Affirm’s Q1 Results and Exclusive Agreement with Amazon
Affirm reported strong Q1 FY2022 results that beat on the topline as sales grew 55% YoY to $269 million. Management also raised its guide for FY2022 sales to grow 42% YoY to $1.2 billion, up from its prior guide of 35% YoY growth. On top of the strong growth, Affirm announced an exclusive agreement with Amazon to be the only BNPL payment option on the e-commerce platform for at least the next two years, just in time for the holidays. This exclusive agreement is not yet included in management’s FY2022 sales guide.
The Amazon partnership was initially announced in August but was made exclusive in November. The exclusive agreement with Amazon follows partnerships with Shopify, Walmart and Target, all since June 2021 and before the holiday shopping season ramps. As shown below, Affirm has exposure to >60% of total retail e-commerce market share following these partnerships.
However, these partnerships do have a cost. In exchange for the exclusive agreement, Amazon is receiving up to 15 million warrants of Affirm equity with a strike price of $100. While this is a hefty price to pay, it does create a mutual interest in Affirm’s success on Amazon’s platform. For example, Amazon will conduct its own marketing to encourage the conversion and adoption of the Affirm program.
The terms of the agreement highlighted a few different marketing strategies that Amazon may use to promote BNPL to its customers, such as promoting BNPL to Prime members when they use credit cards; include cashback for Prime members that use BNPL; email Prime members about Affirm’s BNPL offering; and even use packing tape to promote the program (AFRM 8k, 11/10/2021). The exclusive agreement has Amazon working to encourage adoption of Affirm’s payment methods, because if Affirm succeeds, Amazon will also benefit. Considering that Affirm wants to quickly scale, this was a huge win for the company.
In the chart below, we can clearly see the benefits that these partnerships have on Affirm’s growth. Active merchants surged nearly 1,500% YoY to 102,200. Active merchant growth is important, because it is the primary driver of consumer growth. Merchant growth is a forward looking metric that supports sales growth in the future. Importantly, the rapid rise in active merchants shown below was driven by the Shopify agreement signed in June 2021, implying that merchant growth will likely continue to ramp following the Amazon agreement discussed above.
Affirm’s Q1 FY2022 Financial Results
Following the rapid growth in active merchants, Affirm’s topline growth also came in strong. Q1 sales increased 55% YoY to $269 million, which beat estimates by $20 million. Network fees, which are fees paid by merchants, increased 13% YoY to $112 million and interest income and gains on sale of loans increased 116% and 89% YoY to $117 million and $31 million, respectively. To be complete, servicing revenue increased 132% YoY to $10 million.
Gross merchandise volume (GMV) increased 83% YoY to $2.7 billion, and this growth flowed into loans, as loans held for investment increased 62% YoY to $2.1 billion. However, expenses also rose, driven in part by stock based compensation (SBC) from the recent IPO and a change in estimates. Q1 net loss was -$307 million, and excluding $87 million in SBC following the IPO and $142 million due to changes acquisition related expenses, adjusted net loss was $78 million, or -$0.29/share, slightly ahead of estimates at -$0.30.
Management also raised their guide for the year. The midpoint of its GMV guide was raised 5% to $13.3 billion for the year, while the mid-point of its FY2022 sales guide was also raised 5% to $1.2 billion, implying a 42% YoY growth rate. Adjusted operated loss is guided to be -13% of revenues, slightly higher than the initial -12% guide.
Importantly, management’s guide is somewhat conservative as it does not include any contribution from the exclusive Amazon agreement discussed above (however the dilution from the warrants is included in the EPS guide). Once Affirm has gathered sufficient data from the program, they will incorporate that into their guide going forward. Based on management’s current guide and Affirm’s stock price, Affirm trades at ~35x P/S.
Finally, the company’s credit metrics appear healthy. Provisions for loan losses increased 133% YoY to $64 million, which was skewed by a low base period due to provision releases in the prior year quarter. The rise in provisions drove allowance for loan losses up 24% YoY to $152 million, or 7% of total loans. The rise in allowance for loan losses provides a ‘safety net’ in case defaults begin to rise in the future. As shown below, Affirm’s allowance for loan losses is near its historical average of ~9% of total loans.
Affirm’s reserves for loan losses has trended up with the company’s rapid growth, which provides downside protection from rising defaults. As Affirm’s credit risk model is proven overtime, the company’s reserve for loan losses may decline relative to loan growth, which would fuel earnings growth in the future.
The company’s recent partnerships with major online retailers such as Shopify and Amazon, positions the company well for strong growth going forward. The company’s credit metrics appear healthy and growth should continue to be robust as we enter the holiday shopping season.
Update on Palantir
Palantir reported Q3 results on 11/9/21 and sales grew 36% YoY to $392 million which beat topline estimates by $5 million. Commercial sales accelerated to 37% YoY growth in Q3, up from 28%, 19% and 4% YoY growth rates in Q2, Q1 and Q4 2020, respectively, while government sales increased 33% YoY to $218 million.
On the call, Palantir COO Shyam Sankar explained that the company’s commercial offerings have been robust and that the Foundry tool (primarily used in commercial offerings) has benefited from three key trends: 1) defense industrial 2) automotive and mobility and 3) healthcare. Specifically, defense and healthcare are benefitting from increased spending while automotive and mobility are benefitting from the ramp in EVs and the large amounts of data that this secular trend is creating.
Continuing down the income statement, adjusted gross margin was 82%, up from 81% in the prior year quarter. Q3 operating margin was a slight loss of 1% while adjusted operating profit margin was 30%, its 4th consecutive quarter at or above 30%. Adjusted EBITDA increased 59% YoY to $119 million and adjusted EBITDA margin increased YoY from 26% to 30%. Non-GAAP earnings were $0.04, which met the consensus estimate.
Adjusted earnings exclude large amounts of SBC, but SBC has materially declined and was down 78% YoY to $184 million during the most recent quarter. The normalization of Palantir’s high SBC is due to the outsized levels from last year following its IPO, and a continued normalization in this trend should benefit shareholders going forward as dilution slows.
Looking ahead, management guided for Q4 sales to increase 30% YoY to $418 million, which was 4% higher than initial estimates. For the full year 2021, sales are expected to grow 40% YoY to $1.5 billion, 2% higher than initially expected. Management also raised their adjusted FCF guide to be in excess of $400 million, up from the prior guide of $300 million. The company continues to expect long-term topline growth of 30% or more through 2025.
While Palantir largely came in as expected, there were some concerns with Palantir’s results. For instance, sales growth slowed relative to the prior two quarters. Furthermore, cashflows from customers was lumpy, as deferred revenue and customer deposits decreased relative to sales growth. However, this was offset with a sharp rise in backlog, as RPO to be completed in the next twelve months increased 111% YoY to $393 million, while bookings increased 56% YoY to $510 million. The outsized growth in NTM RPO and bookings relative to sales suggests that there is ample support for future sales growth.
Palantir has also made a series of investments that could further help fuel topline growth going forward. The company invests in commercial customers that gives Palantir exposure to their success if they benefit from Palantir’s tools. As shown below, the company has invested $153 million in commercial partnerships YTD, with a maximum potential revenue from these contracts of $640 million.
Investments in commercial customers is similar to what Amazon has done with Affirm (discussed above), as Palantir gets exposure to companies that can materially benefit from its tools. While Palantir has a robust toolset that can transform data into actionable insights, it takes time for commercial customers to find uses for the products. These investment agreements can help accelerate the time it takes for commercial customers to realize the strength in Palantir’s services. These investments are not without risks, however, because if the company fails then Palantir will be required to write off the investments, impacting earnings.
Looking forward, Palantir’s guide appears reasonable as it has amble support from backlog and bookings to continue to grow 30%+. The company’s commercial segment has been robust, which has been aided by the company’s investments in commercial customers. While growth slightly slowed relative to prior periods, if government spending begins to ramp, then Palantir’s sales growth will likely reaccelerate in the future.