Affirm CFO is building the business around strong labor data

Shares of Affirm (AFRM) are trading lower Friday after the company reported second-quarter revenue that jumped 48% but provided full-year guidance that fell short of Wall Street expectations.

Affirm CFO Michael Linford joins Yahoo Finance to discuss the company's performance as well as the state of the consumer in the current economic environment.

"From our perspective, we've really retooled the business to operate in this [interest] rate environment in a way that's pretty powerful," Linford says. "We were able to serve a lot of consumers last quarter and feel very well-positioned to continue to do that in this environment. The consumer is still out spending, highly engaged, and we think the most important thing to point to there is just really strong employment data, and so while the consumer is fully employed, we feel like they're going to be engaged in the economy, and we're there to support them with financial products."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

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SEANA SMITH: Affirm shares under pressure this morning. Off nearly 10% after its full year guidance for gross merchandise volume fell short of the Street's expectations. But the buy now pay later company did see revenue jump 48% from a year ago.

We want to bring in Michael Linford. He is the CFO of Affirm. Michael, it's great to have you. Thanks so much for joining us here on Yahoo Finance this morning.

MICHAEL LINFORD: Thanks for having me.

SEANA SMITH: So let's talk about the results that you guys just put out. I guess it did disappoint the Street in some metrics, but revenue growth was still up 48% on a year-over-year basis. What do you think your results tell us just about the state of the consumer right now and the resilience of the consumer?

MICHAEL LINFORD: Yeah, we had an exceptionally strong quarter. We were able to grow GMV 32%, which is about four times the rate of e-commerce growth. As you mentioned, we had 48% growth in revenue.

Our unit economic measure of the revenue less transaction cost was up 66% year on year, posting really, really great results in the top part of the P&L. And that growth is reflective of the long-term trend we've been talking a lot about. Consumers are voting with their wallets, finding honest financial products that allow them to get the things they want and need without all the traps of other credit products.

And the thing that I'm most excited about is that we were also able to do that while driving real operating leverage in the business. We had $188 million growth in operating income because we were really focused as a team on the outcomes that we were trying to drive. And we did all that while keeping a really tight eye on credit.

Our delinquencies were flat quarter on quarter and year on year. And we stand out in pretty stark contrast to so many of the other lenders out there who are seeing sharp rises in delinquencies. And we think that's reflective of the better mousetrap that we've built.

BRAD SMITH: Michael, we continue to try and get a sense of what the health of the consumer, what the resilience of the consumer is right now. And reading through even data like your own, as well as pairing that with some of the economic data and consumer confidence readings we're getting from the Conference Board time after time, and they're saying from their positioning and what they're seeing that this is a consumer that's also waiting pending interest rates to start to get cut as well. From your own gauge, what would you say that this consumer is looking for on the interest rate side and how that might flow through to even your products and services?

MICHAEL LINFORD: Yeah, I'm not sure I can speculate as to what consumers are thinking about rates. I know from our perspective, we've really retooled the business to operate in this rate environment in a way that's pretty powerful. We were able to serve a lot of consumers last quarter and feel very well positioned to continue to do that in this environment.

The consumer is still out spending. They're highly engaged. And we think the most important thing to point to there is just really strong employment data. And so while the consumer is fully employed, we feel like they're going to be engaged in the economy and we're there to support them with the honest financial products.

SEANA SMITH: Michael, we do have this higher for longer interest rate environment. Are you still confident just in your ability to expand and kind of weather some of the challenges that are associated, especially with your business in this higher for longer environment, which could potentially stay for maybe longer than what the forecasters had initially anticipated?

MICHAEL LINFORD: Yeah, I think so. This quarter was an exceptionally strong quarter in our unit economics. We posted well within our range of 3% to 4%. And we took up our outlook for that revenue less transaction cost despite the fact that we're in a higher rate environment.

And that's reflective again of the really great work the team has done. Over the past year, we've put a lot of effort into making sure that the asset we're generating has the yield required. We've also executed extremely well in the debt capital markets . And we priced an ABS deal this week with a 100 basis point tighter cost of capital than we did just in December.

And we think that's reflective of the debt capital markets giving us credit for the outstanding results we're driving in our business right now. And we feel like that will continue. And so we feel very well positioned, especially vis a vis competition. Because we've done all the hard work in our business, we feel like we can really be ahead of the competition in this environment.

BRAD SMITH: Is there a specific merchant subset here where you're seeing a rise in users or people who are taking some type of advantage of using Affirm services?

MICHAEL LINFORD: Yeah, the growth in Q2 was really broad. It was across all merchant categories. The only category that we track that was declining was sporting goods and we think that has a lot to do with some of the secular trends that are still playing out from the COVID era. But the rest of the categories all showed really strong growth and across all of our merchant types.

We were especially pleased with the growth that we saw in our small and medium-sized businesses. And those businesses showed real resiliency in Q2. And for us that means that we were able to drive pretty healthy growth in merchant network revenue, which for us is a really key indicator of the health of the businesses. When we're able to earn those merchant fees, we can post really strong units. And I think the strong unit economic performance is a function of all the work we've done, as well as the trends that we saw in Q2 with respect to the smaller businesses.

BRAD SMITH: It sounds like as well over the quarter, Michael, you've been able to look across many of the in-person shopping experiences and try to get a sense of where you might be able to enter into the checkout line. What does that add on to that net margin and ultimately the financial performance? And how does that kind of increase the perspective for the business over the course of this year and perhaps even further out?

MICHAEL LINFORD: It's a great question. The business that we've built to date has really been focused on serving e-commerce transactions. That's because we're a software company and we built software products that serve those transactions really well. But we really haven't cracked the nut in getting offline historically.

We were pleased to announce our partnership with Walmart where we have gotten into some stores. And we're also extremely impressed with the traction we have on the Affirm card where we had 29% of our GMV happening offline in Q2. It's a really effective way for consumers to take advantage of the Affirm financial product in an offline context that uses a form factor consumers are very familiar with and doesn't have a lot of friction at checkout lane. So it's a huge opportunity for us.

Obviously, despite the fact that e-commerce is still growing very quickly much faster than offline commerce, most commerce is still conducted offline. And for us, we think that's a huge piece of upside for our business and why we're so excited about the long term here. Because the factors that are driving consumers towards adopting our products, they're not limited to the online use case. They're obviously also very relevant offline. And you're going to see us continue to focus, whether it's the card or working with merchant partners on developing solutions, to serve that use case.

SEANA SMITH: Yeah, Michael, when you talk about the timeline of that, how quickly can you and do you plan to scale that part of your business given the fact that it's such a huge opportunity?

MICHAEL LINFORD: Yeah, I think we're pretty humble on the challenge here. It's not an easy problem to solve. I don't think very many have been able to make a lot of progress there. And so we're patient.

We know that the long-term trends in our business are in our favor. Consumers are going to continue to adopt our products. Our job is to meet them where they are and make sure we take out any friction so that they can use the products in any case, in any environment that they want.

BRAD SMITH: Michael, always a pleasure to catch up with you and get a sense of how you're viewing things from the c-suite perspective over there. Michael Linford, Affirm CFO joining us here today. Thanks so much.

MICHAEL LINFORD: Thanks for having me.