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Embedded Briefing: Affirm reports strong quarter; focuses on achieving profitability

  • BNPL leader Affirm reported $354.8 million in revenue, exceeding analyst expectation of $345 million, and showing a 54% increase YoY.
  • Analysts are wary of Affirm's trajectory, saying that while the firm may look like an exciting tech company, it is increasingly operating as a traditional credit provider.

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Embedded Briefing: Affirm reports strong quarter; focuses on achieving profitability

Buy Now Pay Later provider Affirm recently posted a quarterly loss of $0.19 per share, beating analyst expectations of a 51-cent loss. Having exceeded its Q3 expectations, the firm raised its outlook for FY 2022.

First, let's get the key numbers out of our way:

  • Total revenue was $354.8 million, exceeding the expectation of $345 million, a 54% increase YoY.
  • The firm reported a net loss of $54.7 million, far less than the expected $156 million.
  • GMV was $3.9 billion, an increase of 73% YoY.
  • Active merchants increased from 12,000 to 207,000, driven primarily by Affirm’s partnership with Shopify.
  • Active users amounted to 12.7 million, up by 137%. Since December 31, it grew by 13%, or 1.5 million users.
  • Total transactions grew to 10.5 million, an increase of 162% YoY.
  • Transactions per active consumer increased 19% to 2.7 as of March 31, 2022, and 81% of total transactions were from repeat Affirm consumers.

When Affirm went public last year, investors swept up its stock valuing it as a tech disruptor, granting the loss-making company a peak market capitalization of $47 billion. That figure fell to $5 billion dollars after the firm’s stock saw a sharp 89% decline in November 2021. Experts say that’s because while the company may dress up as an exciting tech firm, it is increasingly morphing into a more traditional credit provider.

Affirm was launched as a credit provider for young tech-savvy Americans looking to break down their purchases into installments. Initially, much of the firm’s revenue came from partnerships with merchants, but that model has since changed. Most of Affirm’s earnings now come from its functions as a lender. It sells loans as bundles, either via securitization or to third-party buyers. It also increasingly generates interest income. In the last quarter, more than half of its revenue came from interest or selling loans. Additionally, a third of Affirm’s $6 billion portfolio had been bundled into bonds. This quarter, the firm’s interest income increased by 42%, and gain on loan sales increased by 221%

Even in Q3 2022, the firm credited its increase in revenue to higher interest income by turning focus to shorter term loans with greater relative loan discount, selling more loans bundled into bonds, and servicing income as the loan portfolio held by third-parties scaled. 

“These kinds of hybrid financial technology stocks, they kind of trade like tech stocks when they’re growing really fast and the financial side of their business doesn’t cause any problems,” Chris Brendler, an analyst at D A Davidson told FT. “But if you start having higher losses or funding problems, that’s when they start to perform like financials.”

Having said that, it is worthwhile to pay attention to the growth of the company’s merchant network. The growth was driven by the adoption of Shop Pay Installments by merchants on Shopify's platform. The firm wants to continue developing its merchant base. For this, it entered into a partnership with Fiserv and Global Payments to onboard and launch new merchants to its platform. Additionally, CEO Max Levchin announced a new partnership with Stripe during the earnings call, aimed at the distribution of Affirm's financial products to merchants. And lastly, Affirm announced an extension to its Shopify partnership, which expands their current agreement, whereby Affirm serves as the exclusive pay-over-time provider for Shop Pay Installments in the U.S. 

The other side of the acquisition mission has been to get consumers to use their product. Affirm’s user base grew and transaction volume increased, powered by repeat customers who made up 81% of total transactions. The payment volume also witnessed a jump of 107%. All this suggests their product does have value in the market, and consumers do like to use it and come back to it. The company wants to bring this growth to the limelight and expand the revenue stream.

The industry outlook however remains that this is a company that essentially operates as a lender. The increase in per share loss, especially in an increasingly competitive BNPL market, can be off-putting for investors.

The company’s operating loss was $226.6 million compared to $209.3 million in Q3 2021. This loss was attributed to an increase in marketing and customer acquisition expenses, directed at increasing merchant partnerships and getting people to use its BNPL services. This again highlights the firm’s desire to become profitable through its primary business line, i BNPL. The firm knows it has an early mover muscle to flex to dominate the fastest-growing payment method in the US.

Chart of the day

Banking as Service firms are generally flexible with how they structure their pricing and offer a variety of ways for their clients to pay them. These methods fall into four categories: upfront fees for a fixed time period, recurring monthly fees for a fixed period, consumption-based fees, or recurring monthly fees for a flexible time period. The consumption-based fee, which charges for each transaction completed or banking action performed, is the most common in the market.

According to research by Finastra, consumption-based pricing and fixed monthly fee are the two most preferred pricing models, with 40% of distributors, or embedders, choosing one of the two. However, larger distributors, in particular, were found to have a preference for one-time pricing models, as they increase their margins. 

The objective for distributors deploying a BaaS, is to maximize profits. In fact, the study learned that more than a third of distributors expect an increment of over 15% a year by deploying BaaS offerings on their platforms. Different-sized businesses, however, are looking at BaaS to achieve different targets.

50% of the SMB distributors segment was found to be looking at BaaS to become a one-stop shop solution while decreasing operating costs. For bigger players, like corporate distributors, the primary objective is additional revenue growth while streamlining operations. The essential tech, they’re comfortable building themselves.

Source: Finastra

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