Affirm CFO: ‘I wouldn’t bet against the American consumer’

Affirm CFO Michael Linford joins Yahoo Finance Live to discuss company earnings, economic growth, and the outlook for the buy now, pay later space.

Video Transcript

BRIAN SOZZI: Affirm's ticker page is the hottest or among the hottest on the Yahoo Finance platform today, with good reason. The stock is surging as the company's earnings quiets concerns the business could take a big hit during an economic slowdown. Affirm also said it would reach sustained profitability by mid 2023. Let's dive into the company with Affirm's CFO, Michael Linford. Michael, great to see you as always. Let's start on that profitability call-out. It was front and center on that earnings release. Why did you feel the need to come out with that?

MICHAEL LINFORD: Yeah, we wanted the market to understand just how confident we were and where this business is headed. We've talked a lot about, over the time, the framework that we've had for profitability as being tied to the really strong unit economics that we generate and leveraging our fixed cost over time. And we wanted the market to understand just how confident we were in our growth and our ability to leverage those fixed costs.

BRIAN SOZZI: I think a lot of folks on the Street, Michael, were surprised by the gross merchandise value, up 73% year over year. What component of that can you tie to Amazon?

MICHAEL LINFORD: We have not given specific numbers there. But what I would say is, these results this quarter were phenomenal. This is our fifth straight beat, and you highlighted GMV as one of the measures where we grew 73%. We grew active merchants by more than 16 times year over year. Active consumers grew 137%, transactions up 162%. These growth rates are staggering. And maybe what's most interesting to us is that 80% of the transactions were repeat users.

And maybe the most interesting of the market is our revenue less transaction cost, the measure of unit economics were well above our long-term range of 3% to 4% at 4.7%. For us, this is a proof point. And what we have is different than what you see in traditional FIs or our competitors. This is a special company. And it turns out when you combine honest financial products with the world's best technology team, you can thrive in any environment.

JULIE HYMAN: So let's talk about the upcoming environment, Michael. It's Julie here. Affirm's not been around during a recession. Certainly, it has not been around in its current form, right, with the growth the size that it is right now. What happens when economic growth slows further to not just you guys, but the buy now, pay later model more broadly?

MICHAEL LINFORD: Yeah, I can't really speak to our competitors. I think in fact, if you look at what they've been guiding the market to, they're feeling a lot of different contexts than we are here at Affirm. I think for Affirm, we're confident in our ability to control all of the inputs and outputs in our business model. We talk a lot about how we can control these outcomes. This quarter demonstrates that.

Look, I mean, you had one of the most volatile macro conditions possible. We have everything from war in Europe to rising rates, hyperinflation concerns around recession. And Affirm just posted one of its best quarters. And I think there's a real insight there for investors around our ability to execute in these times.

And the key insight there is-- and that's why I talk a lot about this-- it's our ability to decide the level of risk that we take and control it. We do transaction level underwriting, which means that we're not waiting-- we don't issue a loan out and then wait to see what happens. We get lots of small transactions that allows us to tune the results to exactly where we want them to be.

JULIE HYMAN: But during-- if there is, indeed, an economic pullback or a recession, aren't you guys going to have to pull back way-- pull way back on risk? And won't that, then, affect profitability for the company?

MICHAEL LINFORD: Well, we will always make the right risk decision. And that's something that's been true through any economic environment. We will always think about the appropriate level of risk to take, where our unit economics can be strong. Again, this quarter, we posted phenomenally strong unit economics.

The other thing that's really important is our business model is such that we make a lot of margin on the highest credit quality users. And we have a very steep credit curve. And that's very wonky, but the insight there is that we don't need to make major changes to our credit decisioning in order to deliver really strong unit economics, even in an environment of stress.

BRAD SMITH: I suppose the other thought process around this, though, is also thinking through consumer sentiment right now. And if that continues to remain low and if they are picking and choosing exactly where they are spending, where would you see that impact your business, either for better or for worse, if they were looking across some of the more expensive things that they tend to purchase and deciding to break up those payments over an extended period of time?

MICHAEL LINFORD: Yeah, I mean, I wouldn't bet against the American consumer. And I think what we see right now is a really robust consumer. This past quarter saw real growth in categories like travel and ticketing. We are still coming out of the COVID times and the categories that we play in and the breadth of merchants that we have. We talked about Amazon earlier. Amazon, it's Shopify, it's Walmart, it's our travel business.

We have a very broad set of merchants that allow us to participate in, really, any economic environment. We don't see any weakness with the consumer right now. And of course, we are vigilant and looking at it. But with the merchant base of 210,000 merchants, we're able to offset any sort of pressure in one spot with growth in the others.

BRIAN SOZZI: Michael, you spent a lot of time in the tech space back at KKR, time at HPE, now leading Affirm there as CFO. Can you just talk to us about what we're seeing in the tech sector right now? Under a lot of pressure. Has a bubble burst? What happens next?

MICHAEL LINFORD: Yeah, it's no doubt there's a lot of pressure out there. And you're seeing both public and private market valuations come in. For us, that's really exciting. And we mentioned this on the call. We have $3 billion in dry powder. That means that we get to be very opportunistic in looking at this market and buying opportunities to inorganically grow, in addition to our investments we're making organically.

The reason these valuations have come in line is, obviously, macro driven from my perspective. That is going to continue to put pressure until we get out of the macro environment. But I'll say this. If you go back and look at 2001 and 2008, the other major market dislocations, the generational companies were the ones who could thrive in those environments, and they emerged long-term winners. And we believe that we're one of those.

BRIAN SOZZI: So you could see yourself making some acquisitions?

MICHAEL LINFORD: Yeah, I mean, I think we are always very careful to not commit to any specific plans, but yeah, we have $3 billion in capacity here. And we need some of that to get to profitability. We communicate to the market that we need a little bit to run through this year. And then we have the balance to really be aggressive.

We bought paper a year ago in Canada and really cemented our position as a market leader there. That business was growing tremendously well last quarter and continues to grow very fast. We know that we can do this very well. And when you can buy a business and then triple its GMV year on year a year later, it's a pretty good proof point.

BRIAN SOZZI: All right, we'll leave it there for now. Michael Linford, Affirm CFO, always good to see you. Have a great weekend.