Affirm’s results resurface old questions on the financial viability of the BNPL model

Weekly 10-Q

Affirm's results resurface old questions on the financial viability of the BNPL model

The firm slashed 19% of its headcount in an effort to dial back costs.

by SARA KHAIRI

Leading BNPL providers are still reporting disappointing numbers. Affirm announced its Q2 2023 earnings on Wednesday, and investors weren't very happy with the results.

Affirm reported a quarterly loss of $1.10 per share versus the Zacks Consensus Estimate of a loss of $1.01.

• Gross Merchandise Volume (GMV) grew 27% YoY to $5.7 billion, or 35% excluding Peloton, which was one of their largest merchant partners by GMV in the prior-year period
• Total Revenue grew 11% YoY, or 21% excluding Peloton Merchant Network Revenue, to $400 million
• Revenue Less Transaction Costs (RLTC) declined 21% YoY to $144 million, or 2.5% as a percentage of GMV versus 4.1% in the same period a year before
• Operating Losses of $360 million, compared to $196 million during FQ2’22, with Sales and Marketing expenses increased from $143 million to $188 million
• Active merchant count grew 45% YoY to over 243,000 merchants but declined sequentially on a quarterly basis due to churn among merchants

"While the RLTC issue was largely anticipated, as moving to balance sheet funding boosts provision (from 1.5% in F1Q to 1.9% in F2Q), missing GMV and lower merchant network revenue take rates will unlikely be well-received," said Dan Dolev, senior analyst at Mizuho.

What's more:

• Consumers are pulling back on spending: Affirm experienced a falloff in consumer demand for discretionary items. The electronics category took a hit of 11% YoY, while the home and lifestyle category rose by only 2% YoY.
• The sporting goods and outdoor category was also noticeably slower, down 49% YoY, essentially due to reduced growth of Peloton GMV. It was popular during the pandemic, but now consumers are moving past the trend of at-home exercising.
• Although Affirm is actively growing its merchant base, it's important to note that a large portion of Affirm's revenue has been coming from a single merchant partner, Peloton -- an at-home fitness company -- since 2018.
• Mix shift toward interest-bearing loans: Total revenue as a percentage of GMV declined from 8.1% to 7.1% due to a mixed reaction toward interest-bearing loans, as consumers already battle with rising costs.

“The root cause of where we are today is that I acted too slowly as these macroeconomic changes unfolded,” Affirm CEO Max Levchin wrote in a letter to shareholders along with the earnings results announcement.

Operating expenses came in at $760 million for the quarter, $200 million more than a year before, mostly driven by higher transaction costs.

In a move to curb its expenses and navigate economic uncertainties, the company is slashing 19% of its workforce, or nearly 500 jobs -- effective from 8 February 2023. The cuts come after consumer spending lost momentum and interest rates rose over the past three quarters.

The company is also bringing its crypto initiative venture to a close that enabled users to buy and sell cryptocurrencies. Affirm's deal with Amazon to be its sole provider of BNPL services also expired a couple of weeks ago.

On the other hand, the firm has inked a partnership with online travel company Kayak on 25 January 2023 to be its exclusive pay-over-time provider in the US.

Going forward, Affirm will spend between $35 and $39 million in restructuring costs. The firm's restructuring plan is expected to be fully implemented by the end of June this year.

Despite the successful traction of BNPL among merchants and consumers, the business model again comes under question as profitability remains an issue.

BNPL is no longer the industry darling it once was – the installment payments sector is facing some key challenges in 2023. 

With high inflation and consumers cutting on discretionary expenses, e-commerce revenues are under threat. Plus, regulators have also started to ask difficult questions about the lending practices behind the Buy Now, Pay Later business model.

Meanwhile, investors are still left pondering – when will BNPL firms turn a profit?

Market recap

Fintech stocks recorded sharp declines over the past week

Fintech stocks took a tumble this past week as investors taxed quarterly earnings misses at companies like Affirm, Coinbase, Marqeta and Block. 

Affirm - down 37% to $13.29 per share

• After announcing its Q2 2023 gloomy results, Affirm's shares were down more than 17% after hours on Wednesday. 
• The company missed Wall Street expectations and posted a loss of 98 cents per share. It also missed its revenue target, reporting $400 million in revenue for the quarter compared to analyst estimates of $416 million.

Coinbase - down 27% to $59.63 per share

• Coinbase stock has been under selling pressure throughout the year because of underwhelming quarterly results and concerns about potential margin degradation.
• Additionally, the shares have fallen in recent weeks because of the FTX collapse which is impacting the broader crypto market.

Marqeta - down 14% to $6.29 per share

• The decrease is steep relative to the uptick at the beginning of February after Marqeta named Simon Khalaf as its new CEO and completed the acquisition of Power Finance, but the stock was quick to trade down afterwards
• Investors remain concerned about the heavy reliance on one customer, Block, which accounts for the bulk of Marqeta's revenue. Its contract with Block for the Cash App expires in March 2024, while the contract for Block's Square Card expires in December 2024.

Fiserv - up 8% to $116.5 per share

• The company topped estimates in its quarterly results, delivering an upbeat profit outlook
• Fiserv’s recently acquired Clover business posted 12% growth in revenue per user during fiscal 2022. Clover makes point-of-sale technology and business software, positioned as a rival to Block’s Square.

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