Zip Co Limited

Thank you for standing by and welcome to the ZIPCO Limited HY23 results briefing. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question via the phones, you will need to press the star key followed by the number 1 on your telephone keypad. If you wish to ask a question via webcast, please enter it into the ask a question box and click submit. I would now like to hand the conference over to Vivienne Lee, Director of Investor Relations. Please go ahead.

Thanks, operator. Good morning and thank you for joining this first half 23 earnings call. To open the call, I'd like to begin by acknowledging the traditional owners of the land on which we meet today, the Gadigal people of the Eora Nation, and pay my respects to elders past and present. This conference call has also been webcast and both the results presentation and call details are available on the ASX. I'm joined today by Zip co-founder and global CEO, Larry Diamond, Zip co-founder and global CEO, Peter Gray, and our CFO, Martin Brook. 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 once again to Zipco's half year FY23 results presentation. We founded Zip to create a more financially fearless world and we are just getting started on our mission to be the first payment choice everywhere and every day. To create a world where people can live fearlessly today knowing 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. When users click our button, that's the promise we wish to deliver. We have your back. Particularly at a time of heightened inflation and increasing cost of living pressures, BNPL is established as an important budgeting tool for everyday use for consumers and a real necessity for all our merchants. Zip has delivered a strong result and as we look forward to celebrating our 10th birthday in June this year. Before we get into the details of today's results presentation, I'd like to set the scene and talk about the journey that Zip has been on. 12 months ago, in response to changes in market conditions, we pivoted the strategy from a focus on top line global growth to one of sustainable growth, accelerating our path to profitability. We said that we would focus on core products and core markets and allocate resources to those geographies that were either profitable or had a near and clear path to profitability. We reset our strategic pillars and shifted our focus to drive growth in these core markets, improve unit economics, and reduce our global cost base. And over the last 12 months, Zip has been executing exactly on this updated strategy, and you will see significant progress in the results we are sharing today. Along with the initiatives that we have delivered over the past 12 months, we've now finalized the strategic review and will be streamlining the business from 14 to four markets. We are now emerging as a stronger and leaner company that is well-funded, and our results today demonstrate that we are at or approaching our financial targets. So just moving on to the table of contents, today I will cover the highlights and US business performance. Pete, our global chief operating officer, will cover the ANZ business performance and our financial performance. This will be followed by Martin, our Chief Financial Officer, who will walk us through the summary financial statements, and I'll then conclude with a few remarks regarding our outlook. Our key operating highlights are set out on slide five. Before I begin, I should say that all the numbers throughout the presentation will be referring to financial and operating metrics on a continuing basis, which excludes Zips UK, Mexico, and Singapore businesses, which are now closed, and a reconciliation is provided in the appendix. As you can see here, we are very pleased to deliver another period of record volumes. This was despite the challenging external environment and adjustments to our risk settings. We delivered close to $5 billion in transaction volume from over 42 million transactions, driven by a solid increase in customer engagement across the business. Slide six, if you just turn over, is a summary of our key financial metrics. In line with our clear focus on profitability, I'm particularly pleased with the team's execution of our revised strategy to focus on core markets and core products, and that is clear in these financial results. Revenue margins lifted by 50 basis points to 7.1%, the cash transaction margin expanded to 2.5%, and net bad debts came in at 1.9%, down 50 basis points year over year. all in line with our target ranges. This performance was achieved despite a significant rise in interest rates and I think clearly shows healthy demand for our products and services. As a result, half year 23 cash EBITDA for the underlying core business improved by $27 million to a loss of $33 million. Core cash EBITDA, I'd just like to remind everyone, includes EBITDA from our core markets of Australia, New Zealand, the Americas, plus corporate costs, and is a better indicator of the go-forward business. This very strong result has us well and truly on the path to positive group cash EBITDA during the first half of fiscal 24. Turning to the highlights on slide seven. From a highlights perspective, the core business is performing well. We were very pleased to see the US and New Zealand businesses both deliver positive cash EBITDA in November and December for the first time in our history, with both markets continuing that result in January, joining the already profitable Australian business. This performance reflected strong seasonal volumes and our progress in improving unit economics coupled with good cost discipline. The incremental value we bring to merchants continues to resonate. We consolidated our leading presence in travel and marketplaces in Australia with the addition of eBay, Qantas, Jetstar, and Uber, and a very strong pipeline emerging. In the US, we were supported by the likes of Best Buy, Fanatics, and Barnes & Noble, while our Shop Anywhere proposition enabled customers to use Zip at hundreds of thousands of locations. And finally, we took actions to manage our balance sheet liabilities, retiring $110 million of convertible notes. And we were particularly pleased with the transaction in December where you would have seen us retire $70 million of our zero interest $400 million convertible notes, which were undertaken at an attractive price of $0.23 in the dollar and a cash neutral outcome to Zip. While the remaining convertible bond liability has several years until maturity, management arranged focus on opportunities to address this liability and further strengthen the balance sheet as market conditions permit. Now moving on. Slide eight shows the movement in Zip's available cash and liquidity position from 30 June to 31 December 2022. As highlighted on the chart, there are a significant number of one-off, non-operating and non-core cash flows that occurred in the first half that we do not expect to occur in the second half of this financial year. These included payments for past M&A activity, convertible note repayments, as well as movements related to ZIPS funding programs. These activities totaled more than $140 million in aggregate. You can see in the dark blue on the chart what we define as core operating cash flows, and the light purple and light blue for the non-operating items. You can read more detail on this slide and in the half-year report. The next slide, which is arguably more important, demonstrates why we expect a significant improvement in cash flows in the second half as compared with the first. Firstly, core cash EBITDA of negative $33 million is expected to improve further in the second half by up to 50%, driven by continued focus on productivity and efficiency improvements to our fixed costs. Secondly, we expect a reduction in non-operating and one-off payments, as I mentioned earlier, which had an outside impact in the first half. We also have a number of initiatives underway to release restricted cash from our facilities, while funding from peak sales is expected to largely unwind over this quarter. In addition, Zip's strategic review is now complete, as the company elects to exit its rest of world regions. Actions to divest, restructure, or wind down these regions are well progressed and expected to deliver cash inflows during the second half of this financial year, while neutralizing the cash burn in these markets. And finally, we expect to see further improvements to group corporate costs as the business simplifies its footprint from 14 down to four markets. With these actions and ongoing improvements in our core business, we are confident that we have the capital and strategy in place to live a positive group cash EBITDA profitability during the first half of fiscal 24. Just moving on to slide 10. This shows that continuing cash EBITDA for the group was negative $43 million. Removing those geographies under review to be divested, restructured, or closed in the second half, core cash EBITDA, as I previously mentioned, was negative $33 million, a significant improvement of $27 million year over year. On the next slide, we break down cash EBITDA over the half. As demonstrated by the charts, performance improved considerably during the period. As you can see, the majority of the losses incurred in the first quarter of FY23 versus the second quarter. The core business delivered a cash EBITDA loss of $32 million in Q1, which improved to a loss of only $1.4 million in Q2. The movement was assisted by peak seasonal volumes, also driven by significant improvements in the underlying business. As we exit H123, we expect the second half to show an improvement of up to 50% on the first half cash EBITDA results. Now let's turn to slide 12. At the beginning of FY23, We reset the ZIPP strategy to deliver sustainable growth and an accelerated path to profitability while executing on the strategic priorities of core products and core markets, strong unit economics, and right-sizing our cost base. And I believe we have delivered a strong set of outcomes against these three pillars. In core markets, customer engagement continued to grow. In the US, spend per customer spent per active customer grew by 9% year over year. And in Australia, we focused on scaling our higher margin Zip Money product, which delivered its highest two months of TTV in November and December. With regards to unit economics, the margins from the continuing business expanded this half, offsetting the impact of interest rate rises and supported by significantly better credit outcomes. Pete will delve into this later. In addition to the outcomes I just mentioned on our strategic review, we completed the wind down of our non-core businesses in Singapore, the UK, Mexico, and Zip Business Trade. And in the core business, Zip continues to focus on driving operating efficiencies, portfolio simplification, and higher margin revenue growth, all driving towards sustainable profitability. Now let's move to slide 13 and look at the rest of world. These geographies have been under strategic review as we determined as a group that we would focus on businesses that were either profitable or had a near and clear path to profitability. I can say that the strategic review is now complete and Zip has made the decision, as flagged earlier, to exit its rest of world non-core regions. And initiatives are well progressed to wind down, restructure or divest these geographies that will result in the removal of any cash burn during H2 FY23. And this will have the effect of reducing our global footprint from 14 markets to our four core markets. In addition to the neutralisation of the cash burn from these regions, these actions are also expected to deliver additional cash inflows during the half, which will contribute directly to the group's availability of cash and liquidity. And now moving to slide 14. As a global organisation, we remain committed to operating responsibly and in a way that positively impacts all stakeholders. I'm very proud of the progress we have made in the last six months. Supporting financial empowerment for our communities is central to our vision for a financially fearless world. Our partnership with Young Change Agents is a clear example of this, as we've continued to support their financial literacy and entrepreneurial engagement. education programs. For our customers, we remain committed to responsible lending and driving smart money management with the recent addition of bank linking in the Australian app, leveraging the IP and smarts inherited from those who remember our Dear Pocketbook app. We are committed to driving gender balance and have lifted the percentage of women to 44% of our global workforce. And importantly, this included a lift in female representation across all management levels below the board. At Zip, we pride ourselves on being a company that really cares for its people and providing a workplace where they can thrive. We are pleased with our latest survey results with employee engagement levels remaining high at 78%, despite, as we see around us, elevated levels of attrition across the industry. And finally, we have continued our commitment to be a global climate neutral organisation. We work with a solutions provider, South Pole, to achieve this in FY22, and continue to work towards setting emissions reduction targets. So that's the end of the first section, and we'll just now move on to the business performance. And on slide 16, we look at the US. We always believed the US was a significant opportunity for Zip. But we understood there was a limited window of opportunity to establish our footprint given the rapid market forces catching on to the global BNPL trend. And after carefully considering our options to buy versus build, you'll recall that we chose to enter the US via the acquisition of Quadpay in 2020. At the time, the business was doing $75 million in monthly TTV. So as we fast forward today, we have a large operation with over 250 staff on ground, processing annualized volumes of $4.6 billion, up around five times since we acquired the business, an experienced leadership group, and some great household names, such as Best Buy, Fanatics, and Barnes & Noble. We also have a great and differentiated product and market where you can literally pay for anywhere. Hopefully you can understand why I'm extremely excited for our future here, notwithstanding the competitive landscape, and even moved the family over here late last year. So on to the results. The US delivered positive cash EBITDA in the months of November and December for the first time. This was driven by significant improvements in credit performance, coupled with disciplined cost management. We note here that top line growth was impacted, as expected, should I say, by the changes we made to risk settings. Though customer engagement with our existing base improved meaningfully with transactions per active customer up 23% year over year. Our in-store strategy also continued to take shape. We're seeing incremental volumes coming through the physical card program with over 300,000 cards now in market and significant pent-up demand from the existing back book. On slide 17, every year since its launch in 2019, we have seen customer engagement steadily increase in the Zip App and the proposition is resonating with our US customers. where we have a very strong customer MPS of 49 as at December. As mentioned earlier, spend per active customer continues to grow. And importantly, on the right-hand side of this page, you can see through the steepening of the charts that revenue per customer has increased over time, demonstrating our customers' long-term engagement with Zip and continued investment in the app. We are annualizing at around $780 in annual spend and around $50 in annual revenue. We also have recently seen brand awareness rise to 20% in the US for under 45s on a four week rolling basis. Although some of this came from some seasonal activity, it shows a healthy step up for the business from 2022. Just on the next slide. It's important to remember how early we are on the BNPL journey. I just came back last week from San Antonio where there was a huge payments conference. Many of the top US retailers were there. And it confirmed to me that consumer finance in general is a huge part of their business models with a large range of private label credit card programs on offer. Interestingly, we have been able to demonstrate to merchants that BNPL is indeed incremental to their current programs. It doesn't appear to meaningfully cannibalize their private label volumes. And when we run data washes, we actually see very little customer overlap. BNPL customers tend to skew younger and with a much more diverse FICO range. This really validates the role of BNPL in the consumer financial toolkit for retailers across America. With total addressable market estimated to be over $10 trillion in BNPL, still only around 2%, you can see the sheer size of the opportunity before us. Over 40% of millennials in the US have adopted BNPL and they keep on signing up. World Pay in Facts projects volumes to triple by 2025 from 21 levels. And we do believe that the US is on a similar trajectory to Australia, where a third of adults now have an account. I will now pass on to Pete, who will walk us through the ANZ business.