Affirm CEO Max Levchin joins Yahoo Finance Live to discuss company earnings, mounting interest rate concerns, the quality of credit, user delinquencies, growth, and the outlook for competition in the space.
Video Transcript
- --the company's fiscal third-quarter earnings report, but are now in positive territory, up 1% as trade has commenced. And on a conference call to discuss the financial performance, the leadership offered detail on momentum areas, such as its direct-to-consumer business and Debit+ Max, while also acknowledging the anticipation of continued capital market volatility in the current quarter.
Affirm founder and CEO Max Levchin joins us now. Max, great to have you here. Great to grab some of your time off of the back of this earnings report. When you think about your business and pertaining to your business, you talked about capital market volatility in the quarter and on the call. Where would that show up in the performance and in the financial metrics for the business?
MAX LEVCHIN: Thank you for having me. And the capital markets is the lifeblood of our business. Our capital team is the bringer of what we lend out, the money that we offer our consumers at the point of sale.
Obviously, as the Fed figures out how to combat inflation, it changes our cost of capital. That puts pressure or relieves it on our ultimate bottom line, revenue less transaction cost. And as the Fed changed rates quite dramatically, it had a real impact on our LTC.
That said, the quarter we just printed, we've always said that we intend to drive our LTC number between 3% and 4%. We were just a smidgen below 3% last quarter. We printed an exceptional quarter, which was 3.6%, this last one. We still affirm our plans to be between 3% and 4%.
It just shows that the business, ultimately, is really resilient. We have a tremendous amount of consumer and merchant demand. There will be short-term disruptions from capital, from other places. But, ultimately, this is a great business, seems to be performing really well. And I think that majority of it is thanks to the team's excellent execution.
- Max, it doesn't sound like you're convinced that the Fed has figured out how to fight inflation, even as we're parsing through some of the figures from this morning's inflation report and CPI report.
MAX LEVCHIN: I certainly think it's too early to tell. I'm not making any bets about the forward curve that's not reflected in the forward curve. But I do think that their work is starting to bear fruit. I think the CPI came in below expectations for a good reason. That's generally good news for us at Affirm in the long term in the sense that the cost of capital will ultimately come down as the spreads come in and narrow down a little bit.
Again, I'm primarily focused less on the Fed, much more on my ultimate customer, which is the consumer and the merchant. We saw great growth in activity. We're very focused on being there where our consumers need us. So frequency of usage is a really important metric.
All those things we beat across the board. Business is just humming in all cylinders. Team is executing really well. The Fed will do what the Fed will do. And we'll roll with it and just like we always do.
- Give me a little more detail, Max, if you would, on how you guys are compensating for it, right, because you talked about that a little bit in the statement and on the call, doing some-- seeing that the Fed, that rates are going to continue perhaps to move higher. You guys talked about some pricing initiatives and levers that you all can pull if that macro environment continues. Give us a little more granularity, if you could, on those levers.
MAX LEVCHIN: Sure. And, actually, I should sit back and explain probably the single most important thing that we had not mentioned, perhaps because we've done also so well in that one, so credit, quality of credit, maintaining good yield for our capital partners is job number one. So we printed another great quarter, with delinquencies coming down. If you look across the industry, from every bank, every lender out there, you see delinquencies on average going up. Ours went down. We managed our credit outcomes very, very carefully.
One of the things we can do to improve profit margin is to just be extra careful with our approvals. We underwrite every transaction. We have a lot of control over what we will and will not lend to. The lever we control the most, the lever we care about the most is just maintaining exceptional quality of credit. And that's what we certainly did last quarter. We have all the intentions of doing it.
The other obvious thing we can do is we can pass some of the increased cost of capital on to consumers or merchants. We have two major constituents. We have reported that we expanded our APR ranges that our consumers pay by 600 basis points to about half of our merchant base. That's an ongoing project. We'll continue doing that.
And we'll just have wider APRs available to our loans and, therefore, be able to approve more people. That's the other one.
And then over time, as we get to scale and, most importantly, as we prove that we really are in control of the credit outcomes, we get better and better deals with our capital markets partners as they recognize that we're able to deliver them yield without creating too much volatility. That allows us to tap into deeper pools of capital, folks that don't need crazy high-risk, high-reward returns, but much rather have really steady, well-managed yields. And that's certainly where we are spending a lot of our time now.
- So if I understand you, Max, it sounds like-- maybe I'm reading between the lines too much. You tell me. In this environment, when we are going to see a tightening of credit, there are going to be people who cannot get-- cannot borrow from traditional banks because of this environment. Maybe they're going to come to you. And it sounds like you are broadening things out a little bit, if I'm understanding you correctly. How do you balance that with the sort of Affirm push for conservatism, right, in this kind of environment?
MAX LEVCHIN: So I'm not sure we really compete with banks. We lend money at the point of sale. And the primary alternative to Affirm, where we are the primary alternative, given this is very much a David and Goliath fight, are credit cards. We compete with credit cards.
And when consumer says, you know what? I'm already overextended, I'm revolving, I have no idea what I'm paying in interest, Affirm is a great alternative. All of our interest is capped. It's always simple. There are no late fees. It's a much, much, much healthier financial product.
And so we are maintaining credit by way of literally telling folks, hey, you're overextending yourself. You shouldn't borrow money. We don't benefit if you're late because we don't charge late fees. That's the way we regulate credit-- excuse me, overborrowing.
And so in that sense, we're quite conservative. We always have been. We're always making sure that our consumers are not overextending themselves.
If we're able to pass the cost of increased funds cost onto the consumer by offering them a slightly higher APR rate or onto merchants, who pay us for every transaction that happens, according to whatever contract we have with them, in those cases, we can improve a little bit wider because that allows us to compensate for the extra risk we take. But, generally speaking, our posture towards the consumer credit and overall economic outlook is still quite conservative. I'm not yet celebrating the end of inflation or the impending lowering of rates or anything of the sort.
- Max, does anything you're seeing in Affirm's data about the way that consumers are looking to finance purchases at the point of sale right now signal to you that they are bracing for a severe recession?
MAX LEVCHIN: No. In fact, I can tell you that consumers are still very excited about travel. Travel and ticketing is one of the strongest categories we saw of the last couple of quarters. People are sick and tired of being at home. They want to get out of town.
They are traveling. They're staying in hotels. They are renting cars. They're going on cruises. All of those areas are areas of meaningful growth. Travel ticketing last quarter grew 60% plus for us, which is quite a lot.
The other side, the darker side of the considered purchase economy, if you will, are things that you bought during the lockdowns. So if you're buying an exercise machine for your home or you're buying fancy kitchen equipment, that's probably getting postponed as you're figuring out how to deal with inflation. And there's real pressure on folks because of rising prices, in particular rental prices.
So consumer is still fully employed. They're doing fine. They're paying their bills. They're still shopping. But they are figuring out whether the dollar goes to point A or point B. And, generally speaking, if you want to make a blanket statement, point A where the dollars go is events and experiences and far less so goods that will fit into your kitchen or your spare bedroom.
- Max, it's great to catch up with you. I wish we had more time. We got to go. Max Levchin, Affirm CEO, thank you so much. Appreciate it.