Affirm - an upcoming IPO

Affirm, a company that offers Buy Now Pay Later services is anticipated to be IPOed soon.
They don’t have SaaS like gross margins but their S1 reports 5 consecutive quarters of ~70%+ revenue growth rate, sequential revenue increases off of a decent revenue base ($509M in FY2020).
Below are some notes from their S1.

Founder led by Max Levchin, 45. Co-founded Fieldlink in 1998 that eventually became PayPal. Co-creator of a test that is also used in implementing CAPTCHA test.
Named in top 100 innovators in the world in 2002 under age 35 by MIT Technology Review TR100. Founded Affirm in 2012.

Mission - Deliver honest financial products that improve lives.

Current State of the Industry

  • Rapid growth of e-commerce
  • Buy Now Pay Later (BNPL) currently accounts for 6% of e-commerce payment market in EMEA and expected to be 10% by 2023. In US, it is currently at 3%.
  • Gen Z and Millennials have lower affinity for traditional credit cards. Per S1 “Consumers are now turning to technology companies they trust: according to a survey conducted by the Harris Poll in 2020, 64% of Americans would consider purchasing or applying for financial products through a technology company’s platform instead of a traditional financial services provider. This sentiment rises to 81% for Americans aged between 18 and 34 years.”
  • Traditional credit and debit cards can hurt consumers - Revolving nature of credit cards and the incentives to pay off only minimum balance keep consumers in debt for longer periods of time. Debit cards are inflexible, limit buying power, do not provide ability to responsibly access credit.
  • Merchants face raising customer acquisition costs and inefficient current solutions - As per S1, merchants’ customer acquisition spend is estimated at $1 trillion

Opportunity

  • Grow along with the secular E-commerce that is growing at 16%+ CAGR.
  • Omni-channel commerce - tap into offline card spend, non-card spend using virtual card product and future innovations
  • Merchant marketing - Help merchants address customer acquisition challenges using Affirm platform and data insights to increase conversions, reduce friction.
  • New financial products - e.g., FDIC insured high-yield savings products

Affirm’s Solutions

  • Integrated Checkout - Pay over time with 0% APR or interest bearing financing at partner merchants
  • Virtual Card - Universally accepted method of payment on Visa Rails
  • Split Pay - Fixed payment plan for under $250
  • Marketplace - Personalized data-driven product discovery
  • Savings - FDIC insured, interest bearing savings account

Affirm’s platform

point-of-sale payment solution for consumers - pay over time rather than paying entirely upfront. Offers both 0% APR and interest bearing loans with simple interest, no late fees or interest compounding

merchant commerce solutions - helps solve affordability for their customers without hurting bottom line. Alternative to traditional marketing for customer acquisition, increased AOV. Also provides API integration for merchants.

consumer-focused app - for consumers to manage payments, open high yield savings account, access a personalized marketplace. This app allows merchants to provide tailored offers based on consumers spending patterns, shopping habits and purchase intent.

Loan Origination and Servicing Model
When a consumer applies for a loan through Affirm’s platform, the loan is underwritten using Affirm’s proprietary risk model. Once approved for the loan, the consumer then selects their preferred repayment option. The substantial majority of these loans are funded and issued by their originating bank partners.

Revenue Model

  • From merchants - For helping them convert a sale and power a payment. 43% and 46% of total GMV are 0% APR financing in Q4 20, Q1 21 respectively.
  • From consumers - Interest income on simple interest loans that Affirm purchases from originating bank partners. ~33% of Total revenue
  • Virtual debit cards - A portion of interchange fees when customers use at non-Affirm merchant sites. Tiny ~1.5% of total revenue at the moment

Fiscal Year- July to June

			
			Q1	Q2	Q3	Q4	Full Year
	
Rev($M)		2019	51.9	69.9	73.1	69.6	264.5
		2020	87.9	129.9	138.2	153.3	509.3
		2021	173.9				
						
Rev YoY%	2020	69.36%	85.84%	89.06%	120.26%	92.55%
		2021	97.84%				
						
Rev QoQ%	2019		34.68%	4.58%	-4.79%	
		2020	26.29%	47.78%	6.39%	10.93%	
		2021	13.44%				
						
Merch Rev($M)	2019	23.2	39.8	36.2	32.9	
		2020	36.3	67.7	67.3	95.2	
		2021	93.2				
						
Interest Rev($M)2019	24.4	27.4	31.9	35.6	
		2020	40.1	45	52.3	49.1	
		2021	54.2				
						
Oper Inc($M)	2019	-27.03	-39.4	-20.2	-40.6	
		2020	-32.9	-32.6	-81.5	39.3	
		2021	-44.6				
						
Net Inc($M)	2019	-25.9	-38.4	-19.6	-36.3	
		2020	-30.7	-30.9	-85.6	34.8	
		2021	-15.2				
						
NetInc  Margin  2019	-49.90%	-54.94%	-26.81%	-52.16%	
		2020	-34.93%	-23.79%	-61.94%	22.70%	
		2021	-8.74%				
						
GMV($M)		2019	474.3	669.6	694.3	781.7	2,620
		2020	861.3	1,341	1,231	1,202	4,637
		2021	1,475				

						
Active Cons(k)	2019					2,045
		2020			2,383		3,618
		2021			3,882		
						
Contributn Prft	2019	10.9	12.4	22.12	19.4	
		2020	25.1	41.4	-7.5	121.3	
		2021	79.09				
						
CP as % of GMV	2019	2.30%	1.85%	3.19%	2.48%	
		2020	2.91%	3.09%	-0.61%	10.09%	
		2021	5.36%				

From their S1 “Contribution profit is a non-GAAP financial measure. We define contribution profit as total revenues less the following costs that are closely correlated to and variable with the generation of that revenue: (i) the amortization of discount; (ii) the unamortized discount released on loans sold to third-party loan buyers; (iii) provision for credit losses; (iv) funding costs; and (v) processing and servicing expense. We use contribution profit to measure the unit economics of transactions facilitated by our platform in the period.” which I’m interpreting it to be similar to that of a non-GAAP Gross Margin metric that we see in SaaS companies

They have a customer concentration problem. From their S1 - "For the fiscal years ended June 30, 2019 and June 30, 2020, approximately 20% and 28%, respectively, of our total revenues were generated from one merchant partner, Peloton. For the three months ended September 30, 2019 and September 30, 2020, approximately 14% and 30%, respectively, of our total revenues were generated from the same merchant partner. We believe we have a strong relationship with Peloton and, in September 2020, we entered into a renewed merchant agreement with Peloton with an initial three-year term ending in September 2023, which automatically renews for additional and successive one-year terms until terminated.

Anyone have other thoughts and/or how it stands against AfterPay, Klarna and other big players like PayPal that may dive into this space ? Looking at the trends in FinTech, Affirm looks to be a good opportunity for a pure play US based company in BNPL space, no ?

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https://www.sec.gov/Archives/edgar/data/1808834/000119312520…

See also PRG started trading today, I believe. Progressive Leasing.

Interesting. Afterpay is my horse in this race and I don’t think I will switch. I do notice that Shopify has a 5% stake so I guess I have exposure via Shopify (my largest holding).

https://news.crunchbase.com/news/affirm-s1-ipo/

Ant

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…and this is how Afterpay did in BFCM!

I don’t see Affirm remotely in this race at all.

https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-res…

They seem like a one country one client affair with a complicated and potentially conflicting business model of interest charging and interest free approaches.

Afterpay is clear, simple and active in 5 countries with another 6 going live shortly and no concentration risk whilst growing faster off a larger base.

Klarna might be the one genuine competitor in this field but not Affirm. IMHO.

Ant

4 Likes

@ anthonyms - Below numbers corroborate your take as well.

Found this here - https://twitter.com/GetBenchmarkCo/status/133132795778952807…

"Afterpay - Used on 31,000 websites and leading in 33 countries

Affirm - Used on 6,400 websites and leading in 5 countries

Klarna - Used on 50,000 websites and leading in 104 countries"

However I see Affirm on Walmart and Target websites. If it is good enough for these two (and then you have Peloton!), won’t it be good enough for other merchants as well ? One of Affirm’s products is a marketplace App where they claim that consumers will login and begin searching for products that are offered with a Affirm payment option across all its partnered merchants. I think there is some genuine value to such an App so having Walmart and Target in there adds to some network effects I think.

Am trying to see if there is a difference in each of these companies strategy in terms of the type of Merchants and/or Goods that they try to target.

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Affirm has a slightly different business model to Afterpay which seems to be hurting it. Other than an interest-free BNPL model, it also offers interest-bearing loans to consumers to make purchases. Since it is not a bank, it does this in an indirect way: it has an arrangement with Cross River Bank (CRB) where CRB offers loans to consumers but has the option to sell (put) the loans back to Affirm. CRB has always opted to sell these loans back to Affirm. Sometimes Affirm buys these loans at a loss as explained in the S-1.

"In certain instances, our originating bank partner may originate loans with zero or below market interest rates that we are required to purchase. In these instances, we may be required to purchase the loan for a price in excess of the fair market value of such loans, which results in a loss on loan purchase and is recognized as loss on loan purchase commitment in our consolidated statements of operations.

In 2019, this “Loss on loan purchase commitment” was -28% of Rev and in 2020, -32% of Rev!

I don’t understand the math behind these loan buybacks and why they cost so much. I’m definitely not liking it.

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It doesn’t change my choice in Afterpay but it does materially affect the attractiveness of the Affirm IPO IMHO.

https://www.crowdfundinsider.com/2020/12/169853-affirm-acqui…

Affirm has just acquired Canada’s leading BNPL company PayBright. PayBright has a dominant position in Canada in the same way as Affirm used to have and now Afterpay now has in US and the way Klarna has in Europe.

Here’s what PayBright’s lead in Canada looks like on Google trends:-

https://trends.google.com/trends/explore?geo=CA&q=Afterp…

Afterpay was late to the party there in Canada and now neck and neck with Affirm but PayBright is far ahead. (But then so was Affirm in the US before Afterpay took in from them in a spectacular smash and grab fashion over-taking them whilst Affirm was asleep at the wheel).

https://trends.google.com/trends/explore?date=today%205-y&am…

This helps diversify Affirm’s one country/one client concentration issue.

It also might catapult Affirm’s position if it can sell through it’s BNPL solution to the 7000 merchants that PayBright has.

Ant

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