Objective Analysis of Business Update 14/10, page-5

Conference call just finished and for those of you who missed it here are some key points that are also reflected in the jump in share price from $25 to $26 during the call:

1. A question was asked in relation to early indicators that are showing trends of customer behavior. Management responded that as an example they are keeping track of % of customers making payments on time. While this isn't strictly an indicator for losses, it would show stresses on customers. However, this indicator is showing NO material deterioration, only some variance based on seasonality.

2. Question on Afterpay's ability to reduce fixed costs. The response was that if they need to they can cut staffing costs and they emphasized that they aren't locked into marketing costs so there is flexibility there. At the moment they are not looking to cut market costs, but instead using marketing for different purposes, for example to support the merchants rather than focusing on expansions.

3. There was a question on whether the recent first-payment implementation in Australia is a short term strategy? The response was that the US and UK has always had first-payment implementation and that the ANZ markets have been adjusted to mirror that of the US and UK. (They didn't spell it out but it sounds like this is going to be the norm, as a standardized business model across the world.)

4. A question regarding the statement that they are withdrawing guidance of receiving the stated objective of 9.5m customers by 30 June 2020. Management noted that based on current projections they still expect to hit this number, the only reason why they are pulling guidance is due to the increase in uncertainty.

5. A question on revenue vs risk management. Afterpay is prioritizing risk management over revenue and are happy to have slower transaction growth if it means their book is of higher quality and loss rates are reduced.

6. A question on net margin reduction from 2.1% to 2% and asking for some colour around why this is. The response was that different markets have different margin characteristics and with the US having a slightly lower margin to Australia due to it being in a different maturity phase to ANZ and due to the US now making up a larger part of the companies overall portfolio it naturally means the margins have adjusted. This is not due to anything other than different regions blending and not due to lowering of merchant margins or increase in loss rates.

7. A question on whether they are seeing merchants pressuring Afterpay's fees? Not at this point, they are seeing no reductions in net transaction margins. Afterpay is actively partnering with merchants to drive sales through Afterpay's platforms. (I guess alluding that they are making sure the merchants are getting their money's worth).

8. Question on global Ebay roll-out. The word "exciting" was used and noted that the ebay roll out has been extremely successful so far. Regarding global expansion, they noted that they are focusing on Australia at the moment. However they said that they have integrated Afterpay through ebay's global platform which means the ability is there to offer Afterpay in other markets.

There were other questions that were asked that I don't think added much value. Analysts seems quite happy with all the answers provided and some even congratulated them for a good result.

What are your thoughts on the above?