Zip Co Limited

thank you um thank you and on behalf of the zip board i'd like to welcome everyone to zipco's uh first half fiscal 2021 results investor presentation um in the room with me today is is peter gray co-founder and chief operating officer i also have with me martin brooke our chief financial officer i have tommy mermelstein our chief strategy officer and We're pleased to also be hosting the CEOs from the US, Quadpay founders, Adam Ezra and Brad Lindenberg. Before we kick off, I'd also like to thank the hard efforts of the entire Zip team, our Zipsters. We'd also like to thank retailers and of course our customers and loyal shareholders for what has been a bumper half. And also before we continue, I'd like to formally welcome Diane Smith-Gander as our new chair. Very excited to have her on board, and also say farewell to Philip Crutchfield, who's been a fantastic mentor, advisor to us, and has steered this ship for the last five years. And finally, welcome Pippa Downs as well, as a non-executive director who chairs our Audit and Risk Committee. Today, I'll go through a few sections, a quick update on Zip. We'll then talk about the US, which is a real growth engine for the business, followed by a look at Australia and New Zealand. then look at the globe and some of the other initiatives. I'll then hand over to Martin Brooke to look at the financial results, and then we'll talk about what's next. So if we just flip to page four, a quick summary, a refresher on Zip. Our purpose is the freedom to own it, and that really speaks to quite a few vectors for us here at Zip, customers, merchants, responsibility, and our culture. It gives customers the freedom to own the dress, own the moment, own the experience, own their financial wellbeing. It talks to merchants where we give them the freedom to own it, particularly the small business community where they can grow their top line, get another customer and now access working capital from Zip. We also own the responsibilities that come with issuing microcredit and financial services in real time. And fourth, which we are most excited about and we see as a big differentiator, is the culture, the freedom to own it, where we build up an organisation of single-threaded owners who are empowered, run different parts of the org. We reward with the zip stock, who feel like business owners, and we accelerate together. And our mission is to be the first payment choice everywhere and every day, and we've clearly got a long way to go. On slide five, I'd just like to talk to five key differentiators about the Zip business versus the peer set out there. First of all, our product. We offer interest-free installments for both short and long-dated periods, and that really allows us to play across any category set globally. And we are on a roadmap this year to deliver feature parity across all of our markets. The second big differentiator is we derive income both from customers and distributors. merchants and that really gives us the ability to again play in any category any gross profit category but our customer fee is always fair simple and transparent and easy to understand and we have proof points on that. The business model is both a closed loop network where we acquire customers directly and have directly integrated commercial relationships but we also have open loop and that allows customers to shop everywhere which drives habit and we'll talk to that later today. Fourth, we are actually one of very few global BNPL where a single merchant can integrate with us and we can open up multiple markets, which is really important as commerce gets globalised. And finally, risk and financial responsibility is at our core. Since inception, we've done identity and credit checks, and it's our superior risk decisioning and investment in these characteristics that enables us to grow quickly but also manage the risk ahead. On slide six is just a quick summary. You know, we finished December. run rating just over $7.5 billion and annualized revenue of $480 million. And what's really interesting, if you look at the geographic spread, is that we have four core markets being the US, Australia, New Zealand, and we've just launched in the UK. We also have a number of strategic investments which are forming part of our network and that we can access and offer up to merchants, whether it's in Eastern Europe, the Middle East, or South Africa. Now, if we turn to slide seven, we started out the year really with four key strategic priorities focused on payment acceptance, app engagement, global expansion, and zip business. And so just a quick update on how we're tracking to those four priorities. On payments acceptance, particularly in Australia, we became a principal issue with Visa, and we were able to really unlock the in-store potential. And in late October, We finished that project and customers can now use the Zip wallet to shop everywhere in physical and that's really stepped up our engagement rates and we'll talk to that. The US has already had this functionality. In the US as well, they rolled out a Chrome extension which allowed the shop anywhere experience to be delivered via web as well as the app and we'll kind of talk about that. And through a mixture of these techniques, we're not just available everywhere, but also driving a lot of everyday spend, which is driving habit. And pleasingly, we grew the merchant base 73% year on year. On app engagement, it was really a standout for the half. In Australia, we became the number one downloaded BNPL app, and that carried through into January, which is a great result for us with the relentless focus on app and UX over the last few years. And in the U.S., the Quadpay app was the second most downloaded alt credit app during the holiday season, with over 2.8 million app downloads in the half and the customer base grew to 5.7. On global, we obviously completed the Quadpay acquisition in late August, with September being the first month, and that's been a great story, and we'll talk more about that. We launched in the UK in December, and that's really exciting. Pipelines building, we'll talk about that shortly. And we made a number of strategic minority investments around the globe underpinned by our new markets team. And then finally, Zip Business. This was really in beta post-COVID and a great team just working on what our product fit was going to be. That launched towards the end of last year under the rebranded Zip Business, which we'll talk about, and secured two exciting partnerships in Facebook and eBay. So, you know, really, really good results there by the team. If we turn to slide eight, I think if we just go through the quick highlights, you know, we've seen again year-over-year growth across our key metrics of transaction volume, revenue and customers north of 100%. And as we've always said, growth really underpins our business model to take advantage of the BNPL opportunity globally. QuadPay, we completed in August as an entry into the US to accelerate growth. And just since the beginning of September, the TTV for the US has grown over 130%, which is just absolutely remarkable and is being transformational for our business. We bolstered the board with two key appointments, which I spoke about earlier, Diane and Pippa. Very excited to be working with them. We also, during the half, we raised $176 million via an institutional placement and a share purchase plan And really that was to fuel out our global growth with a large chunk of that going into the US. And again, we had really outstanding support from our loyal retailer base and we're very pleased to accept all of these share purchase plans over subscriptions. And again, pleased to see that the price is trading well north of where they participated. We spoke about product innovation, quite a few highlights there, which we spoke about and key partnerships in Australia, Harvey Norman, join the platform and domain. We've also secured Boohoo, JD Sports, and we'll get into the merchant list a little bit later on. Just turning over to slide nine. What we've tried to do here is take another approach to how we show unit economics. And this really is in line with our peers, not just here, but also in the US. And it really looks at unit economics on a per transaction basis. what is revenue as a percentage of transaction volume, less cost of sales, which are the transaction costs being processing data and losses, to get to what we call a cash gross profit as a percent of TTV, or they call it a net transaction margin or transaction margin over in the US. And I think pleasingly, when you look here, transaction volume grew 141% year-on-year. The... The revenue of $159.8 million represented just shy of 6.9% of TTV. And if you go down, we have a margin of about 3.71%. And I think what you've seen there in the movement year on year is the shift in the business mix and also some exposure to more everyday categories. That's a really pleasing result and kind of shows the disciplined unit economics that will be underpinning the growth of our business. Also, what's pleasing to note is cash in the TDA was positive, which is really a great result considering that we have a mature Aussie business but also investing for growth globally. And Martin will talk more in detail about our financial results. Moving over to slide 10, what we can see here is really a proven ability to execute across the globe. We finished the half with $2.3 billion in transaction volume. And that's on an actual basis. That's only including quad pay transactions from the 1st of September. On a pro forma, that was $2.5 billion. Revenue, we finished the half at just shy of $160 million, which is a great result. If you look at our fiscal 20, that entire year was only $160 million and really a great result there. The US, though, clearly is becoming a much larger share of the business. Just in December, they contributed 40% of TTV, and we expect them to overtake the Australian side very, very soon. Also, pleasingly, transactions were up. That number's actually a pro forma number. If you look at our word release, you can see the actuals of 14.6 million transactions for the half. So really strong engagement. And then finally on slide 11, this is really an interesting... story here where since the acquisition of Quadpay in late August, beginning of September, you can really see a step change in the business. Repayments have really accelerated from, you know, we've been issuing instalments from about six weeks to 48 months with an average of about six months with assets on the balance sheet. And what you can really see here is a shortening of six months all the way down to three, really being driven by the mix of the US shorter date of instalments But also in Australia, post-COVID, better UX, better repayment flexibility, and that's having a much more efficient effect on our capital recycle, and that should underpin our future growth. Also, if you look on the return on capital, our revenue yield, which is revenue as a function of average receivables, has really stepped up from 16% to 25%, again, showing really strong return on capital. So when you combine our net transaction margin that we spoke about on the earlier page and this improves capital recycling, we think we are in a really good place to accelerate growth, drive operating leverage and future economics. And then finally on slide 12, as we always say, even though we're seven years in, it really feels like we are only getting started. BNPL penetration is about 1.6% online. And when you look in mature markets, that's about 20%. So a long, long way to go. And what we see across our business is 80% of our global customers are millennials and Gen Z, which will really become the purchasing power leaders over the next 10 years. And so we've got a really exciting long-term road ahead. Jumping into the US on slide 14, Really great results right across all of the key metrics, almost 200% up on most of the key metrics. The pro forma TTV was up two and a half times year on year to just under a billion dollars. Customer numbers grew to 3.2 million, again, up twice year on year. The pro forma revenue, which is very exciting, grew two and a half times year on year to just under $70 million. And even though December was a real standout for the US business, if you look in the January data, you're showing us that on a TTD basis, the business is almost back to November level. So really good start to calendar 2021. The business continues to deliver market-leading unit economics with net transaction margins north of 2%. And the app, which I'm going to talk about a little bit later, is a really exciting story. Slide 15 really talks to, you know, offering buy now, pay later is important, but you have to offer it across all user journeys. And in the US, you can now pay later at checkout, integrated. You can pay later anywhere in-store. You can pay later anywhere online with merchants that we aren't integrated with. which we'll talk to shortly, and you can pay anywhere using the Chrome extension, which enables virtual cards issued in the checkout, and it's showing really strong, strong promise. The merchant base continues to expand. Retailers are critical to the business model, and we saw names like GameStop, which has obviously been in the press, and we see had another big jump last month, but a really great business and great fit for a buy now, pay later. fanatics, and we've just rolled out with Sunglass Heart in-store, which is showing really strong promise. So retail is the key, and what we're finding is that the global footprint is really helping our sales effectiveness, and the pipeline is really exciting. And of course, strategic partnerships are also a key part of the business model, how we get to not just one-to-one merchants, but one-to-many. And we have a number of relationships here that we are working with, such as Fiserv and others, and are going to be a key part of our growth story over the coming years. And slide 17 and 18 really talk to the exciting business model that we have over in the US. A really strong ability to acquire customers directly and organically via the app, as well as through merchants. These customers come into the app, they're able to then shop, and we're able to introduce and refer customers to our integrated partners, driving incremental transactions. But at the same time, we're able to offer customers places to shop outside the closed network, which is driving habit and driving preference. We can then use that data to go back in and talk to merchants around a directly acquired relationship. This is really starting to feed itself. It's driving really exciting transactions per monthly transacting user, and that's really underpinning the engagement model. And slide 18 just quickly shows you the incredible growth in the app. Huge investment has gone into the app with beautiful UX, a lot of experimentation, and this organic growth is really providing a real strong moat around the business. And then finally, with regards to the app on slide 19, the QuadPi app had over 2 million downloads, just in the half, and pleasingly reached 15 in the shopping category during the shopping season on iOS. So really bumping into some of the biggest names and really a testament to the work and laser focus of the US team. And engagement by the app is up over 90% year on year. So real good. leading indicators to what's ahead. And then finally, just on credit performance, I think these two charts really tell a good story. Returning customers, which obviously deliver improved loss rates over time, has jumped from just north of 50% to 85% of monthly transactions. And so if you kind of contrast that, in Australia, by way of comparison, we are over 95%. And as a result of that, we're seeing really improved loss curves charge-offs as a function of monthly transaction volume really coming down. And again, testament to the Chief Risk Officer, Kostav, over there and the decision technology that really underpins how customers are onboarded, how risk is discerned. And you can see as well on the chart how COVID was really dealt with, being able to respond in real time to the portfolio and the application funnel. Moving across to ANZ, really pleased with the results in ANZ with the TTV up close to 60% to $1.5 billion, and really strong metrics, results across all of the metrics. We had more customers join the platform than ever, which talks to the compounding network effects. And our customers completed 2.5 million transactions just in the month of December, which was up 140% year on year, again showing that customers that are joining the network are becoming much more engaged. They're coming into a world with better merchants and a better app. Jumping to, I might skip over slides 23 and 24 and just say, you know, by way of reminder, we are unique in Australia being able to offer interest-free installments for small dollar and long duration, which is really important to merchants, and we can play in any category. We also find a number of great names over the period, including Adore Beauty and Harvey Norman. The great result for the team on slide 25 was that the Zip app was the most downloaded BNPL app in Australia, which is a great title to have grabbed. And you can see just on the right that monthly downloads have really scaled. And I think, you know, for us, we called out the app as a centrepiece to the relationship, and we see payments as the access point for the relationship with customers, and it's really important that we continue to remain laser-focused on that asset. And on slide 26, what's really interesting is that each year we try to do better. We try to make sure that customers that are joining the Zip platform are more engaged. And we can see, you know, a 70% growth in transactions per monthly transacting user year over year, from about two times per month to three and a half times per month, which is just north of 40 transactions if you calculate that on an annual basis. So we are becoming more and more important to our customers. Revenue as well for cohorts is getting better year on year in 2020. Look, it was slightly up, but really what we're seeing here is that engagement has been through the roof. And as I spoke about earlier, payments is the access point to us and the customer. The more times that customers are using us, the more important we become and the more valuable and the greater the LTV or long-term value is of the customer. And then finally on credit performance, again, you know, our credit decisioning engine, which has been a consistent focus for us really since we started seven years ago, what began as a rules-based engine is now, you know, full machine learning model, you know, particularly up to a few thousand dollars, and then we go all the way up to 20,000 and 30,000. And really, this decisioning engine that digests conventional and nonconventional data is showing improved cohort performance as we look from, you know, 2017 and pleasingly net bad debts of 1.9%, which shows our ability to really control the front end, control the portfolio, and during COVID that was really tested. So a great result by our credit team and our data and risk team. And then moving over just to slide four, which encapsulates global business and pocketbook. Zip Business was launched really towards the end of last year under the brand Zip Business. The product that we have now gone to market with is Zip Trade, and we were very pleased to sign both Facebook and eBay late last year. With Facebook, small businesses can now advertise now and pay later, and we have a great team behind this part of the business. The road ahead over the next six months is incredibly exciting. the daily engagement rates and acquisition rates are all heading in the right direction. And we expect to report on those results later this year. So most of the activity is happening in the everyday buy now, pay later, up to about $5,000. The team is looking to also roll out a trade plus, so slightly larger SMEs that might be looking for working capital. And we're really excited about the road ahead for Zip Business. It also really talks to the ecosystem play that we are trying to build, where sellers can offer Zip as a payment acceptance, but they themselves can also become Zip buyers and hopefully we can get more commerce happening around the Zip ecosystem. Moving on to slide 30, Zip launched officially in the UK in December and really off to a great start if you look at both December and January. We signed just over 100 small merchants, which was good to get things going. But pleasingly, the team has been able to sign some real marquee names in Boohoo, JD, Cotton On, and some of us are starting to see as well the ability to port our US merchants into the UK, similarly our Aussie merchants into the UK. So really, when we look at the go forward, we've got a great technology platform now in the UK, which is on the same technology stack that QuadPay has now. has built, and all of the feature sets that we have in the US will be brought across to the UK, which enables great app, great sign-up, virtual card and shopping everywhere, as well as closed-loop networks. And the global and the retailer pipeline is very, very exciting. Anthony Drewing and the team is doing a fantastic job, and we look forward to reporting updates on the UK throughout the calendar 2021. Last year, under our chief strategy and global officer, Tommy Mermelstein, we established a new markets function, which was a team specifically developed to look at both opportunistic and strategic expansion opportunities. They were behind the quad pay deal, behind getting UK going. And it's a team that has regulatory product tech risk and market launches. We've done a range of things this year, which is really exciting. We made a number of minority investments with great founding teams in Eastern Europe with Twisto, and they have the ability to passport licence across the EU. We also made a small investment in the Middle East, which we see as a really exciting region. Again, a great founding team. And we're just starting to mobilise a small team in Canada. But really the purpose there, given that the QuadPay staff just moved... you know, really nicely into that region is really to support our US business, to help us acquire and retain our US merchants. And so we're looking for a soft launch there. As well, we've moved our global integrations into new markets that a single merchant can integrate with us once, and we can now open up multiple markets, which is increasingly becoming exciting to more global retailers. On slide 32, Pocketbook is obviously a key part of our product set. up to 812,000 users. It's a free app that allows customers to track budget and save. Our view has always been that some customers are eligible for credit, some customers don't want credit, and we have a duty of responsibility to engage and provide market-leading experiences for them. And you'll see a lot more coming from this over the next year. That's it for a summary of the business, and obviously we'll take questions later, but I'll now hand over to Martin Brooke, our Chief Financial Officer.

Thanks, Larry. So starting with slide number 34, we take a look at our information bias segment. We split it between Australia, global and business. And the exciting thing to see is that the US, which is part of the global segment, is already 38% of our revenue. And that's with only four months of transactions going into there. Also, we previously said that we would invest in growth while maintaining cash EBTDA positive in the AU business. And clearly you can see that we've done that, generating a positive cash EBITDA of 3.1 million and also an overall positive cash EBITDA of 200 grand. Clearly a strong result there. Obviously business is a small part of the group at the moment, but strong growth aspirations for the next half. Turning now to slide 35, we touched on the operating income previously. Operating income now has been split between portfolio income and transactional income to reflect the different revenue streams acquired and also the new revenue streams of ZIP. Transactional income really relates to affiliate revenue interchange and service fees, and the portfolio income is the traditional merchant fees, establishment fees, and mutton fees, recognised over the repayment profile, whereas the transactional income is recognised when earned. cash cost of sales 73.7 million obviously the inclusion of quad makes a huge difference to these numbers so key key things to point out here is that on the on the interest side the reduction in the bbsw by about a percent over the year has slowed through into our average interest costs the bank fees and data costs which are pretty significant the volumes there give us a great opportunity to investigate reductions in the unit prices in line with those volumes on both the local and global scale. Healthy unit economics, as we've talked about previously, reflecting the cash gross profit of 54%, up from 52% in the previous year. We've covered a little on the bad debt side on previous slides. On the operating cost side, increased by 51.5 million predominantly due to the acquisition of Quad We're increasing headcount to scale the business globally, and obviously we have an increased marketing cost to drive not only transaction volumes across all markets in the seasonally strongest quarter, but we also incur additional costs in driving the launch of tap and dip. So I also note that we hit a cash EBTDA of 0.2 against 1.5 in the previous year, as I kind of covered on the previous slide. If we look at the, in terms of the provision for expected credit loss, important thing to note there is that we have reduced our overall provision from 4.4% to 3.8% across the group. And that largely reflects the improvement in roll rates in the Australian business, slightly faster repayment profile in ZIP money, and a significant reduction in the number of hardships in the ZIP business portfolio. We have maintained the economic overlay at the same level as we were stuck in June, Just turning over to page 36. A couple of key things to point out here. Significant increase in share-based payments, largely relating to the acquisition of Quad. The shareholders approved some tenure and performance shares. Those tenure and performance shares are best obviously based on tenure and the performance of the business. Very pleased to announce that the first hurdle on the performance share side has been achieved and there will be 15 million USD in shares issued no later than September this year. As the tenure and performance shares are all linked to ongoing employment, they need to be reported as part of the P&L account and not really considered part of the cost investment in Quad. Fair value loss and the adjustment on Quad we'll look at in the next couple of slides. So if you look at the slide 37, we recorded a quad pay acquisition adjustment of net of some $306 million. If you look at the, this obviously has no bearing on cash or the quad pay business, but obviously the achievement of the first performance hurdle suggests that the business is going very strongly, and it obviously is. When we were negotiating quad prior to COVID, ending in March, We were obviously in ongoing discussions. When COVID hit, the share price of Zip fell quite considerably. The other US exchange rate deteriorated. And in order to remove those market forces from the discussions, we agreed a share ratio with the vendors at Quad. That share ratio being essentially the shares would be issued equal to 23.3% of the issues that issued share capital at completion. So that essentially speaks to the number of shares that we were going to be issuing. and all that was left was the price. Accounting standards demand that we use the price at the date shareholders approve the transaction, which was, first of all, the share price of $9.16. For the purposes of recording the initial purchase price, there is no choice. That is considered fair value. If you look at the slide, or the graph on slide 37, I think it would be pretty, there wouldn't be many people who would think that 9.16 was a fair value. So that was our view. So in conjunction with independent valuers, we looked at volume weighted average pricing up to the date of the transaction and formed a view that a fair value equivalent to some 6.50 was much more appropriate. In conjunction with the fair value system, we also had to revalue our existing 14.09%. So if you look at the sequence, step one, on acquisition, we revalued our 14.09% up to $9.16, which required us to report a fair value adjustment of $109 million. And then the day after, we revalued, we took a share value adjustment of $415.9 to reflect a fair value equivalent of $6.50 as opposed to the $9.16. For those of you who are looking to multiply the number of shares issued by the Net adjustment of 306, purely accounting, no impact on the business. Turning on to page 38. When we were looking to announce the acquisition of Quad, it was very important that we had funding to go with it. At the time, we looked at various different options. Our share price was down at $370,000. The market for equity was not that great, quite turbulent. Looking at those options, we came to the view that the issue of convertible notes and warrants would have a much less dilutive impact on shareholders. And therefore, we issued 100 million in convertible notes with an initial conversion price of 53, 553, sorry, and 100 million in warrants with an exercise of price of 515. both significance to the prevailing share, significant premiums to the prevailing share price. When we account for these things in a convertible note, you have to split it between a debt and a embedded derivative. The warrants are a derivative, and we have to value the embedded derivative in the convertible notes and the warrants at fair value at each reporting date. So in coming up with that value at December, using a share price of 529, we ended up having to report Should be noted that the fair value is very sensitive to our share price. So if we get to double the share price between now and 30 June, at 30 June it's at sort of 1060, we will be required to book a further fair value adjustment to that point of around 160 million. So fairly volatile. Turning onto the balance sheet on 39, obviously very much influenced by the addition of Quad. Significant cash on the balance sheet at December, largely reflecting the capital raise just prior to the end of the half year. Normally we would have as much money as we can in the funding vehicles. Obviously it's better for us to use our money to fund receivables rather than draw down on our financiers, but obviously with that The customer receivables numbers, obviously the biggest number on the balance sheet, supported by the increase in borrowings further down the balance sheet. Investments that we made in Spotty, Twisto, all coming through in those investments lines. Other big things to call out is that on the acquisition of Quad, we had to value acquire intangible assets, which we have done on a provisional basis. So that will be finalized at 30 June. and that provisionally we've recognized at $253.7 billion of acquired intangibles which comprise the brand name, the software platform, and partner relationships. So they're all valued at the acquisition date. The other big item on the balance sheet, Goodwill, obviously that relates predominantly to the Goodwill arising on the acquisition of COD, being the difference between the purchase price post-adjustment and the 500 assets. the intangibleness assets and the quiet assets and that goodwill numbers around the sort of 730 odd million per quarter. Looking further down the balance sheet, obviously with bigger volumes across global businesses, the trade and other payables is largely payments to merchants and has grown significantly. The financial liabilities is the debt host and the So just moving on to the cash flow, obviously a positive cash flow, 13.9 million, 20 million if you exclude the acquisition costs up from 6.7 in the previous year. Key call-outs I think on there, because we paid quite largely in shares, acquiring Corby brought a net $26 million into the group. Riding down the proceeds from the issue of the converter work to 96.8, that's net of costs. We had the capital raise where we received $120 million in the year and the money from the shareholders came through in January. That's obviously not reflected in those numbers. And overall, an increase in cash of $187.2 compared to the position in June. Moving to the funding update. Obviously, we're well placed to support our growth plans with the funding programs in place. The key call out there within our consumer receivables portfolio in Australia, we have variable funding of about $873 million that enables us to generate new receivables from both new and existing customers. We grow that core. We then turn it out to the rated markets. repay the variable funding providers, and then we can repeat the process. So that's a great position to be in within our most significant funding position. The excellent performance of our receivables portfolio, and we were able to receive a two-notch improvement in the rating of our CD note. Not quite at AAA yet, but we would expect to get there shortly. And overall, we're able to get a 10 basis point reduction in the average rate across that transaction compared to the first transaction. We have 150 million facility in the US with Goldman Sachs. Because of the nature of the seasonality of the business, obviously huge volumes over Black Friday, Cyber Monday, repaid by the time we get to January, and we were able to recently pay 25 million US of the drawn amount in January. Final thing to point out there is that We talked a little bit about the expectations for the ZIP business segment to grow in the next six months. We established $100 million facility with Victory Park Capital during the half to fund that growth. And you may recall that they were the initial funders to the ZIP back in the day, back in 2015. So I have a long and healthy relationship with those guys. And on that note, I'll pass back to Larry.

Thank you, Martin. And just finally, Section 6 What's ahead? Yeah, half year 21 was our biggest result yet and is providing strong momentum into the second half. And I think we're going into it with really strong tailwinds. You know, we've got a great head start in the buy now, pay later space and a global footprint ready to take charge. The flight to online, which we saw accelerate last year as a result of the pandemic, you know, we really believe is here to stay. The aversion to the credit card is continuing at pace. It's happened significantly over here in Australia. We're seeing these trends globally. And we would argue that increased competition is increasing retail awareness, which actually is a huge positive for us, given our footprint globally. And of course, we are competing against the really slow banks. So I think we're in a really, really good place as long as we keep innovating and moving at zip speed. The US acquisition was clearly transformational for Zip, and as we have global momentum, there is going to be a huge focus in the US. US, US, US, as the board says. We also look to continue looking for opportunities and continue to accelerate our growth in the UK. We're going to remain focused on those four key strategic priorities really at the top, which is continue the payments acceptance route, which is around getting customers to transact everywhere and every day. through an increase in closed-loop network. We need to continue to drive app engagement. That is the heart of the relationship, and we need to remain focused on that. And we spoke about global expansion and good business. There'll be a big focus on global sales. We have a great pipeline. We're in discussion with a lot of great names, and our ability to offer not just Australia, but the US, UK, and other regions is increasingly favorable for these retailers, and we look forward to announcing some names more names over the coming period. And while we focus on growth, as we've kind of shown on the slide around transaction margin, we need to make sure that the transaction margins remain healthy, unit economics remain sustainable, and as we invest in fixed costs, we see the operating leverage come through as volume starts to expand. So we are really excited about the road ahead, and thank you for listening. We'll now hand over to the moderator for questions. Cheers.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Jonathan Higgins with Shawn Partners. Please go ahead.

Hi, guys. Obviously a massive first half of 21, a lot of initiatives launched. Just interested just on a couple of points. Just around the app-based usage, the metrics and sort of the customer adoption in the US, we're seeing average balances and average transaction sizes in Australia rising and the US are rising materially as well as you've provided some new data on sort of repeat customers in the US that looks pretty high around that 85, 90% level. Are you surprised as to the level of uptake and adoption in the US? And secondly, just talk us through just like what you are seeing in the US from a competition point of view.

Yeah, thanks for that. We have Brian and Adam in the room, so one of them will take the US question.

Look, I don't think we're particularly surprised with the uptake. Our strategy from the outset has really been about enabling buy now, pay later anywhere. And the acceptance size of the Visa network obviously allows consumers to shop wherever they want. And that broadness of reach allows for, you know, the repeat purchase rates to be high as they can use it when and wherever they want. And so, you know, I think the usage rates are in line with what we expect. And, you know, we also expect that to grow over time as people become, you know, more used to shopping with Quope.

And a question on the... Was the second question, John, just the competitive landscape?

Yeah, just talk us through just the competitive landscape and how it's playing out in the US from your view.

Yeah, look, I think we're in a very large market. We truly feel that the... The market size is very large and the penetration is low, as you can see in the deck. There's a lot of runway there. There's obviously a number of competitors playing. I think there are differentiated approaches. You know, some of the key players only have the, like, integrated network, whereas we have both sides and the flywheel, and that really is driving a lot of the outperformance that you're seeing. You know, so, yep, I think we're in a great position.

I think, you know, if you look at our product strategy globally, it is differentiated. So the ability to offer short and long-term installments, that does resonate with the merchants and gets us alongside some of the peers. The ability to derive income from merchant and customer means we can also play in all other players and the global lens, the ability to offer up multiple markets. So as I said earlier, the pipeline is looking, even though competitive threats are out there, the pipeline is looking great and merchant conversions are accelerating.

Two last ones for me, just weaving onto that question, just in regards to the product portfolio, you are running with a single product internationally or mainly a single product you've got a significant portfolio of other longer-duration products and various sort of like interest-free and buy-now-pay-later products. Are you able to sort of give us your thinking around the suitability of those products into the international market and when you'd look to take them there?

Yes, I think, you know, as we've always said, being able to offer an interest-free instalment, whether it's a $160 pair of shoes... or a $2,000 iPhone is really important. And we've proven that out here in Australia. Globally, Horizon One has been paying for, but we're actively working to deliver feature parity across all regions where you can pay in three, pay in six. And I think there's a lot of proof points out there of why longer-term installments are really important and make a huge difference for a lot of big retailers out there. So we'll be working on those products to add to the portfolio, but more on the consumer side. So, you know, don't expect to see business go global anytime soon. It's still very much in a beta phase over here in Australia. We have to earn our stripes, but definitely focused on short, long-term installments in all markets. So US is working on that right now, UK as well, and you'll see some announcements from us throughout the year.

Last one for me, guys, just on the unit economics. I know it's a real focus for you. Unit economics have held up really well through the half, and you've also delivered a flat result on the cash EBITDA front, which I think was probably a little bit surprising for us with the growth. Are you able to just talk us through just what we should expect around the gross margins into the second half and onwards? I don't think you've split out quad versus zip, but quad obviously effectively has a higher turn and higher margin there. It just looks like gross margins are sort of coming in ahead of expectations and how should we think about that moving forward?

Thanks for the question Jono. I think we'd be expecting to sustain or improve gross margins over the second half.

I think we call out that's one of the strengths of our model and differentiated approach Jono. globally.

Perfect. Thanks, guys. Cheers.

Your next question comes from Phil Chippendale with Ord Manette. Please go ahead.

Hi, guys. Thanks for your time. A couple of questions for me. Firstly, probably for Brad and Adam. Just seeing, you know, you specifically mentioned the anywhere product being your focus for you in the U.S.

Sorry, Phil. Phil. Sorry, Phil. Sounded a bit blurred. Are you able to maybe speak a bit clearly into the microphone? Louder?

How about that? Go again? Go again, Phil? So my first question just relates to the Any... Yes, the event.

Yep, go for it.

Okay, just on the Anywhere product in the US. So a question for Brad and Adam. You mentioned that was a real focus for you guys. I'm just wondering what percentage of your USPTV comes from the Anywhere product against the relationships where you've got direct line of sighting to a merchant like Fashion Nova, et cetera?

Thanks for the question. Look, whilst we've spoken about the app, we're very focused on the integrated partner network, and the business is doing very well bringing on board a number of well-regarded enterprise merchants, You know, the merchant base is growing rapidly. You know, these two models work hand-in-hand together. You know, just based on the performance that downloads in the app store, that's really driving a lot of first-time new users into the app, which then go into our integrated network and benefit our merchant base. So... Look, I don't want there to be thinking that we're not doing well on the merchant front. That is remaining a huge focus for us. That core model is very important, and the two models are working nicely together.

Yeah, and there's been a big uptick as well just in the merchant sign-ups as well over the last half. So merchants are being onboarded on an accelerated path. A lot of investment has gone into automated onboarding, and big names are now starting to join as well.

Okay, thanks. Just turning domestically, the increase in capital efficiency and the rate of turn in the book in Australia, has that really been a function of increased usage with ZipPay? Yeah, just a lot of comment as to what's driven that domestic increase in efficiency.

I think it's been a function of a number of initiatives. Phil, we've certainly focused on our repayments as a service to our consumers. understanding the overall benefit it has to that yield concept. So it's certainly been a significant area of focus that we have delivered through the app. So as much as it plays penetration to everyday spend categories, which typically might have a shorter duration in terms of the repayment profile for that type of usage. So it's probably the combination of a number of things. Having said that, zip money on the larger ticket stuff has also had improved velocity of repayment as well.

Okay, thanks. Just turning to ZipBiz, you've identified that as a specific area of focus for you over the next 12 months. I'd be interested in a self-assessment of your progress with that rollout so far. And then just, you know, outside of the observer, sorry, of the industry, you see a number of new players entering the space. Harman's recently launched into that area as well, as well as more traditional sort of financiers in this space. It does seem to be reasonably competitive. How do you plan to differentiate your product into a new customer set, really?

Yeah, I think in answer to the first part of the question, Phil, we're probably well behind where we had expected to be by now. Clearly, there's been a number of external factors that have caused us to be a little bit slower to some of the targets we'd probably set ourselves internally. I think the success in partnering with eBay and Facebook really are yet to pay dividends with regard to the accelerated customer adoption. We're completing levels of integration to provide a seamless onboarding process for small business customers. And to the competitive point, that really will be one of the points of differentiation and that real-time decision, be it for a limit of $3,000 all the way up to $150,000. So the competitive peer set that you sort of touched on don't necessarily have the existing relationships across their platform. They don't necessarily have the competency at the risk assessment piece that really will allow us to provide great experiences for small businesses. So there's a number of other initiatives that we're working on which really will open

some strong growth there this half yeah I think I think the others are coming from a very different world you know we've got a network of you know tens of thousands where small business can actually check out and use their zip wallet and so you'll start to get that sort of compounding effect and we're you know we're trying to build an ecosystem here where sellers can sign up in a few minutes they can offer zip at checkout they can offer zip online and in store they can also get you know a zip trade account which is you know digital buy now pay later you know in the future they'll this ecosystem. I think the others are thinking about it very, very differently.

Okay, thanks. Last question from me is just on the banking side of things domestically. You know, you guys have had Pocketbook for a number of years now, and that's obviously a well-known budgeting tool. We have seen others in the space, you know, announce intentions to launch bank accounts, not just domestically, but also overseas. You know, I sort of cite Klarna in Germany as one example. Yeah, I'd just be interested to know what you guys... Sorry, Phil, Phil, we can't actually hear you.

I think we'll need to move on to the next... The next question. The next questioner. Thanks, mate.

OK. Thank you. Your next question comes from Brendan Kerrig with Macquarie. Please go ahead.

Good morning, Jen. Just a couple of questions from me. Can we really start on the marketing side of things? So it makes complete sense that you'd be investing a fair bit into marketing, but just wondering how we should be thinking about this line going forward as you're continuing to grow and how this will be fitting into your customer acquisition costs across all of your jurisdictions.

We just had a bit of audio issues here. Are you asking about how marketing costs are expected to trend over time?

Yeah, effectively. I mean obviously there's been a reasonable step up which you would expect given the move into the US. So yeah, I'm just trying to get a bit more of an understanding as to how that will be continuing to trend given the growth profile or given the growth profile you're targeting from here.

Yeah. The way that we think about use of funds, a chunk of that is for marketing, both acquisition, but also a lot of retail partnerships. That's kind of where a lot goes into. But very disciplined the teams are around what does that mean in terms of re-engagement, in terms of customer acquisition costs. And if you just look at our channels versus the world of credit card, the CACs are just miles and miles apart. So I think as the surface area increases, you will see marketing spend increase. but done in a very disciplined way where we identify channels, retail partners, and we're ensuring we are signing up the right number of customers, those customers are remaining engaged. And that comes all into Steve Brennan, who's our global chief marketing officer. He's sort of providing the governance around marketing spend. We obviously allocate budget, but jurisdictions and teams can't unlock that budget unless they achieve the gates. So, you know, we do expect that number to increase. I mean, it came off a very, very small base given the size of the footprint. And also the US is a real big focus for us. So how we get the brand out there, how we work with the retail partners is going to be a huge focus of the next 12 months.

Yes, it's clear. And then just while we're still on that cost line, the bank fees and the data costs sort of moved ahead of where your revenue growth was, or at least your volume growth was. has been, is there anything else at play there that I should be considering or thinking about going forward?

What was the question again, Brendan?

Just on the bank fees and data costs that you're experiencing, so a reasonable step up. Are these moving up ahead of your TTV and your revenue, or they appear to be? So I'm just thinking, are there any, I guess, shifts in the proportion of these costs relative to your revenues?

No, I mean, that suggests whether the unit economics have gone up, and the answer to that would be no. And it's really a focus for going forward is really to take advantage of the volumes that we're generating locally and globally to drive those economics down. But there's been no fundamental change in any of that.

Okay, awesome. And then the last question I had, just maybe flipping a question that was asked earlier a different way. So, you know, potential for expanding the Australian products offshore, but conversely, you talk about the better capital recycling and the advantages of paying for products that you're seeing offshore. Would there be any potential or any scope to bring a product such as that to domestic, to the Australian market?

Yeah, short answer is no. You know, a short product, a short data product here is a pay by account, which we actually really, really enjoy. And we've seen obviously great results from that. So this everyday account for us is our go to market strategy here. That product set does get more challenging globally because of some of the regulatory environment and paying for the pay-by-account, which is ZipPay, and we have long-term instalments, which really is the ZipMoney piece. So no change expected here.

And just apologies to the audio we're experiencing. I'm getting some messages through that you guys can hear the other callers okay. It's very muffled from where we are sitting, so apologies for that.

Yeah, I think it might be the storm that we're seeing. And sorry, just finally, just on the provision side, Is there anything else at play aside from the reduction in that expected loss from 4.4% to 3.8%? Just conscious of the fact that your receivables and volumes have gone up significantly and then that dollar value's down versus the PCP.

I mean, the provision is determined through our ECL model and basically that rolls or takes the roll rates, which are factual rolls and through for performing a non-performing receivable. So it's and that is what it is. Then we get to a number there and then we apply an economic overlay and that economic overlay as a percentage has remained unchanged from June to December. So really it is just an improvement or largely an improvement in those roll rates over the period.

So I'm directly in line with the improving performance. Arguably the provision is extremely conservative given the actual losses experienced. So obviously that is related to that number coming down. Yeah.

Okay, thanks.

I'll leave it there for the next question. Thanks. Cheers. Your next question comes from Tim Piper with RBC Capital Markets. Please go ahead.

Morning, team. Thanks for taking the question. I'll just add another one around the unit economics, just given the focus that you have on that and, you know, talk evaluation, et cetera. I guess when we used to look at the Oz business and when we look at the business, it's always been a yield on... receivables that we've kind of looked at. I noticed that obviously you've integrated quad pay-in now, which the pay-in for is more of a transaction margins, percentage of volume, et cetera.

Sorry, Tim. Tim, I think we've got audio issues here in the boardroom, so I think we're getting a couple of messages here coming through. So I think we'll probably have to call it here, and what we'll do is we'll give you – and whoever else had – call the line now we'll set up calls for you guys after thanks so thanks everyone and um thanks for listening uh and uh