Zip Co Limited

I would now like to hand the conference over to the Director of Investor Relations and Sustainability, Vivian Lee. Please go ahead.

Thanks, Operator. Good morning and thank you for joining us for ZIP's first half FY25 results. To open, I'd like to begin by acknowledging the traditional owners of the land on which we meet today, the Gadigal of the Eora Nation, and pay our respects to Elders past and present. This conference call is also being webcast and an archive will be available on ZIP's website. I'm joined today by ZIP's Group CEO, Cynthia Scott, and Group CFO, Gordon Bell, who will present today's results. We also have US CEO, Joe Heck, and ANZ CEO, Peter Gray, who will join us for Q&A. We will start this call with some prepared remarks and then open up to questions. With that, I'll now hand over the call to our Group CEO, Cynthia Scott. Thanks, Vivian. Good morning, everyone, and welcome to Zip's results presentation for the first half of financial year 2025. I'm very pleased to present an outstanding set of results for the half, with record financial performance, a continued focus on exceptional experiences for our customers, and a strengthened balance sheet to support future growth. Our U.S. business delivered excellent results, and our ANZ business returned to growth. Zip is well positioned to capitalize on the significant growth opportunity in our two core markets, as we continue to drive scale and deliver material operating leverage. SIF continues to be a strong and sustainably profitable business with unique competitive advantages as set out on slide four. And I'll touch on each of these in more detail as we go through the presentation. Our key financial highlights are set out on slides five and six. In the first six months of the year, we delivered $6.2 billion in transaction volumes, up 24% year-on-year from over 45 million transactions. This was driven by a particularly strong performance in U.S. volumes and increased customer engagement across both markets. Total income was up nearly 20% to $514 million. Our revenue margin of 8.2% remains within our two-year target range. The year-on-year movement reflects the increased contribution from the U.S., now representing 70% of TPV. Active customer numbers were up 1.5% to 6.3 million, with the US recording customer growth in both Q1 and Q2. And we continue to add new merchants, with almost 82,000 now on our platform, reflecting strong demand to have Zip available for their customers. Turning to slide six. Zip continues to demonstrate strong unit economics. Cash gross profit was up 30.1%, and credit losses improved 22 basis points. with 1.6% of TTV, reflecting strong credit performance in both markets. Group cash added TDA of 67 million, with up 117% versus the prior corresponding period, reinforcing ZIP's ability to deliver significant operating leverage as the business scales. Turning to slide seven and how we've delivered against our FY25 strategy. At the beginning of the financial year, we set out three clear priorities, growth and engagement, product innovation and operational excellence. Starting on the left, we saw increased customer engagement in both markets, reflecting investment in brand awareness and the rollout of Zip Plus in Australia. This was achieved while maintaining strong credit performance in line with our strategy to deliver sustainable, profitable growth. We continue to innovate for our customers, including through the rollout of our pay and aid products in the US and the development of a new personal loan product in Australia. In delivering on operational excellence, we took further actions to strengthen and simplify our balance sheet, repaying all corporate debt in July. To support growth in both markets, we upsized our US receivables financing facility to US $300 million and refinanced $1.1 billion of funding in Australia. The collective impact of these actions can be seen on the next slide, with a record first half cash EBIT TDA result of $67 million. This was driven by outstanding growth in our US business, up 80% from the first half of financial year 2024. Now turning to slide nine. At our FY24 results, we introduced operating margin to our target ranges. Pleasingly, operating margin increased by 584 basis points to 13%, underpinned by disciplined investment in our cross-base to ensure we capitalise on our growth opportunities while delivering improved returns at the cash earnings line. Turning now to slide 10. This business model is built on being a responsible lender, and we've delivered solid progress against our focus areas of financial inclusion and wellbeing, employee engagement, and environmental sustainability. A key highlight for the half was achieving our carbon neutral status for the fourth consecutive year. Before I step through the detailed performance of each region, slide 12 is a reminder of this unique business model. Acquiring both customers and merchants onto our platform is fundamental to our two-sided business model. For customers, we drive engagement through repeat usage and greater frequency by providing fair, flexible and transparent payment solutions that can be used for both discretionary and everyday spend, online and in-store, which increases customer lifetime value. As our business continues to scale, we unlock efficiencies, generating material operating leverage and driving sustainable, profitable growth. Slide 13 provides an overview of the unique role both regions play in driving ZIP's longer-term opportunities. The US market continues to present significant opportunity with an addressable BNPL market of US $130 billion. ZIP's playing a greater role in providing short-term unsecured credit solutions to some of the 100 million everyday Americans underserved by traditional financial services. Our US business continues to outperform the market with TPV growth of 40.3% versus the weighted average annualized growth of our peers' comparable products of 30 to 32%. In ANZ, we're leveraging our market-leading capabilities to drive product innovation, including new solutions that broaden our financial services offering, increase engagement with our customers, and drive receivables growth. Onto slide 14 to go through our US performance in more detail. The 80% growth in cash earnings in our US business was driven by TTV and revenue growth of 40.3% and 42.3% respectively, underpinned by an exceptional holiday period and deeper customer engagement. Active customer growth, up 6.2% year-on-year, was supported by our investment in direct-to-consumer marketing and brand awareness initiatives to drive customer acquisition. We continue to add new merchants in targeted verticals, including GameStop, Take-Five Oil Change and Major League Baseball Ticketing and Shops. We remain focused on unlocking the significant in-store opportunity in the US, which represents 84% of the total payments market. In the half, we delivered a 64% increase in in-store volumes, which now represent 22% of PPV, up from circa 12% two years ago, benefiting from increased adoption of the physical card by our customers. The U.S. business continues to optimize and scale its PayIn8 installment solution, which is now available to all eligible customers through the app. PayIn8 is the next offering of our broader PayInV platform, which will provide further flexible and personalized installment products for our customers. Turning now to slide 16. The U.S. continues to present a significant growth opportunity for ZIP, based on the sheer size and the early stage of the market maturity. with BNPL representing 5% of e-commerce spend and less than 2% of total payments, well below adoption rates in more established markets. Slide 16 provides some insights on the US customer and our differentiated capabilities. Our customers are everyday Americans, a group of over 100 million Americans who have difficulty accessing or face higher costs to access traditional credit products. Our customers are more likely to use short-term unsecured credit products such as this for flexibility and help them manage their cash flow. Over 90% of our customers either work full-time, part-time or are self-employed and over 98% of all transactions are repaid in full. We have proven expertise in underwriting with more than seven years of customer and transaction data and the ability to swiftly adjust our risk settings to balance top-line growth with lost rates outperforming traditional credit products. Finally, in the US, merchants are increasingly offering multiple flexible payment options at checkout, recognising the incremental benefits different providers offer to different customers. Slide 17 shows the increased customer engagement we've achieved over time. As demonstrated by the chart, transactions and PTV for active customer are up 44% and 49% respectively over the last 18 months. This growth has largely been driven by existing customers. Our data shows that once a customer joins Zip, they spend more per month over time, with our data and underwriting capabilities enabling us to optimize credit lines. The most recent July 2024 cohort experienced a 26% increase in average spend over the six months to December. We have a clear strategy to drive future growth, supported by an engaged customer base, with monthly transacting users 33% higher than two years ago. Slide 18 covers US credit performance on a cohort basis. Our cohort performance for July to December was commensurate with the growth in new customers, with the US adding 400,000 active customers. As you can see on the chart, this continues to deliver significant growth while maintaining loss rates within our target range of 1.5% to 2% of TTV, reinforcing the strength and agility of our credit decisioning platform. Pleasingly, early indicators for January are well within our target range, with expected losses at 1.6% of cohort PPV. Finally, on slide 19, you can see that the US has delivered a nearly $100 million turnaround in earnings over the last two years, driven by strong margin expansion, cost discipline, and scale benefits. Turning to the ANZ business now on slide 20. 18 months ago, Management took deliberate actions to change strategic settings to optimise margins in response to the external environment. After delivering improved margins and positioning the business for a higher for longer interest rate environment, the ANZ business has shifted its focus to initiatives to drive profitable growth, improved customer engagement and new product offerings. As a result of these activities, in the first half of FY25, we've seen increased customer engagement and positive improvements to margins. The ANZ business is well-placed to accelerate PTV and receivables growth at healthy margins in FY25 and beyond. Moving to slide 21. The ANZ business gained momentum through the half, with PTV returning to year-on-year growth in the second quarter, driven by increased transaction frequency. This momentum continued as we exited the half, with Australian PTV for December up 10% year-on-year. And transactions per MTU are now at the highest rate in the history of the company, as more Australians use our products to manage their household finances. Innovation is at the core of Zip's business, and we've accelerated the pace of innovation, growing from three to five products in ANZ in the past 18 months. During the half, we've rolled out Zip Plus to new Zip customers, and at higher limits for eligible customers of up to $8,000. And we're seeing good momentum. With the monthly acquisition of ZipPlus customers now more than double the acquisition prior to external launch, and ZipPlus receivables are up 24% over the last three months. In January, we launched our Zip Personal Loan, a next-generation lending product that rewards customers for on-time repayments. We'll provide more details on our new personal loan product construct and its performance later in the year. Turning to slide 22 for more detail on the performance of the Australian loan book. With our account-based product construct in Australia, yield on the loan book and excess spread is the best way to think about the performance of the business. Increased yield, strong portfolio management and ongoing initiatives to tighten funding costs delivered a 70 basis point expansion in excess spread from the Australian book. As you can see on the chart, arrears rates and net bad debts continued to improve in response to management actions and risk settings following the seasonal peak. Turning now to slide 23. Initiatives focused on yield expansion and margin have increased revenue per active customer. In line with the usual movements from seasonality, revenue from peak volumes in the second quarter will be realised over the second half of the financial year. With the settings that we have in place and ongoing initiatives to increase growth from new higher margin products, the business is well-placed to drive profitable growth. This slide is a reminder of the ANZ strategic assets that ZIP has established in the region. These strategic assets provide strong foundations for our strategy to become a next-generation financial services provider. With a highly engaged customer base of approximately 10% of the Australian adult population, products in market that are well-suited to the current operating environment And a business that's generating healthy excess spread, the ANZ business is strongly positioned to deliver on its strategy. Now, as announced with our results this morning, having successfully completed the reset of the ANZ business, ANZ CEO and co-founder Peter Gray will be moving to a newly created leadership role at Zip as head of strategic growth. His role will focus on accelerating Zip's growth agenda across both markets with an initial focus on ANZ. Pete's new role reinforces Zip's commitment to our innovation culture and delivering on our significant growth opportunity in both markets. Following a comprehensive search and succession planning process, I'm very pleased to announce Soraya Alali will join Zip as ANZ's CEO from the 12th of May this year. Soraya brings over 20 years' experience in the financial services sector with a focus on driving scalable growth, digital transformation and enhanced customer experience. I'll now hand over to Gordon to cover group financial performance.

Thank you, Cynthia. Thanks, slide 26. I'll cover the group's financial performance. As highlighted earlier, Zip achieved a record group cash EBTDA of $67 million for the half, up 117.1% year-on-year. Cash gross profit reached $235.5 million, which was up 30.1% year-on-year. Underpinning these great results was total income of $514 million, up 19.8% from the first half of FY24, driven by an outstanding US business performance, as well as continued portfolio yield, expansion, and improved excess spread in Australia. I'll cover operating costs in more detail, but at a high level, cash operating costs have increased 10.1% from the first half of FY24, on a like-for-like basis. For the half, ZIP delivered a statutory net profit after tax of $23 million. This is lower than the first half, FY24, due to one-off gains in the prior period relating to the convertible bond restructuring. The appendix shows the breakdown of the corporate one-off adjustments and non-cash items and the reconciliation from cash PBTDA to statutory accounting profit. Moving to slide 27, which covers our unit economics. India covered TTV and revenue, which were both superb outcomes for the half. Zip remains focused on improving all aspects of our business. For the half, this translated to improved unit economics and greater operating leverage, which has contributed to a 30.1% increase in cash gross profit. 1.6% is at the lowest level in the last two years, reflecting ongoing discipline with credit settings and portfolio management in both markets. Interest expense as a percentage of TTV was 1.7%, an improvement of 21 basis points year on year. receivables financing. The performance for all aspects of unit economics contribute to the 18 basis points of strengthening in our net cash transaction margin to 3.8%. Moving to cash operating expenses on slide 28. Cost management remains priority across the group as we continue to make measured investments in existing business activities year-on-year on a like-for-like basis. This includes adjusting the first half FY24 reported number for the portion of the cash-based short-term employee incentives, which were fully accrued for in the second half of 2024 for that full year. When measured as a percentage of underlying volumes, Cash OpEx has decreased 34 basis points year-on-year on a like-for-like basis. This reflects Zip's ability to balance measured investment spend and deliver consistent profitable growth. The investments made during the half in projects, people, and information technology will support the business at scale. Our investment was weighted to the U.S. businesses, take advantage of that significant growth opportunity in that market, and to enhance our risk and process capabilities to support sustainable future growth. brand and product awareness. Zip will continue to exercise strong discipline across the group in FY25 to deliver optimal operating leverage as the business scales. Finally, other operating costs decreased mainly due to the early extinguishment of the corporate debt facility. The next few slides, starting with slide 29, cover the group's liquidity, funding and capital management framework. and year movement in available cash. In the chart on the left-hand side, you can see the breakdown of ZIP's $527 million total cash position. After allowing for cash held at balance sheet date that was unavailable and including cash that may be withdrawn from our funding vehicles, over the calendar year-end period and as a result of the holiday season. We had a January 2025 month-end position of $165.9 million. On the right-hand side, you'll see the material improvement in our available cash position was driven by both operating and non-operating cash flows. Pleasingly for ZIPP, operating cash flows comprise cash, EBTDA, CapEx, working capital, Non-operating cash inflows of $56.1 million includes the $50 million proceeds from ZIP's share purchase plan in July 2024. Collectively, these actions delivered a $115.1 million improvement in our available cash balance since June 30 last year, further strengthening our balance sheet. Moving to slide 30, which outlines the financing facilities in place for ZIP's receivables and headroom for future growth. and future opportunities. During the half, we completed six funding arrangements, which extended our maturity profile and diversified our investor base. And we continue to garner strong support from both existing and new investors. In October last year, we exercised the option to upside our U.S. funding facility from $225 million to $300 million, which provides capacity and support future growth opportunities in the U.S. warehouse facility, labelled BFN4, and executed a $350 million rated public issuance, labelled Series 2024-2. Both of these financings were used to repay the $663.5 million facility, labelled 2021-2. Additionally, we extended three of our existing facilities during the half. As of 31 December 2024, ZIPP continues to operate with no corporate debt. We will continue to review corporate funding options as the business scales and the needs of the group develop. ZIPP will continue to develop funding programs through consistent engagement with existing and expanding investor networks. Refinancing for our two maturing facilities this calendar year is well advanced and I'm confident we'll continue to successfully manage our financing arrangements receivables growth in the second half and beyond. Moving to slide 31. Slide 31 provides an overview of our capital management framework. Our framework aligns with our corporate strategy and focuses on maximising shareholder return. Guided by the principles of this framework, decisions will be thoughtfully considered to accomplish the balance of building long-term value and delivering maximum shareholder return. resilient balance sheet. Attractive growth opportunities that enhance our competitive position are explored through a lens on risk, expected returns and strategic alignment with regular evaluation to ensure they are delivering the appropriate returns. Consistent with our strategy for Thanks Gordon.