Zip : FY23 Investor Call Transcript

	TRANSCRIPTION
Company:	ZipCo Limited
Date:	29 August 2023
Duration:	57 minutes
Reservation Number:	10029767

	[START OF TRANSCRIPT]
Operator:	Thank you for standing by and welcome to the Zip Co Limited FY23 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, you
	will need to press the star key, followed by the number one on your telephone
	keypad.
	I would now like to hand the conference over to Vivienne Lee, Director of
	Investor Relations. Please go ahead.
Vivienne Lee:	Good morning and thank you for joining Zip's Full Year 2023 Earnings Call. To
	open the call, I would like to begin by acknowledging the traditional owners of
	the land on which we meet today, the Gadigal of the Eora Nation and pay my
	respects to Elders past and present. This conference call is also being webcast
	and both the results presentation and call details are available on the ASX.
	I am joined today by Zip's Group CEO, Cynthia Scott, co-founder and US CEO,
	Larry Diamond, co-founder and ANZ CEO, Peter Gray and our CFO, Martin
	Brooke. We will start this call with some prepared remarks and then open up to
	questions. With that, I will now hand over our call to CEO Cynthia Scott.
Cynthia Scott:	Thanks Vivienne. Good morning and welcome to Zip's FY23 Results
	Presentation. Zip was founded in 2013 to create a more financially fearless
	world and our mission remains to be the first payment choice everywhere and
	every day. Zip's principles of financial empowerment and innovation are what
	attracted me to the Company two years ago and I am honoured to have
	recently taken the role of Group CEO.
	Zip delivered a strong result in FY23 and as we celebrate our 10th birthday this
	year, we know that as a responsible lender our products continue to resonate
	as important budgeting tools for consumers and to deliver significant benefits to

our merchant partners. We firmly believe that when you give people knowledge, access and control of their financial lives, you give people the ability to live every day with confidence.

Before we get into the details of the results, I would just like to set the scene and recap the journey that Zip has been on. Just over 12 months ago in response to external market conditions we reset our strategy to focus on sustainable growth in two core markets, ANZ and the Americas and to accelerate our path to profitability. We remain absolutely committed to that strategy and have delivered against each of our strategic priorities. We are now a stronger and simpler company with two core markets and a strong platform for growth in FY24 and beyond.

Building on the progress the business made in FY23, my focus will be on ensuring we continue this momentum. Larry and Peter, as regional CEOs in the US and ANZ, will remain close to the business driving performance in these two markets and I look forward to continuing to work closely with them as we collectively deliver on Zip's next phase of growth.

This morning I will cover the FY23 highlights, then Larry and Peter will go through the business performance, Martin will take us through the financial performance and then I will conclude with remarks regarding our FY24 strategy and outlook. Before I begin, I should say, all the numbers throughout the presentation will be referring to financials and operating metrics on a continuing basis which excludes Zip's UK, Mexico and Singapore businesses, which are now closed and Spotii, Twisto and Payflex, which were divested during FY23. A reconciliation is provided in the appendix.

Our key financial highlights are set out on slide 5. In line with our clear focus on Group profitability, Zip has delivered a very strong financial result. Cash transaction margins expanded 30 basis points to 2.8% and credit losses fell to 2% of TTV, down 70 basis points year on year, both in line with our targets. This performance was achieved despite a significant rise in interest rates reinforcing the continued relevance of our products.

Cash growth profit grew 20.4% over FY23 to $250.6 million and core cash EBTDA improved by $103.2 million to a loss of $48.2 million. Core cash EBTDA includes our operations in Australia, New Zealand and the Americas, plus corporate costs and reflects our simplified Group structure going forward. We

remain on track to deliver positive Group cash EBTDA during the first half of FY24.

Now, turning to the operating highlights on slide 6. We are very pleased to have delivered another period of record volumes despite the challenging external environment and the proactive adjustments we made to our risk settings. Across the Group we delivered $8.9 billion in transaction volumes from over 72 million transactions driven by a solid increase in customer engagement across the business.

Active customer numbers finished the period at 6.2 million and were impacted by risk management decisions taken during the year. Merchants on our platform grew more than 11% to over 72,000 reflecting the strong demand we see from merchants to have Zip available for their customers. Revenue grew 16.1% to a record $693.2 million and our revenue margin widened 60 basis points to 7.8%. This strong margin performance is a testament to the benefits of our two-sided business model and the resilience of our products.

Turning now to slide 7 which is a recap of where we started the year. We reset and simplified our strategic pillars for FY23 and shifted our focus to drive growth in core products and core markets to improve unit economics and to reduce our global cost base and we successfully delivered against this strategy as you can see on slide 8. We delivered profitable TTV growth and strong credit outcomes which improved the cash transaction margin by 30 basis points despite the rapid increase in interest rates in FY23.

The US achieved cash EBTDA profitability as we exited the year in line with our guidance joining the ANZ business which is already cash EBTDA profitable. We completed the strategy review of non-core assets and we neutralised the cash burn from these businesses in the second half as planned. Further actions to simplify our core business and reduce corporate costs were taken resulting in cash OpEx falling 15.7% over the year.

Finally, we took actions to manage our corporate liabilities reducing the outstanding face value of convertible notes by over $312 million, materially strengthening the balance sheet. Collectively, these achievements during FY23 have simplified our business, strengthened our foundation and had us on target to achieve positive Group cash EBTDA during the first half of FY24.

The next slide breaks down cash EBTDA over the two halves. Six months ago, we said that we expected the second half to improve by up to 50% on the first half cash EBTDA result. As a result of the changes we made to the business, you can see that we exceeded that guidance with a 55% improvement in cash EBTDA in the second half. A particularly strong result in the current operating environment.

As highlighted on the slide, in the second half revenue and NTM margins were at or above our medium term targets and the business is exiting FY23 with significant momentum. We reaffirm guidance that Zip remains on track to be cash EBTDA positive during the first half of FY24.

Slide 10 demonstrates the significant improvement in cashflow in the second half as compared with the first. Firstly, as mentioned, core cash EBTDA of negative $33 million in the first half improved by 54.8%. Secondly, following our strategic review, actions to divest and wind down non-core businesses delivered cash inflows during the second half of FY23 while neutralising the cash burn in these markets.

Finally, we experienced a substantial reduction in non-operating and one-off payments which had an outside impact in the first half. With these actions and ongoing improvements in our core business, we finished the year with $57.3 million in available cash. I will move now to cover how we strengthened our balance sheet through liability management on slide 11.

An important focus this year was reducing our convertible note liabilities which we delivered on. Slide 11 shows the impact of the two incentivised conversions in December and June of our senior convertible notes and the $50 million repayment of the CVI convertible notes to reduce Zip's total convertible note liabilities from $500 million at the start of the financial year to $340.2 million in June 2023.

After year-end we completed the consent solicitation process to amend the senior convertible notes reducing the balance further to $137.8 million. Then finally, up until 28 August a further $7.3 million of senior convertible notes were converted into ordinary shares further reducing the outstanding face value to $130.5 million and deleveraging the balance sheet.

	Turning now to slide 12. Our business model is built on being a responsible
	lender and doing what's right by our customers, merchants and other
	stakeholders. Supporting financial empowerment for our communities is
	essential to our vision for a financially fearless world. For our customers we
	remain committed to responsible lending advocating fit for purpose regulation in
	our core markets with strong consumer safeguards like Zip has and supporting
	customers to develop financially responsible behaviour.
	Zip remains focused on continued improvements to our cyber security
	resilience and the protection of customer privacy and data. We are committed
	to driving gender balance and have lifted the percentage of women to 44% of
	our total workforce and pleasingly our employee engagement levels remain
	high at 78%. Finally, we continued our commitment to being climate neutral and
	progressed our work on climate risk management and setting emissions
	reductions targets.
	Slide 13 is a reminder of what we achieved in the last 12 months. In FY23 we
	took specific action that prioritised profitability and set the foundations for the
	next horizon of Zip's growth. We are entering FY24 focused on core products in
	our two core markets, ANZ and the Americas. We have simplified our operating
	structure and ways of working to focus on our most important initiatives. We
	have also strengthened our balance sheet and ensured that we have the
	funding in place to support our product strategy and future growth.
	Finally, we determined our medium term strategy in each of our core markets
	which I will take you through shortly. I will hand now to Larry to cover the
	performance of the Americas business.
Larry Diamond:	Thank you, Cynthia. Onto slide 15 to discuss the performance of the Americas
	business. Having moved to the US almost one year ago I am extremely pleased
	with the overall performance of the team. FY23 was a year of significant
	improvement as the US delivered on its strategic reset, exiting FY23 cash
	EBTDA positive on a monthly basis, consistent with our market guidance.
	We saw healthy top line growth of $4.7 billion in transaction volume and $309
	million in revenue, which was moderated by changes to risk settings which we
	implemented earlier in the fiscal year, however we closed out FY23 with strong
	positive momentum. Transactions in Q4 were up 13% year on year including