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
- 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
- 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 $250
- Marketplace - Personalized data-driven product discovery
- Savings - FDIC insured, interest bearing savings account
point-of-sale payment solution for consumers - pay over time rather than paying entirely upfront. Offers both 0% APR and interest bearing loans with simple interest, no late fees or interest compounding
merchant commerce solutions - helps solve affordability for their customers without hurting bottom line. Alternative to traditional marketing for customer acquisition, increased AOV. Also provides API integration for merchants.
consumer-focused app - for consumers to manage payments, open high yield savings account, access a personalized marketplace. This app allows merchants to provide tailored offers based on consumers spending patterns, shopping habits and purchase intent.
Loan Origination and Servicing Model
When a consumer applies for a loan through Affirm’s platform, the loan is underwritten using Affirm’s proprietary risk model. Once approved for the loan, the consumer then selects their preferred repayment option. The substantial majority of these loans are funded and issued by their originating bank partners.
- From merchants - For helping them convert a sale and power a payment. 43% and 46% of total GMV are 0% APR financing in Q4 20, Q1 21 respectively.
- From consumers - Interest income on simple interest loans that Affirm purchases from originating bank partners. ~33% of Total revenue
- Virtual debit cards - A portion of interchange fees when customers use at non-Affirm merchant sites. Tiny ~1.5% of total revenue at the moment
Fiscal Year- July to June
Q1 Q2 Q3 Q4 Full Year Rev($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 ?