Earnings Transcript for ZIZTF - Q4 Fiscal Year 2022

Operator: Welcome to the Zip Full Year 2022 Financial Results Call and Webcast. Today's call is being recorded. [Operator Instructions] It is now my pleasure to turn the floor over to Vivienne Lee, Director of Investor Relations at Zip. You may begin, ma’am.

Vivienne Lee: Good morning and thank you for joining Zip’s FY ‘22 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 respect to their elders both past, present and emerging. By now, you would have seen the release of Zip’s FY ‘22 results across the ASX and have a copy of the investor presentation. I’m joined today by Zip Co-Founder and Global I, Larry Diamond; Zip Co-Founder and Global I, Peter Gray; and I, Martin Brooke. 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 Larry.

Larry Diamond: Thanks, Vivienne. Good morning and welcome to Zip Co's FY '22 results presentation. We founded Zip 9 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 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 BNPL becomes an even more important budgeting tool for everyday use and a real necessity for all merchants. While FY '22 has been a year of change and consolidation, we remain committed to this responsibility with a sharpened focus in FY '23. 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 summarize our priorities and outlook at the end before opening up for questions. Our key operating metrics are set out on Slide 5 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 shop at hundreds of thousands of more outlets. Pleasingly, the number of Zip transactions was up 80% to over $74 million, demonstrating a healthy increase in customer engagement. Slide 6 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 U.S. Cash EBITDA was a loss of $207 million for the year which was in line with expectations and we recognize 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 FY '24. Turning to Slide 7. 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 U.S. And in Australia, we entered new verticals, including making our play in travel with Qantas and Virgin. In FY '22, 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 that 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 U.S., 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 awards 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 noncore products and noncore markets. We announced the decision to close the Singapore business in Q4 and we are announcing today the decision to close the U.K. 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 FY '22, 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 9. 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 FY '22, we are proud to launch a partnership with Young Change Agents which is a not-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 FY '23. As our business matures, so have our practices to support environmental sustainability. We have continued our commitment to operating as a climate-neutral organization. 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 FY '26. And finally, we also continued our commitment to inclusion in our communities through partnering with Women Who Code and the Pinnacle Foundation. And the last point on this slide. At Zip, our employees' health and well-being is a top priority, particularly in a world with COVID and some of these changing conditions. This focus encompasses all Zip 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 U.S. 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 U.S. 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 continued 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 U.S. market remains a sizable opportunity with only 14 of the top 40 U.S. 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 FY '23, 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 FY '23, our focus here is going to be on accelerating the path to EBITDA profitability and focusing on those initiatives that deliver increased revenue and optimize 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 FY '22, this is -- annual spend per customer was $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 Zip Pay and Zip Money, who we know are materially more profitable, lifted by 30% year-over-year. Another initiative that we rolled out were installments on the Zip Money product and this gives customers the ability to pay installments at any online checkout, unlocking a much broader range of retailers. In FY '23, 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 FY '22, we believe we have the team and plan to deliver even more in FY '23 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 FY '21, cohorts transacted at over 70x a year. And as we finished FY '22, that number was 63 and the cohorts haven't yet fully seasoned. So very, very encouraging statistics. And again, on the right, similar to the U.S., 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 deliver 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 TTV and revenue growth of 64% and 82% year-over-year, respectively. And considering the challenges in the region, this was a reasonable result. Spotii which is based in the Middle East, is a top 3 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 continued to scale, with a strong pipeline emerging in Mexico and Canada is now fully integrated into the U.S. operating model. And finally, in South Africa, our brand Payflex which is number one player over there, continues to sign up the top merchants, adding Takealot recently and is on a clear path to profitability. And just the last slide of the section, on Slide 16, we discuss active customers. Now this is a measure that, of course, we monitor internally across our RFM customer 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 FY '22, we report 7.5 million active customers. And pleasingly, we saw this segment actually increase their 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.

Peter Gray: 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 and 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 FY '21 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, is still a solid result at 2.3%. Just turning to the next page. We show these results against our targeted range. So if unit economics are a critical piece with our path to profitability, then 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 have 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 we'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 U.S. 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 the operating leverage. Off the back of 4 consecutive years of profitability, the Australian business delivered a record cash EBITDA profit of $28 million and this will continue to increase. During FY '22, we took a series of actions to simplify our product range and reprioritize our resources, focusing on our core and higher-margin products while also streamlining our cost base. So we expect to see the Australian business flow -- or these actions flow through in FY '23, 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 FY '24. We see a similar opportunity and trajectory in the U.S. and fast tracking a similar outcome is also a key driver to group profitability in FY '24. 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 FY '22 are already driving outcomes towards our targeted range of 2% and below. With 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 cutoff scores, increasing use of banking transactional data assessing affordability and repayment and collection optimization 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 which then reduces write-offs. Losses have now peaked and will trend down over the course of FY '23. Slide 22 focuses on the U.S. 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 cutoff scores, increased focus on limit and exposure management and repayment and collections optimization 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 U.S., 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 1 FY '23. Moving to Slide 23, interest rates. The reality is that we're experiencing a rising interest rate environment globally, though 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 U.S. and a strong focus on repayments as part of the customer experience and life cycle management in ANZ. During the period, Zip 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%. Our 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. The U.S. business, in particular, remains well placed to maintain margins in a rising rate environment, with any 25 basis point rise only increasing U.S. funding costs by 2 basis points per transaction. Slide 24 highlights our healthy cash and funding position. We have strengthened our balance sheet with a $173 million capital raised by an 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 group 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 U.K. businesses, the entire Pocketbook and the Zip Trade and Zip Plus product range. We expect these decisions and actions to deliver a $50 million benefit to our cost base on an annualized 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're undertaking a strategic review of our rest of world businesses with a likely further reduction to our cost base with the aim being to neutralize cash burn from rest of world businesses during the second half of FY '23. And finally, across our core markets, Australia and U.S., 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.

Martin Brooke: 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 EBITDA expansion. The Americas which is largely the U.S., focused on improving credit losses and driving benefits to cash EBTDA. And the loss in EMEA increased with the inclusion of the Spotii and Twisto acquisitions and we are focused on neutralizing the cash burn from this region in the second half of next year with actions from our strategic review. Jumping to the income statement on Slide 27. As Peter has called out the key moving parts to the gross profit line, I'll focus my comments on the remaining items on the slide. On cash operating costs, we grew head count 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 head count reduction announced in April. As a percentage of transaction volume, salaries and employee benefit expenses have risen to 2.1%. And as discussed earlier, we're closing Singapore and the U.K. by completing a strategic review of our noncore geographies and are looking at our organization structure to realize 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, then marketing costs are at 1.1% of transaction volumes. IT and other costs are broadly in line with the prior year as a percentage of transaction volume and include the cost of establishing new geographies in the first half. The provision for expected credit losses has increased to 6% compared to 5.1% last year as a result of the movement in roller rates across our receivables portfolio and adjustments to the economic overlay. Looking at the corporate items and one-off adjustments in the next slide and again, just looking at the material items. Acquisition costs reflect cost incurred on acquisitions in the period, majority being costs associated with the Sezzle 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 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 $190 million was recorded on the embedded derivatives 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's strategy is move to focus on core markets and we've reviewed the allocation and availability of capital to the markets in which we operate. We have also reviewed growth rates and discount rates in our models and as a result, have fully impaired goodwill and intangibles attributable to the U.K., Spotii and Twisto cash-generating units and partially impaired goodwill attributable to the U.S. 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 the change in timing on the receipt of payments from our processing partners. The growth in receivables which is reported net of unearned income and allowance for debt, is supported by the increase in borrowings and the use of surplus funds receivables and deferred borrowings until such time you need the funds for operational purposes. Twisto which was previously shown as an investment, is now consolidated into the group and we report our ownership interest in Indian by-now-pay-later operated, ZestMoney, as an investment. The movement in intangible assets and goodwill reflects the acquisition of Twisto, Spotii 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 risen to date. There is also a 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 $190 million being recorded. The remaining movement reflects effective interest charge in the year and added to the reported liabilities. Turning to the cash flow. The net increase in receivables and borrowing transaction costs are now shown in the cash flow. Cash flow to operations were previously shown in investing and financing activities, respectively. The movement in receivables is largely supported by the net movement in borrowings shown in financing activities, noting that we refinanced our inaugural rated note issuance during the year. We capitalized $25 million on the development of our technology platforms and invested $72 million or a 11% shareholding in ZestMoney. In March, we raised $173 million in carrying cost of $3.4 million. Moving to the available cash slides. We used capital raised to fund receivables 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 borrowings. At 30 June, we had $226 million in available cash to fund investments in operations. After allowing for cash held at balance at a 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 initiatives. The combination of our Australian consumer receivables facility 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 market, repay the variable funding providers and start again. As a result of the performance of our receivables book portfolio, our senior notes in the last rated series achieved AAA status. Consequently, the weighted average margin on the 2021-2 rated note issuance priced at a weighted average of $1.5 to $0.08 [ph] below the inaugural issuance which is 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'll now hand back to Larry to make some comments on our business model, FY '23 priorities and outlook.

Larry Diamond: 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 acquired at checkout, 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 to 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 every day 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 U.S. 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 customized 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 2-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 ASER report showed that over 50% of consumers said that BNPL helped them manage their cash flow in FY '21 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 3 benefits our products are providing with new and repeat customers and increased order values. 60% of Australian merchants who accepted BNPL in FY '21 believe 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. This is supported and always has been by a simple fit-for-purpose regulation and our first product we ever launched, Zip Money, is already regulated under the NCCP Act. And as you know, we conduct identity, credit and affordability checks on customers. Similarly in the U.S., 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 this differentiates end market. Our unique advantages span 4 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 payments 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 2-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 the 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 multitrillion dollar addressable payments opportunity in our core markets of ANZ and the U.S. which Worldpay expects to see more than double by 2025. Clearly, we're still in the BNPL -- still early on in the BNPL life cycle and penetration of BNPL payments at checkout in our core markets, this is less than 2%. The U.S. 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 ANZ which is a more mature market, it's estimated that just over 10% of e-commerce goes through BNPL but this still lags other installment markets such as Sweden and Germany, where penetration levels are at least double where Australia is today. Moving on to Slide 38 -- yes, Slide 38. FY '23 will be a year of continued growth as we execute on our strategic pillars, focusing on the things we can control. We have 3 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 U.S., 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 FY '23, we will continue to pursue new profitable merchant relationships which will fuel customer acquisition and TTV growth while delivering continued benefits and new Zip services to this space. We will continue to embed and scale recent enterprise merchant wins such as Best Buy, Bed Bath & Beyond, eBay and Qantas. And with a 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 optimizing 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 noncore product lines which we expect to deliver further operating efficiencies. In FY '23, we will complete the wind-down of Singapore and U.K. and we are working through and we'll finalize actions related to our remaining noncore 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 U.S. exiting FY '23 cash EBITDA positive and to neutralize, 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, that's 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 color, in the medium term, we expect to deliver a cash transaction margin of 2.5% to 3% and achieve group cash EBITDA profitability during the first half of FY '24. Revenue as a percentage of TTV is targeted at 7% to 7.5% as we grow the adoption of high-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 sale as a percentage of TTV. Here, we're targeting 4% to 4.5% over the medium term. And this reflects the outcomes of actions to drive down credit losses in our expectation 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 U.K. business as well as the nonrecurrence of the one-off rebrand costs in FY '22. 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 FY '24. As we scale, OpEx as a percent of TTV is expected to decrease to below FY '22 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 math, you can see a business once scaled generating cash EBITDA 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 goal in the first half of FY '24. Finally, on behalf of Pete and I, together with the Board, we would like to thank the entire Zip team and our dear Zipsters for everything they have passionately delivered this year and our shareholders for their ongoing support. We look forward to FY '23. That ends the formal part of the presentation and we'll now open up for any Q&A. Thank you.

Operator: [Operator Instructions] Our first question will come from Tom Beadle with UBS.

Tom Beadle: 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 they be -- numbers be subject to periodic revisions like they were today? And are you treating the definition of a customer consistently between ANZ and the U.S. now because the fact that you restated in the U.S. but not ANZ suggest 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 U.S. stated active customer base of 6.4 million and divided by TTV of about AUD4.1 billion -- sorry -- or divide that TTV by that customer base, I get about AUD639 of TTV per customer. In the presentation -- I think it’s on Slide 12 -- you stated it was US$725 per active customer. So that’s obviously a bit over AUD1,000. 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, call it Australian dollars and divide that by your TTV, it implies that you have less than 4 million active customers, about 3.8 million is my assumption -- is that correct -- versus the 6.4 million that you reported. Is that fair?

Larry Diamond: Yes. So we'll kind of step through that. First of all, of course, we track all customers. And so in the past, say, in Australia, for example, customers might have signed up one account and transacted a year ago. Of course, all customer funnels have -- became customers from year 1 to year 2 and year 3. And so we've just -- we are reporting now on the 12-month active which is making 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 500,000 to 600,000 of customers that have signed up with an account that 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 million. 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 3 months or 6 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 math -- and Martin is just cross-checking it now. That division is actually based on the active customer count of 4.1 million for the U.S. versus the 6.4 million. So if we take the TTV of 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.

Peter Gray: And going forward, we will be reporting on the active customers I set out on Slide 16.

Larry Diamond: Yes. 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's about 30%, where the average customer spent is at $550 and now it's about $720. And same is the increasing in the number of transactions. But again, our whole business still targets customers that might be dormant and that's the RFM model that we spoke about earlier.

Tom Beadle: Okay, great. No, thanks for the clarification there. And I guess sort of what's that active customer number then in Australia and New Zealand?

Peter Gray: There are on Slide 16. So ANZ, 2.3 million; U.S. 4.1 million and the rest of world 1.1 million, giving a total...

Tom Beadle: Apologies. Sorry. I actually missed that slide. Sorry.

Operator: Our next question will come from Elise Kennedy with Jarden.

Elise Kennedy: 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 payments?

Larry Diamond: So, I think -- look, as we touched on in the presentation, 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. So as part of the strategic review, we are looking at a range of things such as investment, divestment or indeed wind down, as you’ve seen some of those decisions come out for the U.K. 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 burn which can be delivered through any of those 3 measures. And that’s currently under review.

Peter Gray: I think to the second question, Elise, Zip money 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 has galvanized behind this challenge. We've significantly upgraded the capabilities of how that installment product is actually offered to consumers and they now have the ability to set an installment at any online checkout regardless of whether or not it's an integrated Zip card. 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 optimizing the velocity of the recycling, that is largely related to Zip Pay. 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 Zip Pay initiative. Clearly, Zip Money is more the fixed installment.

Operator: I would now like to turn it back to Vivienne Lee for any additional questions.

Vivienne Lee: We've got some questions from John Moran [ph] from CLSA. So firstly, can you please remind us where you are on the mix of receivables in Australia across BNPL and longer-term products? And then maybe discuss the longer-term plans on this front in North America over time? That's the first question.

Peter Gray: Yes. 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 higher margin growth. So that high-margin growth obviously will offset to some degree the faster revolving Zip Pay product receivables. The second part of…

Vivienne Lee: And the second part of the question is from John. Can you also speak to the performance of your credit metrics across the 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?

Larry Diamond: And I sort of touched on that with that 4 key pillars, being able to allow a customer to make a purchase and pay that back over an appropriate serviceability period, whether it’s 6 weeks or 6 months is a core tenet of the Zip business and is an area that we are looking at in FY ‘23 for our American business. It’s likely to be through partnership initially which obviously means a much more effective use of capital and allowing us to grow in sort of the current environment. And that’s currently underway. We are in late-stage review of a number of strategic partners over there.

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

Peter Gray: So generally speaking, the longer duration product performs better with regards to arrears and losses than Zip Pay. 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 Zip Pay product.

Vivienne Lee: The next question are from Brendan Carrig. The third question from Brendan is while APAC was profitable in FY '22 at the EBITDA line, what impact will higher funding costs have on this division, specifically, in FY '23 given it has a circa $2 billion funding base? So every 100 basis points of increase reduces EBITDA by $20 million.

Peter Gray: Yes. 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 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 in 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. So -- and clearly, decreasing losses by greater percentage points than the businesses experienced 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 FY ‘23.

Vivienne Lee: The second question from Brendan Carrig is of the $64 million of corporate costs, $20 million for rebranding fee, nonrecurring. What about the other $44 million?

Martin Brooke: Yes. So in the $44 million there is, obviously, the element of professional fees that won’t recur because we have been going from a very complex organization into a much simpler organization during the course of the year, strategic review. There is some FX sort of sitting in there as well as a few million. And then we have a corporate infrastructure

Vivienne Lee: And the final question from Brendan was on Slide 21 which is the credit loss side. What is driving the uptick in the expected losses as we progress through first quarter of '23?

Peter Gray: So effectively, we’ve made very conservative forecasts here and we’ve achieved exceptional results over the last 2 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.

Vivienne Lee: No further questions through e-mail. Back to Larry for some closing comments.

Larry Diamond: So I think it certainly sort of wraps everything up. So look, I want to thank everyone for their time today after listening into the questions. As always, feel free to reach out to our IR line as well if you have any other questions. And thanks for your support. We look forward to executing on our strategy in FY ‘23. Cheers.

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