedges.
A securities class action related to a February 2022 social-media post was dismissed with prejudice on October 20, 2022, after the plaintiff did not amend the complaint by the deadline. Related shareholder derivative cases were stayed. The company said estimable legal exposures were not material. It also reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the operating-cash-flow amount: the cash-flow statement reports $51.2 million provided, while MD&A says $51.2 million used.
- Track credit performance, including delinquencies, charge-offs, allowance coverage and the performance of newer loan vintages.
- Assess whether revenue growth and loan-sale economics can offset rapid expense growth, particularly stock-based compensation and partner-warrant costs.
- Monitor funding availability, borrowing costs, warehouse capacity, securitization activity and covenant compliance as rates and capital-market conditions change.
- Review the revenue and GMV mix, including Pay-in-4 adoption and the reduced share of longer-term 0% APR loans, for effects on revenue per dollar of GMV.
- Follow the stayed derivative litigation and any developments in contingent consideration, fair-value estimates or other material contingencies.