Zip Co Limited

Welcome to the Zip Full Year 2022 Financial Results Call-In Webcast. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the prepared remarks. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Lastly, If you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Vivian Lee, Director of Investor Relations at Zip. You may begin, ma'am.

Good morning, and thank you for joining Zip's FY22 earnings call. To open the call, I would like to acknowledge the traditional owners of the land, the Gadigal of the Eora Nation, and pay my respects to the Elders, both past, present and emerging. By now, you would have seen the release of Zip's FY22 results across the ASX and have a copy of the investor presentation. I'm joined today by Zip co-founder and global CEO, Larry Diamond, Zip co-founder and global CEO, Peter Gray, and CFO, Martin Brooke. We'll start this call with some prepared remarks and then open up to questions. With that, I'll now hand over the call to Larry.

Thanks, Vivian. Good morning and welcome to ZipCo's FY22 results presentation. We founded Zip nine years ago to create a more financially fearless world and we are just getting started. We've been on a mission to be the first payment choice everywhere and every day and to create a world where people can live fearlessly today knowing that they're in control of tomorrow. We continue to believe that when you give people knowledge, access and the ability to control their financial lives, you give people the ability to live every day with confidence. So in short, when users click our button at checkout, they know we have their backs. And at a time of heightened inflation and increasing cost of living pressures, the NPL becomes an even more important budgeting tool for everyday use and a real necessity for all merchants. While FY22 has been a year of change and consolidation, we remain committed to this responsibility with a sharpened focus in FY23. For today's call, I will speak to the highlights and the business performance Pete will speak to our financial performance and unit economic analysis. Martin will step through a quick review of our financial statements, and I'll summarise our priorities and outlook at the end before opening up for questions. Our key operating metrics are set out on slide five and confirm another year of strong performance. We delivered $8.7 billion in transaction volume, up over 50% year over year. This was derived from our valued merchants and customers, which at June 30 stood at 11.4 million customers and over 90,000 integrated merchants globally. And if we look beyond our integrated merchants, our customers shopped at hundreds of thousands of more outlets. Pleasingly, the number of ZIP transactions was up 80%, so over 74 million, demonstrating a healthy increase in customer engagement. Slide six is a summary of our key financial metrics. As you can see here, revenue growth was strong, up 57% to $620 million, while revenue margins lifted to 7.1%, driven by a differentiated and robust revenue model. While delivering impressive top-line growth, we have clear focus on our path to group profitability. The cash transaction margin, while still very solid at 2.3%, was down from last year, and we have taken actions to improve our gross profit in both Australia and the US. Cash Viva TDA was a loss of $207 million for the year, which was in line with expectations, and we recognise that in a shifting external environment, there is still work to do here. We have the plan, and we'll talk to this in more detail throughout the presentation. And finally, our cash position remains strong with $279 million of available cash and liquidity, which we are confident will see us through to group positive cash EBITDA in FY24. Turning to slide seven. From a highlights perspective, firstly, some of the operating metrics I just spoke to continue to demonstrate strong top line growth the business continues to deliver with both TTV revenue customers and merchants all up more than 50%, again, demonstrating the healthy continued demand for BNPL out there. The incremental value we bring to merchants continues to resonate. We signed with a number of marquee brands, including Best Buy, Bed Bath & Beyond in the US, and in Australia, we entered new verticals, including making our plane travel with Qantas and Virgin. In FY22, we added 4.1 million new customers to the Zip platform, And as we bring customers to more merchants and verticals, we can see that our proposition continues to drive deep engagement. Transactions per active customer in core markets increased 45% in the year. One number that we really wanted to highlight was the cash EBITDA of the Australian business of $28 million. This clearly demonstrates the operating leverage of the business model and proof of its potential to deliver strong EBITDA growth at scale. And finally, I'd like to thank all of our dear shareholders who have supported us over the years and in particular the capital raising earlier this year. We started the year executing on our global strategy at a rapid pace, opening up many ZIP markets and taking advantage of the early BNPL adoption curve. But as we spoke about a few months ago, the world changed drastically and we had to respond. We proactively refined our strategy to focus on sustainable growth, strong unit economics and cost management. And I'm pleased to say there are a number of initiatives we have delivered on helping to accelerate our path to profitability. Providing value to our customers is part of our DNA. We launched new products and services with zip installments in Australia and physical cards in the US tackling the in-store opportunity. Product innovation and evolution of experience is a common theme as we strive to meet our customers where they are. This year, we also enhanced our rewards program with a key partnership with Qantas. We also added in-store rewards to the Zip app. With regards to unit economics, there are a number of actions we've taken to maintain and increase margins, including repricing initiatives, as well as the considerable response underway to manage credit losses, which Pete will take you through later in the presentation. On the right, we talk about reducing cash burn with reductions in people cost base and our global footprint. This is in line with our aim to allocate capital with a focus on markets that are profitable or have a near and clear path to profitability. As such, we've made a number of decisions to pause or wind down non-core products and non-core markets. We announced the decision to close the Singapore business in Q4, and we are announcing today the decision to close the UK business, reducing the group cash burn further. We also want to thank our dedicated teams in those regions for their efforts over the years. In tandem, we have also been undertaking a strategic review of our rest of world footprint to determine how we can best allocate capital to generate long-term shareholder value. And we'll come back to you with more details on the outcome of this review. In line with this, the ANZ business also made a number of proactive changes to its product set in FY22, allowing us to focus all our resources on core products and setting up the business for further margin expansion and EBITDA growth. Now let's move to slide nine. As a global organization, we remain committed to operating responsibly and in a way that positively impacts all of our stakeholders. Supporting financial empowerment for our communities is central to our vision for a financially fearless world. And in FY22, we're proud to launch a partnership with Young Change Agents, which is a non-for-profit supporting financial literacy and entrepreneurial skills for youth across Australia. For our customers, we remain committed to responsible lending and driving smart money management. We look forward to bringing more features into the Zip app in FY23. As our business matures, so have our practices to support environmental sustainability. We have continued our commitment to operating as a climate-neutral organisation. Next, diversity, equity, inclusion are key to our employees feeling like they can bring their whole selves to work. And we revised our measurable objectives for gender balance this year, as you can see, which we are committing to at 40-40-20 across all levels by FY26. And finally, we also continue our commitment to inclusion in our communities through partnering with Women Who Code and the Pinnacle Foundation. And the last point on this slide, you know, at Zip, our employees' health and wellbeing is a top priority, particularly in a world with COVID and some of these changing conditions. This focus encompasses all colleagues of all genders, ethnicities and orientations in all the countries we operate in. And one of the key changes we made to our bereavement leave policy that took effect in June this year was to enable US employees to safely access abortion treatment. We'll now move on to slide 11 as we discuss some of the more regional performance. So first on the US, As you can see here, we saw strong transaction volume growth over the year, up 67%. The app, which is a key measure of engagement, saw volume up over 80% year over year, and the number of unique transacting customers in the app increased by 38%. As mentioned earlier, we're also excited to launch with great merchants like Best Buy and Bed Bath & Beyond, which continue to increase our customer acquisition funnel. It's early days in the Best Buy relationship, But through initial customer engagement, we see it's quite pleasing with NPS at 84 in July, evidencing that the offering is extremely productive for their customers. The US market remains a sizeable opportunity with only 14 of the top 40 US retailers currently offering a BNPL product. And so we continue to innovate for our customers and merchants. We recently launched a physical card pilot in June of this year, And post-pilot, we are aiming to scale this card in FY23, where in-store is a huge untapped opportunity, particularly as customers are returning in-store post-pandemic and shifting spend from online into in-store. And moving forward to FY23, our focus here is going to be on accelerating the path to EBITDA profitability and focusing on those initiatives that deliver increased revenue and optimized costs. If we just look on the next slide, slide 12, as you can see here, engagement continues to increase in the American market with both overall app and spend per active customer continuing to grow. As you can see on the chart on the left, in FY22, this is annual spend per customer for $725, which grew 30% year-over-year. And if you look at the chart on the right, Through the steepening of the curve, you can see that revenue per customer continues to increase over time, demonstrating our customers' long-term engagement with Zip and the continued investments we make through product and engineering in the Zip app. Now let's move on to ANZ. ANZ revenue grew at 40% year-over-year, which was, as we note, a faster clip than the transaction volume growth. This was led by increasing customer purchase frequency and lifetime value. In fact, dual users of both ZipPay and ZipMoney, who we know are materially more profitable, lifted by 30% year over year. Another initiative that we rolled out were installments on the ZipMoney product, and this gives customers the ability to pay installments at any online checkout, unlocking a much broader range of retailers. In FY23, we are going to be focused on driving growth from this profitable and big-ticket financing product, which we see even more important with the higher inflationary environment. As mentioned earlier, we were also incredibly pleased to announce both Virgin and Qantas, which joined our payment platform, and we signed eBay earlier this year. So finally, with close to 60% brand awareness for under 45s in Australia, a strengthened leadership team led by our ANZ managing director, Cynthia Scott, and the actions we took to focus the business on core products in FY22, we believe we have the team and plan to deliver even more in FY23 from our already strong and profitable business. On slide 14, Here again, you can see our engagement metrics on a customer basis. Customers are increasingly adopting BNPL products as their preferred payment option versus traditional consumer credit products. With recent industry data pointing to 6 million active BNPL accounts in Australia, with almost half of them not using a credit card. Leveraging our differentiated account-based product in this market, customer transaction frequency is on the rise. And you can see in FY21, cohorts transacted at over 70 times a year. And as we finished FY22, that number was 63, and the cohorts haven't yet fully seasoned. So very, very encouraging statistics. And again, on the right, for most of the US, we're seeing a steepening of the curve as customers that join the platform are driving more lifetime revenue and the team is very focused on this across product engineering and data analytics as we move on to the next slide and cover the rest of world here this largely covers our high growth emerging markets portfolio now these businesses continue to live a strong growth and while we confirmed we are undertaking a strategic review we remain of the view that there is significant unmet opportunity in these markets. So a few quick highlights here. If we look at Central and Eastern Europe, our Twisto business, they delivered TDB and revenue growth of 64% and 82% year-over-year respectively. And considering the challenges in the region, this was a reasonable result. Spotty, which is based in the Middle East, is a top three player in the region and had a good year with downloads growing nicely and signed brands like Pan Emirates and Virgin Mobile. Mexico and Canada continue to scale with a strong pipeline emerging in Mexico, and Canada is now fully integrated into the US operating model. And finally, South Africa, our brand Payflex, which is number one player over there, continues to sign up the top merchants, adding tape a lot recently, and is on a clear path to profitability. And just the last slide of the section, on slide 16, we discussed active customers. Now, this is a measure that, of course, we monitor internally across our RFM custom models, which looks at recency, frequency and monetary, and we will now be reporting on the 12-month active customer to more closely align with our peers. These are customers that have engaged any transaction activity in the last 12 months. With that in mind, in FY22, we report 7.5 million active customers. And pleasingly, we saw this segment actually increase the average spend by just under 30% year-over-year and transactions by 45% year-over-year across our core markets. With our differentiated proposition, we believe we can continue to drive higher spend, and our revenue is very strong when you compare it to our peers. I will now hand over to Pete to take us through the financial performance.

Thanks Larry. Just moving to slide 18. So here we are providing a more detailed breakdown of our unit economics as we continue to focus driving the businesses to targeted ranges in sustainable financial outcomes. Revenue was up 57% year on year to $620 million. As Larry touched on, a pleasing outcome to see revenue growing faster than TTV. Revenue margins actually improved by 30 basis points on FY21 levels. as transaction volume increased by 50%. So it really is validating our differentiated revenue model, which continues to perform strong relative to our peers. Cash cost of sales increased year on year, largely as a result of bad debts. Cash transaction margin, while down, was still a solid result at 2.3%. Just turning to the next page, we show these results against our targeted range. So unit economics are a critical piece of our path to profitability, and we're taking very specific actions to improve our cash transaction margin, and we expect this to quickly improve towards our targeted range of 2.5% to 3%. Interest expense as a percentage of TTV decreased by 20 basis points over the financial year. This is reflecting lower weighted average margins and a change in business mix, with the group now turning over capital more rapidly on a blended basis. As we previously guided, credit losses remained elevated in the second half of the year and at 2.6% of TTV for the year were outside our targeted range. This was the biggest impact to the cash transaction margin decrease. We've implemented a range of measures across all our markets to manage credit outcomes and these actions are already delivering their desired effect with a clear path to our target of 2% and lower and I'll go into those very shortly. Bank fees and data costs increased slightly year-on-year to 1.3%, reflecting the ongoing volume mix shift towards the US. Our targets reflect our current strategy and risk settings and also the current operating environment. Just moving to slide 20, as Larry touched on, we're really highlighting the Australian business. It demonstrates how our business model and our unit economic scale and the benefits when applying operating leverage. Off the back of four consecutive years of profitability, the Australian business delivered a record cash EBITDA profit of $28 million, and this will continue to increase. During FY22, we took a series of actions to simplify our product range and reprioritise our resources, focusing on our core and higher margin products, while also streamlining our cost base. So we expect to see these actions flow through in FY23, where we expect to deliver an even better result again. I'm very excited about the future potential of the Australian business, and it is an important element in accelerating group profitability in FY24. We see a similar opportunity and trajectory in the US, and fast-tracking a similar outcome is also a key driver to group profitability in FY24. Just moving to slides 21 and 22 and an update on credit performance. As mentioned, credit losses are a key component and driver of strong unit economics and cash transaction margins. Thanks to our unique product construct and capital recycling profile, we can respond and take actions to rapidly improve credit performance. Actions taken in the second half of FY22 are already driving outcomes towards our targeted range of 2% and below. For new customers, we've adjusted risk settings, which has meant that top-line growth has been managed to deliver controlled and profitable outcomes. We've also taken a more disciplined approach to portfolio management, tightening credit limits where required for existing customers. Additionally, new repayment initiatives and additional collections resources are seeing an uplift in repayments and recoveries, and as a result, contributing to better loss outcomes. Taking a closer look at the changes we've made in the Australian market, actions include reducing cut-off scores, increasing use of banking transactional data assessing affordability, and repayment and collection optimisation initiatives. Over the second half of the year, 650,000 Australian customers moved to a custom repayment schedule, driving a higher repayment success rate. These actions have seen a reduction in the number of customers entering arrears, improving roll rates. This then reduces write-offs. Losses have now peaked and will trend down over the course of FY23. Slide 22 focuses on the US performance, and this slide is tracking losses on a cohort basis, which is the most accurate way to measure the pain for losses. Actions include tightened cut-off scores, increased focus on limit and exposure management, and repayment and collections optimisation initiatives. These actions have seen losses on a cohort basis fall from 3% in December 2021 to 2.1% in late June, despite a continued deterioration in the external environment. So looking forward for the US, we expect further actions will continue to drive further improvement, and we anticipate these losses continuing to trend to deliver outcomes at our target range or below in half one FY23. Moving to slide 23, interest rates, the reality is that we're experiencing a rising interest rate environment globally. So our business model remains very well placed to navigate this scenario. Our loan book is currently recycling every 3.8 months, which compares to 4.1 months in the prior period. This change reflects both a shift in business mix in the US and a strong focus on repayments as part of the customer experience and lifecycle management in ANZ. During the period, DIP issued its first issuance under the Master Trust with a AAA rating, delivering a lower weighted average margin. As we called out earlier, our cost of interest for the year actually fell, which was a great result. Fell by 20 basis points, 0.9%. A differentiated business model also possesses multiple levers to maintain or grow top line margins, which offset or mitigate any further interest rate rises. As was demonstrated on the previous slide, some of these initiatives have already driven a higher top-line gross revenue margin. US business in particular remains well-placed to maintain margins in a rising rate environment with any 25 basis point rise only increasing US funding costs by two basis points per transaction. Slide 24 highlights our healthy cash and funding position. We've strengthened our balance sheet with a $173 million capital raised by our institutional placement and share purchase plan, and currently have $279 million available in cash and liquidity. We are very confident we have enough capital to execute on our strategy, and that is delivering great profitability. Operationally, we've taken steps to reduce cash burn across all of the business. These include a reduction in global people costs and the decisions we've made to close the Singapore and UK businesses, the Thai hospital and the ZipTrade and ZipPlus product range. We expect these decisions and actions to deliver a $50 million benefit to our cost base on an annualised basis. A range of other initiatives to reduce additional costs are being explored and enabled. In line with our strategic allocation of capital to core markets to fast-track profitability, we are undertaking a strategic review of our rest-of-world businesses with a likely further reduction to our cost base, with the aim being to neutralise cash burn from rest-of-world businesses during the second half of FY23. And finally, across our core markets, Australia and the US, we have debt funding facilities of $397 million and US $183 million available respectively, which is more than sufficient capacity to support strong transaction volume growth. I'll now hand over to Martin to step through the detailed financial statement.

Thanks, Pete. Now turning to slide 26 for a few brief comments on the segments. As you've heard, APAC continues to deliver strong growth and EVTDA expansion. The Americas, which is largely the US, focus on improving credit losses and driving benefits to cash EVTDA. The loss in EMEA increased with the inclusion of the Spotty and Tristo acquisitions, and we are focused on neutralising the cash burden from this region in the second half of next year with actions from our strategic review. Jumping to the income statements on slide 27. As Peter's called out the key moving parts of the gross profit line, I'll focus my comments on the remaining items on the slide. On cash operating costs, we grew headcount during the early part of the year, both organically and by acquisition. We ended the year with just under 1,500 full-time equivalents following the headcount reduction announced in April. As a percentage of transaction volumes, salaries and employee benefits expenses risen to 2.1%, and as discussed earlier, we're closing Singapore and the UK, are completing a strategic review of our non-core geographies, and are looking at our organisational structure to realise efficiencies and create a more lean structure. Marketing costs have increased to 1.4% of transaction volume from 1.3% in the prior year. This includes one-off rebranding costs of 20.3 million. If you exclude these one-off costs, our marketing costs are at 1.1% of transaction volume. IT and other costs are broadly in line with the prior year as a percentage of transaction volume and include the cost in establishing new geographies in the first half. The provision for expected credit losses has increased at 6% compared to 5.1% last year. as a result of the movement in roll rates across our receivables portfolio and adjustments to the economic overlay. Looking at the corporate items and one-off adjustments on the next slide, and then again just looking at the material items, acquisition costs reflect costs incurred on acquisitions in the period, the majority being costs associated with the SESL transaction. The costs do not include the agreed termination fee of US$11 million, which was paid in July. Share-based payments have dropped $97.3 million in relation to tenure and performance shares issued to the Quad founders approved by shareholders on the acquisition of Quad. The tenure conditions have been met and the first and second transaction hurdles have been achieved. The third hurdle has not been achieved. A fair value gain of $119 million was recorded on the embedded derivative contained within the convertible notes and warrants compared to a fair value loss in the previous financial year, which is a reflection of the movement in Zip's share price year on year. As discussed previously, the group strategy has moved to focus on core markets, and we've reviewed the allocation and availability of capital to the markets in which we operate. We've also reviewed growth rates and discount rates in the models, and as a result, have fully impaired goodwill and intangibles attributable to the UK spotty and twisto cash generating units, and partially impaired goodwill attributable to the US cash generating units. Moving on to the balance sheet, I'll talk a little bit about our cash position on a couple of slides later. The increase in other receivables reflects an increase in accrued transactional income and a change in timing on the receipt of payments from our processing partners. The growth in receivables, which is reported net of unearned income allowance of bad debts, is supported by the increase in borrowings and the use of surplus funds to fund receivables and defer borrowings until such time as we need the funds for operational purposes. Twisto, which was previously shown as an investment, is now consolidated into the group. We report our ownership interest in Indian buy-now-pay-later operator Death Money as an investment. The movement in intangible assets and goodwill reflects the acquisition of Twisto, Spotty and Payflex in the early part of the year, net of the impairment charge that we booked at the end of the year. Deferred consideration of $19.3 million has been held back to settle any claims against Twisto arising from the period prior to acquisition, and no claims have arisen to date. There is also deferred consideration based on Payflex hitting certain transactional volume hurdles. The convertible notes and options are reported as a debt and embedded derivative. As noted previously, the revaluation of the embedded derivative at 30 June resulted in a gain of $119 million being recorded. The remaining movement reflects effective interest charged in the year and added to the reported liability. Turning to the cash flow. The net increase in receivables and borrowing transaction costs are now shown in the cash flow to operations where previously they were shown in investing and financing activities respectively. The movement in receivables is largely supported by the net movement in borrowing shown in financing activities, noting that we refinanced our inaugural rated note issuance during the year. We capitalised £25 million on the development of our technology platform and invested £72 million for an 11% shareholding in death money. In March, we raised £173 million in carrying costs of £3.4 million. Moving to the available cash slides. We used capital raised to fund referrals in our funding vehicles prior to being used for operational purposes. As funds are required, we draw funds from the vehicles with corresponding increases in borrowing. At 30 June, we had $226 million in available cash to fund investments and operations. After allowing for cash held at balance date that was unavailable to us, and after including cash that can be withdrawn from our funding vehicles, and including the undrawn corporate debt, we had cash and liquidity of approximately $279 million at 30 June. Moving on to the debt funding side, we are well-placed to support our strategic initiative. The combination of our Australian consumer receivables facilities provides a variable funding facility of $1 billion. This enables us to generate new receivables from new and existing customers, build up receivables, turn them to the rated markets, repay the variable funding providers, and start again. As a result of the performance of our receivables portfolio, Athenian Oats in the last rated series achieved AAA status. Consequently, the weighted average margin on the 2021-2 rated note issuance price had a weighted average of 1.5 to 8 cents below the inaugural issuance, which it refinanced. We also established a consumer facility in New Zealand during the year and extended the zip capital facilities across Australia and New Zealand. Our weighted average cost of funds on drawn balances across the group has remained constant at 3.7%. I now hand back to Larry to make some comments on our business model, FY23 priority and outlook.

Thank you, Martin. And now to slide 34. A slide that hopefully many of you are familiar with, but important to reiterate as we look at the flywheel where customers are required to check out, move into the app, shop, shop everywhere, driving frequency and engagement, and then equally customers that sign up in the app, referring those back to our merchants. In light of the current macroeconomic environment in which inflation, rising interest rates and supply chain issues are all top of mind, we believe our product and flexible model uniquely positions us to provide increased value to both of these stakeholders. For merchants, it's about driving incremental top-line sales growth in a world where stimulus is no longer a tailwind. This includes driving new customer referrals through the app to e-commerce sites and physical stores, improving conversion at checkout through payment flexibility, increasing average order value, and providing valuable customer and transactional insights. For our consumers, our products provide a fair and simple payment solution to cater for both everyday and discretionary spend. And this helps them budget, also managing their cost of living in order to maintain their current lifestyle. All of these factors are even more important. in the current climate. As we move on to slide 35, I want to talk to some of the factors driving current market conditions, the impacts on our business, and why we are confident we have the right business model and the levers that will prove resilient. Firstly, the prevalence of rising interest rates is a reality of the current environment and was particularly evident in the second half of the year. We are also seeing this in the forward yield curves. we are strongly focused on how we maintain margins in this environment. Our product construct and repayment velocity, as Pete touched on, means the US business in particular is well-placed to mitigate interest rate rises. And we continue to implement initiatives to drive improvements in repayments, such as the customised payment schedules and collection strategies that Pete spoke to earlier. Our portfolio in general recycles capital significantly faster than the average credit card, and this provides an advantage. In addition, our two-sided revenue model permits us to pass on some of the pricing increases to customers and merchants, helping to protect margins and yields. We know that inflation has lifted substantially and is changing consumer spending profiles, putting pressure on merchants. Our product construct continues to be just as relevant, if not more important to customers who are looking to manage their cash flow needs. For example, A recent AFI report showed that over 50% of consumers said that BNPL helped them manage their cash flow in FY21, and the same percentage also said that using BNPL allowed them to avoid interest charges compared to traditional credit cards. Another great way we are supporting our customers. For merchants, we know the top three benefits our products provide include new and repeat customers and increased order values. 60% of Australian merchants who accepted BNPL and FY21 believed their revenue would fall if they did not provide it as a payment option. Finally, we are well positioned for any potential change to the regulatory landscape. Zip is supported and always has been a simple, fit-for-purpose regulation, and our first product we ever launched at Money is already regulated under the NCCP Act. And as you know, we conduct identity, credit and affordability checks on customers. Similarly in the US, our partnership with WebBank sees us well-placed to adapt to any future needs. And we are actively engaged with regulators in both of our core markets, as innovation meets regulation, and regulation meets innovation. Turning to slide 36. Again, another slide that we've shared before, but a very important one, and demonstrates how ZIP differentiates in market. Our unique advantages span four key areas. Firstly, we offer both short and long-duration installments in a single checkout experience. And Zip's aim is to be able to offer the right level of payment flexibility and serviceability for any consumer purchase, big or small. Next, we operate both an open and an integrated payment network. This allows us to accelerate our flywheel and enable customers to use BNPL everywhere while referring customers back to our integrated merchant network. This ultimately drives both preference and frequency. Third is our two-sided business model, where we derive revenue both from customers, fair and transparent fees, and revenue from our merchants. This enables us to support transactions of any size in any vertical while maintaining healthy unit economics and revenue margins. Essentially, we can play where others can't. And finally, our risk management, as Pete touched on earlier, is a key tenet of our proposition, leveraging our proprietary decision tech to optimize checkout conversions for our merchants while delivering profitable outcomes. And we've made further enhancements to this capability in the current year and ongoing, of course. And we have now underwritten over $18.5 billion in installments since 2013, which is no small feat. Moving on to slide 37. This demonstrates the significant opportunity of BNPL and just how early we are into our journey. You can see the multi-trillion dollar addressable payments opportunity in our core markets of ANZ and the US, which WorldPay expects to see more than double by 2025. Clearly, we're still early on in the BNPL lifecycle and penetration of BNPL payments at checkout. In our core markets, this is at less than 2%. The US continues to present a sizable market opportunity based on sheer size, early stage market maturity and the low penetration levels with BNPL at just 4% of e-commerce and 1% of in-store spend. If we flip to the AMZ, which is a more mature market, it's estimated that just over 10% of e-commerce goes through BNPL, but this still lags other instalment markets, such as Sweden and Germany, where penetration levels are at least double where Australia is today. Moving on to slide 38. So, yes, slide 38. FY23 will be a year of continued growth as we execute on our strategic pillars, focusing on the things we can control. We have three clear company goals that we are working towards, and I'll step through these. Firstly, as a group, capital allocation and resources will be focused on areas of business that demonstrate the right characteristics to accelerate our path to profitability. Specifically, our clear and simple focus is to deliver sustainable growth in the core markets of ANZ and the US. We are already generating a profit or have a clear and near path to profitability. Merchants are a significant driver of growth and customer engagement, and in FY23, we will continue to pursue new profitable merchant relationships, which will fuel customer acquisition and CTV growth while delivering continued benefits and new Zip services to the space. We will continue to embed and scale recent enterprise merchant wins, such as Best Buy, Bed Bath & Beyond, eBay, and Qantas. And with the lens on profitability, we are also reviewing all merchant agreements, repricing where appropriate, but also, if necessary, exiting unprofitable agreements that do not align with this portfolio approach. Customers, which form the other part of our flywheel, here we are investing heavily to enhance core product experiences for our millions of customers, driving adoption of high-margin features and increasing LTV. We are also adjusting and optimising risk rules and delivering on portfolio management and collections to manage credit losses to approach our target range of below 2%. And we are also undertaking actions to reduce our global cost base. In Australia, we have already taken a number of actions to discontinue lower margin and non-core product lines, which we expect to deliver further operating efficiencies. In FY23, we will complete the wind-down of Singapore and UK and we are working through and will finalise actions related to our remaining non-core global businesses with the aim of reducing cash burn. Together with a range of other in-market initiatives, we expect these actions to see the US exiting FY23 cash-given TDA positive and to neutralise, as Martin touched on, the cash burn from the rest of the world in the second half of this fiscal year. And finally, with incremental EBITDA expansion from our already profitable Australian business, we expect to be delivering on our goal of getting to group EBITDA positivity. On to the outlook slide, slide 39, and building on the analysis that Pete shared earlier in the presentation. Our targets reflect our current strategy focused on sustainable growth. To provide some colour in the medium term, we expect to deliver a cash transaction margin of 2.5% to 3% and achieve group cash EVA TDA profitability during the first half of FY24. Revenue as a percentage of TTV is targeted at 7% to 7.5% as we grow the adoption of higher margin products. TTV growth as a result is expected to be tempered in the near term in line with adjustments to our risk settings. Next. Cost of sales as a percentage of TTV, here we're targeting 4% to 4.5% over the medium term. This reflects the outcomes of actions to drive down credit losses and our expectations of the rising interest rate environment. On OPEX, we have the benefits of reductions we have made to people costs in April and the closure of our Singapore and UK business, as well as the non-recurrence of the one-off rebrand costs in FY22. A disciplined approach to our cost base, in line with our recent Australian success, will be key to delivering significant operating leverage over the next couple of years and our goal of generating positive cash EBITDA in FY24. As we scale OPEX, as a percent of TTV is expected to decrease to below FY22 levels, and you can see here that's about 1.5% to 2.5% over the medium term. And so finally, when you run the above maps, you can see a business once scaled generating cash, either TVA of about 1% to 2% of TTV or around 20% to 25% of revenue. And just finally, on slide 40, I'd like to make some closing remarks. Firstly, the addressable opportunity remains significant, particularly in the U.S., with BNPL still maturing in our core markets. Our differentiated business model should prove resilient in the current operating environment when coupled together with our innovative products. And this positions us to capture significant market share. Third, we are well funded with approximately $280 million in liquidity and have the balance sheet to fund the group to profitability. And finally, we have the team the product economics and the strategic plan to deliver on our EBITDA goals in the first half of FY24. Finally, on behalf of Pete and I, together with the board, we would like to thank the entire Zip team, our dear Zipsters, for everything they have passionately delivered this year and our shareholders for their ongoing support. We look forward to FY23. That ends the formal part of the presentation and we'll now open up for any Q&A. Thank you.

Thank you. The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We ask that each participant limits themselves to two questions only. Our first question will come from Tom Beetle with UBS. Your line is open.

Hey, guys. Thanks for the opportunity to ask questions. I'll just ask two questions just around the customer numbers. The first question is just, how are you going to define a customer going forward? Will numbers be subject to periodic revisions like they were today? And are you treating the definition of a customer consistently between ANZ and the US now? Because the fact that you've restated in the US but not ANZ suggests that that definition might have either been inconsistent previously or is inconsistent now. So that's the first question. The second question is just if I take your US stated active customer base of 6.4 million and divide it by TTB of about 4.1 billion Australian dollars, or divide that TTB by that customer base, I get about $639 Australian dollars of TTB per customer. In the presentation, I think it's on slide 12, you stated it was $725 per active customer. So that's obviously a bit over $1,000 Australian. So effectively, is the difference there in active customers? And if so, why weren't those customers removed from your base? And by this logic, if I use that $1,040, let's call it Australian dollars and divide that by your TTP, It implies that you have less than 4 million active customers, about 3.8 million if my assumptions are correct, versus the 6.4 that you've reported. Is that fair?

Thanks, Tom. Yeah, so we'll kind of step through that. First of all, of course, we track all customers. And so in the past, you know, say in Australia, for example, customers might have signed up, got an account and transacted a year ago. Of course, all customer funnels have decaying customers from year one to year two and year three. And so we've just a lot... We are reporting now on the 12-month active, which is making a... a transaction, a customer account that's making a transaction. In the quarterly, you would have seen that we said 7 million customers for America and that included five to six hundred thousand of customers that have signed up with an account but had not transacted so we just clarified that here and that's how you've seen the 12 million number come down to 11.4 so we obviously have significantly more customers that we actively target as part of our marketing and product initiatives who might sign up and not transact and we might not catch them in three months or six months maybe a year a year later so i think that's first of all and going forward we are now going to be sharing the last 12 months reported active customer. And so then as you move on to slide 12, which I think you were talking about the maths and Martin's just cross-checking it now, that division is actually based on the active customer count of 4.1 for the US versus the 6.4. So if we take the TTV or the transactions which we've quoted throughout the presentation, that is on the active customer number, which is how we get to the US$725.

And going forward, we will be reporting on the active customers I set out on slide 16.

Yeah, yeah. And I think the other point we just called out is the active customer engagement metrics grew quite nicely year over year. Based on spend, it was up about 30%, where the average customer spent about $5.50 and now it's about $7.20, and same as the increasing in the number of transactions. But again, our whole business still targets customers that might be dormant, and that's the RFM models that we spoke about earlier.

Okay, great. Now, thanks for the clarification there. And I guess, sort of, what's that active customer number then in Australia and New Zealand?

We're on slide 16, Tom. So ANZ, 2.3 million, US, 4.1, and the rest as well, 1.1, giving a total of 75.

Apologies, sorry. I actually missed that slide. Sorry. Thanks for the clarification.

Thank you. Our next question will come from Elise Kennedy with Jarden.

Hi, Larry, Pete, and Martin. It's my two questions. My first is just on the M&A Rest of World Strategic Review. You've highlighted a few of those strategic assets being looked at again. I'm wondering if you're seeing any appetite from others willing to purchase these assets, or is there another way to find and contain costs without closing the businesses? And then my second question is just around increasing emphasis, it looks like, on that Zip Money product in Australia, which is a longer duration. I'm just wondering how we can think about that flowing through in terms of your velocity of payment.

Thanks for the question. So I think, look, you know, as we touched on in the presentation, You know, we are still big believers in BNPL in those rest of world markets. But obviously, as we fast track profitability, we need to look at reducing the burn. And so as part of the strategic review, we are looking at, you know, a range of things such as investment, divestment, or indeed wind down, as you've seen some of those decisions come out for the UK and Singapore. So that's really all we can share at this stage. The only other guidance we gave was that in the second half of this year, the goal is to remove the cash firm, which can be delivered through any of those three measures, and that's currently under review.

I think to the second question, at least BitMoney is a massive opportunity for us to grow both TTV and revenue margin. It's definitely a higher margin product and the product team really have galvanised behind this challenge. We've significantly upgraded the capabilities of how that instalment product is actually offered to consumers and they now have the ability to set an instalment at any online checkout regardless of whether or not it's an integrated DIP partner. So we have significantly opened the addressable opportunity and we can certainly transact in verticals and categories that our integration penetration is not as broad. I think with regards to the repayment and optimising the velocity of the recycling, that is largely related to BitPay. Clearly, that is a significant chunk of both the business and the receivables. And the initiatives in serving out that customer experience in the way that we have increased velocity is largely a BitPay initiative. Clearly, BitMoney is more a fixed instalment.

Thanks, Larry and Peter.

Thank you. I would now like to turn it back to Vivian Lee for any additional questions.

Thanks, Operator. We've got some questions from John Marin from CLSA. So firstly, can you please remind us where you are on the mix of receivables in Australia across BNPL and longer-term product, and then maybe discuss the longer-term plans on this front in North America over time? That's the first question.

Yeah, so I don't have the specific split in front of me, John, with regards to the Australian receivables. I believe it's about 55% zip pay. So that has, over time, been a strong growth product for the business. That clearly is the faster capital recycling product. So we receive the natural benefits that that delivers with regards to the cost of funds. But as I just touched on, we do have strong ambitions for core ZIP money to deliver high margin growth. So that high margin growth obviously will offset to some degree the faster revolving ZIP pay product receivables.

And the second part of the question is from John. Can you also speak to the performance of your credit metrics across this spectrum in Australia? Sorry, the second part of the first question was, please discuss the longer-term plans on this front in North America over time.

Yeah, thanks for that. And you sort of touched on with our four key pillars, being able to allow a customer make a purchase and pay that back over an appropriate serviceability period, whether it's six weeks or six months, is a core tenet of the Zip business and is an area that we are looking at in FY23 for our American business. It's likely to be through partnership initially, which obviously means much more effective use of capital and allowing us to grow in sort of the current And that's currently underway. We are in late stage review of a number of strategic partners over there.

And the second part of John's question, can you also speak to the performance of your credit metrics across the spectrum in Australia?

So generally speaking, the longer duration product performs better with regards to arrears and losses than ZipPay. I think typically it's a more considered purchase, marginally higher credit quality, although the average credit scores for both products are relatively similar. But it would typically perform marginally better than the Buy Now, Pay Later ZipPay product.

Thanks. The next question is from Brendan Carrick. The first question from Brendan is, while APAC was profitable in FY22 at the EBTDA line, what impact will higher funding costs have on this division, specifically in FY23, given it has a $2 billion funding base, so every 100 basis points of increase reduces EBTDA by 20 million?

So clearly we are in the interest rate rising environment as we touched on throughout the presentation. We've got a number of levers at our disposal that can firstly increase margin. And we've deployed a few of those that significantly, well not significantly necessarily, but will increase the overall gross revenue margin. Australia is very healthy. It's north of 8% at the top line. And we have initiatives in place with regards to refinancing facilities and also as we're touching on the increasing velocity of consumer repayments. So the success we've had so far in decreasing the recycle rate across the book actually mitigates to some degree the rise in rates and clearly decreasing losses by greater percentage points than the businesses experience on the interest rate rise side mitigates quite nicely as well. So we believe the business is very well placed to continue. Our models and our target ranges that we've provided today are in line with how we see our risk settings in the current external environment. So we are taking into consideration the forward curves for those outcomes. And we're very confident that Australia will deliver a much better result again in FY23.

Thank you. The second question from Brendan Carrig is, Of the 64 million of corporate costs, 20 million for rebranding appear non-recurring. What about the other 44 million?

Yeah, so in the 44, there is obviously an element of professional fees that won't recur because we're going from a very complex organisation to a much simpler organisation through the course of the strategic review. There is some FX sort of sitting in there as well of a few million. And then we have a quantum infrastructure. As we simplify the organisation, then you'd expect that to reduce both the headcount and the cost perspective.

Thanks, Martin. And the final question from Brendan was on slide 21, which is the credit loss slide. What is driving the uptick in expected losses as we progress through first quarter 23?

So effectively we've made very conservative forecasts here and we've achieved exceptional results over the last two months. So we actually, that is a conservative forecast. So the back of the range of changes that we've made in the first half of this calendar year have started to deliver significant outcomes, but we can take a rather conservative forecast and that's effectively what we see on the screen. The likely outcome is a continued trend line without that bump towards the right-hand side of the graph.

Thanks, Pete. No further questions through email. Back to Larry for some closing comments.

I think that sort of wraps everything up. So, look, I want to thank everyone for their time today, for listening in to questions. As always, feel free to reach out to our line as well if you have any other questions. And thanks for your support. We look forward to executing on our strategy in FY23. Cheers.

Ladies and gentlemen, this does conclude today's conference call and webcast. A webcast archive of this call can be found at zip.co forward slash investors. Please disconnect your line at this time and have a wonderful day.