Affirm Inc. (NASDAQ: AFRM), a leading provider of online payment solutions, released its financial report for the first quarter of the fiscal year, posting better-than-expected results and causing its stock to surge by 10.4%. The company's total funding capacity has increased sequentially, reflecting its preparedness to grow the business while managing credit in the higher-for-longer interest rate environment.

The company reported a loss of $(0.57) per share, which was $0.13 better than expectations. Revenues rose by 37.3% year-over-year to $496.55 million, surpassing street estimates.

One of the key highlights for Affirm in Q1 was the growth in Gross Merchandise Volume (GMV), which increased by 28% compared to the previous year, reaching $5.6 billion. This indicates a healthy increase in consumer demand for the company's services.

Affirm delivered adjusted operating income of $60 million, representing a 12% adjusted operating margin. This signifies the highest level of profitability achieved in the company's history. The strong revenue growth outpaced GMV growth, primarily driven by the robust performance of network revenue and interest income.

Funding Capacity increased sequentially by $1.4 billion to $13.1 billion as of the end of Q1 2023. Loss allowance increased accordingly, and total revenue and Revenue Less Transaction Costs (RTLC) exceeded expectations. 

Looking ahead to the second quarter, Affirm issued in-line guidance. The company expects revenues in the range of $495 million to $520 million for Q2. Affirm forecasts GMV between $6.70 billion and $6.90 billion for Q2, which aligns with market expectations.

Affirm aims to achieve FY24 GMV of over $24.25 billion, with revenue as a percentage of GMV remaining consistent with FY23. The company maintains a positive outlook for its long-term growth prospects.

Incorporated into its guidance, Affirm considers the current forward interest rate curve and negative consumer sentiment, expecting these conditions to persist throughout the fiscal year ending June 30, 2024. The company anticipates the impact of consumers' student loan balances on underwriting decisions, projecting a modest headwind to FY24 GMV once loan repayments resume.

Affirm emphasized its commitment to responsible credit management, acknowledging a modest seasonal increase in delinquencies during the quarter. However, the company noted that delinquencies returned to normal levels as the summer came to an end. Affirm remains dedicated to closely monitoring credit conditions, making credit management its top priority.

The company also highlighted its efforts to extend access to credit responsibly, stating that more than 90% of interest-bearing GMV in October was offered at a maximum Annual Percentage Rate (APR) of 36%. This showcases Affirm's commitment to offering affordable credit options to a wider range of consumers.

Overall, Affirm's Q1 results demonstrate the company's ability to deliver profitability and operating leverage over time.  Investors responded positively to the news, with Affirm holdings jumping 14% after the Q1 revenue beat estimates. Investors are concerned that the rising rate environment will lead to a spike in delinquencies given the uncertainty around the companys business model. That has not occurred. The stock broke above the $22 level and is challenging the YTD highs ($25.63).