Earnings Transcript for ZIZTF - Q4 Fiscal Year 2023

Vivienne Lee: Good morning, and thank you for joining Zip's Full Year '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 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'm joined today by Zip's Group CEO, Cynthia Scott; Co-Founder and U.S. 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'll now hand over our call to CEO, Cynthia Scott.

Cynthia Scott: Thanks, Vivienne. Good morning, and welcome to Zip's FY '23 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 2 years ago. And I'm honored to have recently taken the role of Group CEO. Zip delivered a strong result in FY '23. 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'd 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 2 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're now a stronger and simpler company with 2 core markets and a strong platform for growth in FY '24 and beyond. Building on the progress the business made in FY '23, my focus will be on ensuring we continue this momentum. Larry and Pete, as regional CEOs in the U.S. and ANZ will remain close to the business, driving performance in these 2 markets, and I look forward to continuing to work closely with them as we collectively deliver on Zip's next phase of growth. So this morning, I'll cover the FY '23 highlights, then Larry and Pete will go through the business performance, Martin will take us through the financial performance, and then I'll conclude with remarks regarding our FY '24 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 U.K., Mexico and Singapore businesses, which are now closed and Spotii, Twisto and Payflex, which were divested during FY '23. 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 margin 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 gross profit grew 20.4% over FY '23 to AUD 250.6 million and core cash EBTDA improved by AUD 103.2 million to a loss of AUD 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 FY '24. Now turning to the operating highlights on Slide 6. We're 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 AUD 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 AUD 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 2-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 FY '23 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 FY '23. The U.S. 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 strategic review of non-core assets, and we neutralized 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. And finally, we took actions to manage our corporate liabilities, reducing the outstanding face value of convertible notes by over AUD 312 million, materially strengthening the balance sheet. Collectively, these achievements during FY '23 have simplified our business, strengthened our foundations and have us on target to achieve positive group cash EBTDA during the first half of FY '24. The next slide breaks down cash EBTDA over the 2 halves. 6 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, 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 FY '23 with significant momentum. We reaffirm guidance that Zip remains on track to be cash EBTDA positive during the first half of FY '24. Slide 10 demonstrates a significant improvement in cash flows in the second half as compared with the first. Firstly, as mentioned, core cash EBTDA of negative AUD 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 FY '23, while neutralizing the cash burn in these markets. And finally, we experienced a substantial reduction in non-operating and one-off payments, which had an outsized impact in the first half. With these actions and ongoing improvements in our core business, we finished the year with AUD 57.3 million in available cash. I'll 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 2 incentivized conversions in December and June of our senior convertible notes and the AUD 50 million repayment of the CVI convertible notes to reduce the total convertible note liabilities from AUD 500 million at the start of the financial year to AUD 340.2 million in June '23. After year-end, we completed the consent solicitation process to amend the senior convertible notes, reducing the balance further to AUD 137.8 million. And then finally, up until August 28, a further AUD 7.3 million of senior convertible notes were converted into ordinary shares, further reducing the outstanding face value to AUD 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 central 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 adds] and supporting customers to develop financially responsible behavior. Zip remains focused on continued improvements to our cybersecurity resilience and the protection of customer privacy and data. We're 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 reduction targets. Slide 13 is a reminder of what we achieved in the last 12 months. In FY '23, we took specific actions that prioritized profitability and set the foundations for the next horizon of Zip's growth. We're entering FY '24 focused on core products in our 2 core markets, ANZ and the Americas. We've simplified our operating structure and ways of working to focus on our most important initiatives. We've also strengthened our balance sheet and ensure 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'll take you through shortly. I'll hand now to Larry to cover the performance of the Americas business.

Larry Diamond: Thank you, Cynthia. On to Slide 15 to discuss the performance of the Americas business. Having moved to the U.S. almost 1 year ago, I'm extremely pleased with the overall performance of the team. FY '23 was a year of significant improvement as the U.S. delivered on its strategic reset. Exiting FY '23 cash EBTDA positive on a monthly basis, consistent with our market guidance. We saw a healthy top line growth of AUD 4.7 billion in transaction volume and AUD 309 million in revenue, which was moderated by changes to risk settings, which we implemented earlier in the fiscal year. However, we closed out FY '23 with strong positive momentum. Transactions in Q4 were up 13% year-on-year, including transactions per MTU, up 9% in June, while TTV growth in June increased 20% year-on-year. On the commercial front, we are pleased to welcome Andy Stearns to the U.S. leadership team to lead our go-to-markets efforts. Andy comes with significant payments experience from Amex and most recently, CapitalOne. And the U.S. pipeline continues to expand, adding additional brands across ticketing, sports and apparel. Our product strategy is also progressing very well. We are seeing a growing adoption of our pay anywhere product used at almost 900,000 locations over the course of FY '23. And the physical card continues to drive incremental volumes across the omnichannel. We also know this is resonating with our customers. NPS for the U.S. business was plus 55%, up 10 points in the last 12 months, reflecting the work we've done to improve the user experience and demonstrate more value to our customers. This, coupled with higher repeat use rates, over 90% of transactions are now coming from repeat users, indicate that our customers are increasingly loving Zip and using it more and more. We'll now turn to Slide 16. This slide covers the U.S. credit performance in more detail and shows how we've successfully brought loss rates to within our target range despite what has been a challenging external environment. This is an outstanding result for the business and key to delivering profitable growth in the upcoming FY '24 year. Our focus on credit performance delivered an improvement of 150 basis points over the year as we adjusted our risk settings and launched new product features to drive responsible repayment behavior. Such features included payment date change self-service, flexible installments and gamified repayments, where customers may be eligible for limited increases based on the successful repayment history. Targeted actions included tightened cutoff scores, new ML models and increased limit management, which we implemented earlier in the year. There was also continued and significant investment in our proprietary decisioning engine and underwriting capabilities. And as we exited FY '23, these enhanced capabilities as well as adjustments to risk settings should see losses trend towards the target range of 1.5% to 2% to support profitable growth from both new and existing customers. And so our North Star remains -- a North Star for the region, excuse me, remains, which is perceived to be the best in market at providing short-term unsecured credit to approximately 35% of the add-on American population unfairly assessed by the traditional finance industry. I look forward to FY '24 with a revitalized leadership team now in place, a clear strategy and an exciting product road map in development. On to the ANZ business results, which Pete will cover.

Peter Gray: Thanks, Larry. Just talking to Slide 17. The ANZ business continues to deliver very strong results. Revenue was up 24% year-on-year, with revenue margins expanding by 140 basis points to 8.8%, really reinforcing the resilience of the business and the benefits of our 2-sided revenue model. Very pleasingly, the New Zealand business delivered a positive cash EBTDA result for the year for the first time, which was a great result, again, reinforcing the underlying strength of the business model. We consolidated our leading position in travel, launching Jetstar, Webjet and Uber, who joined Virgin and Qantas on our platform. Our differentiated Zip Money product really continues to play a key role in our strategy to own this vertical. Our merchant pipeline remains very healthy across a range of industries and verticals. And in the second half, Zip signed and launched with Peloton, HP, ASICS and Hoyts, providing an example of the opportunity market consolidation and a differentiated regulatory position is presenting for Zip. Transaction volume and customer growth rates were moderated and reflected changes to internal risk settings in response to the external environment. Notably, transactions per customer increased by 7.3% year-on-year, really reflecting the increasing relevance of our product to customers in a rising cost environment. Finally, in May, we welcomed the announcement from Treasury to further strengthen the BNPL regulatory framework by endorsing Option 2, which was the option Zip had supported and advocated for. The regulatory framework announced will provide certainty and clarity and is effectively business as usual for Zip. Our business practices are already aligned with the proposed regulatory framework. We have 10 years' experience offering fully regulated credit under our Australian credit license and the National Credit Code and already conduct full ID, credit and affordability checks on our customers. A low reliance on late fees and a mature hardship assistance program are already part of our Australian business, which has been cash EBTDA profitable for 5 years. We believe this regulatory readiness is a point of differentiation to others in our market. Just moving to Slide 18 for more detail on the performance of the Australian loan book. With our account-based product construct in Australia and well over AUD 2 billion in receivables, returns and metrics on the loan book is the best way to think about the performance of the business and the significant future upside. The chart on the left-hand side shows the return on the loan book similar to a net interest margin for a bank. This shows the resilience of the business as we've increased yield in part offsetting the rapid increase in interest costs. Future innovation and new product launches in FY '24 will deliver significantly increased yields, which will flow straight to the bottom line. The right-hand side provides further detail on our credit performance. This chart largely reflects seasonality with an increase in arrears over the last few months, but also reflecting a slight softening in the broader consumer credit and the impact of a one-off third-party processing issue, which has now been resolved. As we have consistently proven we have a core competency in managing credit through both different external cycles and internal strategy settings. Our product construct and capital recycling profile provide a unique advantage with the ability to change risk settings and rapidly influence credit performance. In response to the current operating environment, we have already had again adjusted to risk settings to improve our credit performance. Actions such as tightened lending criteria, increased bank linking and reduced exposure to higher-risk cohorts have been implemented to improve the credit quality and future loss performance. These actions are already delivering results with early-stage arrears trending down to the lowest levels since 2021, and we expect net bad debt to follow this trend during FY '24. Passing over to Martin now for the financials.

Martin Brooke: Thanks, Pete. Slide 20 brings all the components of our unit economics together. A 60 basis point increase in revenue margins and 70 basis point reduction in net bad debts have more than offset the 90 basis point increase in interest expense. The resulting 30 basis point increase in our cash transaction margin is a great result in the current environment. Turning to Slide 21 for a few brief comments on the segments. ANZ continued to deliver positive EBTDA, although performance was impacted by the speed and quantum of base rate increases, which offset strong revenue margin expansion. The Americas delivered improved credit losses and reduced operating costs, which drove benefits to cash EBTDA. Zip business is in the process of being wound down. Corporate cash costs have reduced by 15% as we've simplified the business, restructured the corporate function to support core markets. Group cash EBTDA reported by the core markets has improved by over AUD 100 million year-on-year and as we have seen by 54.8% half-on-half. Moving to the income statement on Slide 22. As we've covered the key moving parts to the gross profit line, I'll focus my comments on the remaining items on this slide. On cash operating costs, salaries and employment-related costs have fallen as a percentage of underlying volumes from 2% in FY '22, down to 1.9%, reflecting proactive changes we have made to reduce our people costs, remove duplication and simplify the business. Excluding the one-off rebranding costs in FY '22, marketing costs have more than halved to AUD 41.9 million. During the year, we reassessed the likely conversion of both convertible notes, resulting in an accelerated effective interest charge of AUD 49 million, which is a non-cash expense. Following the conclusion of the consent solicitation process in July, the conversion assumptions and effective interest charge will be reassessed as the result of the reassessment reported in our half year result to December 23. Finally, the provision for expected credit losses has fallen to 5.5% compared to 6% last year as a result of the significantly improved performance of our receivables portfolio. Moving to the next slide. Looking at the corporate items and one-off adjustments. We settled the agreed termination fee to settle AUD 16.3 million in July 2022. The AUD 29.9 million incentive payment related to the 2 incentivized conversions of the senior convertible notes. The fair value loss of AUD 61.1 million includes a fair value loss of AUD 8.3 million on the embedded derivative contained within the convertible notes and warrants compared to a fair value gain of AUD 119 million in the previous financial year, reflecting the movements in Zip's share price. There was also a AUD 52.8 million fair value loss reported on the group's investment in ZestMoney. Impairment losses relate to the wind down of Zip business, a reduction in value of the group's investment in Nintendo and the impairment of a number of Zip's non-core software development initiatives. Adjusting for some of these items on Slide 24, brings us to an adjusted loss of AUD 204.7 million. Turning to the balance sheet on Slide 25 and noting that the FY '22 comparatives include the full group numbers that are not restated. I will cover our cash position in a couple of slides. The growth in receivables, which is reported net of unearned income and allowance for bad debts is supported by the increase in borrowings. Zip had an additional AUD 80 million invested in its funding vehicles at June '22 compared to June 23, which is the main reason why the increase in borrowings exceeds the increase in receivables. The movement in goodwill and intangibles reflect the sale of Zip's non-core assets and the normal AUD 40 million amortization charge for the year. The increase in trade and other payables is driven by an increase in merchant payables due to higher transaction volumes and the increased prefunding by our partners in the U.S. to cover increased volumes and weekend trading as the 30th of June was a Friday. The prefunding sits in restricted cash at 30 June and is required to settle openly transaction volumes as they arise. This line also includes the outstanding incentivized conversion payment of AUD 17 million. The convertible notes and options are reported as a debt from embedded derivative, the movement reflects the revaluation of the embedded derivatives, the liability reduction arising from the incentivized conversions of repayments during the year, together with both the accelerated and standard effective interest charge in the year. The liability reduction from the consent solicitation process will be shown in the half year report to December 23, as it was completed in July. Turning to the cash flow on Slide 26. After allowing for the additional amount we had invested in our funding vehicles at 30 June '22, the movement in receivables is largely supported by the net movement in borrowings shown in financing activities. In line with the terms agreed with CVI Investments, we paid AUD 54 million to reduce the number of convertible notes outstanding. This included the three, six monthly payments of AUD 10.8 million each, which have been deferred from previous years. We paid AUD 12.5 million in relation to the incentivized conversion in December, with a further AUD 17.4 million paid post year-end for the June incentivized conversion. These payments were fully funded by a capital raise of AUD 36.6 million net of costs. Slide 27 walks from our reported to our available cash position. At 30 June, we reported a cash balance of AUD 275.9 million. After allowing for cash held at balance date that was unavailable to us and including cash that could be drawn from our funding vehicles, we had AUD 57.3 million in available cash and liquidity to fund operations. As set out earlier in the presentation, the movement in available cash over the year included both cash requirements for the core business of approximately AUD 70.7 million and non-core non-operating and one-off payments of AUD 150.6 million. Net cash outflows reduced significantly in the second half, supported by our group cash EBTDA performance and a reduction in non-core and non-operating outflows. In addition to the AUD 57.3 million, Zip has AUD 28.4 million invested in its debt funding programs that will flow back to the group in the first quarter of FY '25. We continue to progress discussions with third-party investors, which would allow us to release this cash earlier. Looking at Slide 28 for a funding update. We are well placed to support our strategic initiatives. We completed 2 rated note issuances during the year, and we paid the facility that matured in October. We extended variable funding note 2 for a further 12 months and extended the 2017-1 Trust, and in both cases, it revised the limits to better reflect the forecast usage of the facilities. We also renegotiated our facility in the U.S. to better align with expected usage. Our weighted average cost of funds on drawn balances across the group has increased to 7.36% due to a 310 basis point increase in floating rates and a 63 basis point increase in weighted average margins. I'll now pass over to Cynthia to make some comments on our strategy, FY '24 priorities and outlook.

Cynthia Scott: Thanks, Martin. Now turning now to Slide 30. Following a year of delivering consolidation, simplification and strengthening the foundations for Zip, we've developed a medium-term strategy that leverages the strategic assets of each regional business. Across the group, we will continue our focus on driving sustainable cash EBTDA profitability using product innovation to deliver growth and maintaining operational excellence. In ANZ, we'll leverage our position as a mature cash EBTDA positive business with significant market share. We're continuing to focus on product innovation that will drive the next phase of growth in Australia. This will include new products that broaden our financial services offering, increase our market share in personal lending and deliver new revenue streams. In the U.S., now that the business is cash EBTDA positive, we're in a position to drive incremental profitable growth and scale as well as continue to innovate for our customers and merchants, in-store and online. Moving now to Slide 31. In ANZ, we have strong foundations to deliver further growth and share of the broader consumer credit market in FY '24, including our distribution networks, product expertise and regulatory readiness. We have 2.3 million active customers and a market-leading digital distribution network with 56% brand recognition. Our products provide flexibility for every day and discretionary purchases and are customer-centric with an NPS of plus 60, well above other more established financial services businesses. We've built a wealth of data insights from 10 years of proprietary data and credit decisioning capabilities, and we currently underwrite AUD 2.4 billion of consumer receivables. We've operated in Australia as a cash EBTDA profitable business for 5 years and achieved revenue margins of over 10%, demonstrating the success of our business model through the cycle. We're regulation ready, having offered a regulated product since inception, holding an Australian credit license and embedding responsible lending practices across all of our businesses and products. And finally, we have plans in place to implement a new product that's well suited to the current operating environment and will be revenue yield accretive, supporting our ability to self-fund incremental future earnings growth. Turning now to the next slide. It's important to remember just how early the BNPL journey is in the U.S. And Slide 32 sets out the incredible market opportunity that exists with the total addressable market estimated to be over USD 11 trillion and BNPL penetration still under 2% of total payments, both online and in-store. This demonstrates the sheer size of the opportunity that we're positioned to capture in the U.S. After entering the market in FY '21, we now have a business that has grown TTV at a CAGR of 25% to USD 3.1 billion and revenue at a CAGR of 23% to USD 2.8 million, achieving a positive cash EBTDA. Now on to Slide 33, in the U.S., we also have the platforms in place to support accelerated growth in FY '24. We have a customer-centric approach, and we're committed to innovation and delivering for our customers. We were the first in the U.S. with pay anywhere and innovated with physical pain forecasts, which is now scaled to approximately 30% of in-store volumes. We've invested in adaptable decisioning platforms that allow us to provide credit to America's underserviced customers, maintaining strong approval rates and rapidly respond to changing market conditions throughout the credit cycle. Our book recycles every 6 weeks on average. So we have a very high yield and a minimal exposure to interest rate movements, with every 25-basis point movement in interest rates impacting our cost of funds by around 2 basis points per transaction. We've demonstrated the resilience of our 2-sided business model and how we can leverage that to create multiple pathways for growth. And finally, our expanded relationship with WebBank strengthens our Zip U.S. offering, and we're well positioned for regulatory change. Slide 34 sets out our clear and simplified FY '24 priorities in line with our regional strategies, capabilities and competitive position. Firstly, we'll maintain our focus on driving profitable growth in our existing products, and we'll maintain our relentless focus on credit performance and deliver on initiatives to further reduce our cost of sales. Secondly, we'll unlock new customer and market segments with product innovation, new merchant verticals and by providing customers with new ways to pay and budget responsibly. And finally, we'll continue to invest in our processes, platforms and systems to support further scale and deliver operating leverage as we grow. Now turning to the outlook on Slide 35. Our outlook has been updated to reflect Zip's achievements in FY '23, our streamlined operations in core markets and the external market conditions. It reflects our strategy and our aim to deliver the best outcomes for our customers and merchants as well as driving long-term shareholder value creation. We have clear medium-term targets that we're driving the business towards as we scale. Over the medium term, revenue as a percentage of TTV is targeted between 8% and 9% as we grow higher-margin products and drive customer lifetime value. Cost of sales as a percentage of TTV is targeted between 5% and 6% as we manage credit losses to optimize transaction margins and movements in interest costs reflect the increase in our base rates. On OpEx, we expect to benefit from the reductions we made to our labor costs in Q4 FY '23, and we'll continue to exercise a disciplined approach to our cost base as we scale. While we're targeting OpEx spend to be no greater than FY '23 levels next year, in the medium term, the change in target reflects an increase in corporate funding costs from base rates and the amendment to the senior convertible notes to include coupon payments as well as the controlled TTV growth in ANZ in FY '24. On cash EBTDA, we expect to deliver 1% to 2% of TTV in the medium term, which is unchanged from our prior guidance. And finally, in FY '24, we remain on track to deliver positive group cash EBTDA during the first half of '24. And we also expect to deliver a positive group cash EBTDA as a result for the second half of '24. Now onto the final slide, where I'd like to make some closing remarks about how Zip is positioned and our strategic plans for FY '24 and beyond. As we look forward to our next phase of growth, we have strong foundations in place to scale and succeed in our core markets. The addressable opportunity remains significant, particularly in the U.S., with digital consumer finance offerings still maturing in these markets. The ANZ business is well positioned to benefit from regulatory clarity and further market consolidation, and we'll pursue innovation that helps drive our next phase of growth. Our solid momentum coming out of FY '23 has continued into July, with U.S. TTV growth accelerating. U.S. credit losses for July remain on target, trending at 1.5% of TTV on a cohort basis. Low earlier arrears levels in the Australian business also show a very promising trend. We've seen further reductions in our convertible note liabilities and are well progressed on our new product innovation. Following the strong delivery against our targets in FY '23, we begin FY '24 with clear and simplified goals, strong operating momentum and the balance sheet and platforms to enable accelerated and profitable growth. I'm confident we're well positioned to deliver on our strategy and drive long-term value for our stakeholders. On behalf of the executive team, I'd like to thank the entire Zip team for everything that they've delivered in FY '23 and to our shareholders for their ongoing support. So that ends the formal part of the presentation, and we'll now open the call for Q&A.

Operator: [Operator Instructions] Your first question comes from Siraj Ahmed with Citigroup.

Siraj Ahmed: Just the first one, I guess. I guess it's a question that everyone is asking is regarding the balance sheet, right? I mean you have AUD 57 million of cash. But I'm guessing -- I mean, if you can give us an idea of how much cash burn you expect in FY '24. I know you bring cash EBTDA targets, but there's also CapEx in there. But just in terms of cash burn and then how you think whether that's enough for funding future growth? That's the first question.

Cynthia Scott: Yes. Siraj, maybe I'll start, I might ask Martin to add. I mean, we've reaffirmed our absolute focus on reducing our cash burn and that we will be cash EBTDA positive during the first half, and we'll maintain that cash EBTDA positive position in the second half. So that remains absolutely a focus because we really are as a business on the cusp of being self-sustaining and self-funding. So that's a priority for us. I might ask Martin just to add any comments in relation to the specifics around CapEx.

Martin Brooke: Yes. Yes, in terms of CapEx, with excess slightly below this year's levels, if you're looking at that from a core perspective. So it is about AUD 18 million, AUD 19 million, so a little bit less than that. And then as we've reiterated, we don't -- we expect to have enough cash to get to cash EBTDA profitability and don't expect to be coming to market any time soon.

Siraj Ahmed: Okay. So all right. So you think around AUD 30 million, AUD 35 million of cash is -- okay, got it. Second thing, maybe Cynthia, in terms of the medium-term targets, I mean, you already had some of those targets right now. But just in terms of the shape that you're expecting as you unwind -- as you focus on growth, right, that will be quite helpful in terms of both revenue yield and also OpEx, how you think shape of that comes through in the next couple of years?

Cynthia Scott: Yes. So thanks, Siraj. Well, just in relation to the revenue margins, no, you're right, absolutely. So the reason that we were comfortable increasing our medium-term targets from our previous target of 7% to 7.5% is because we beat that this year at 7.8%. And also just because of the momentum that we see in our business from a revenue perspective and the new products that we'll be bringing to our existing customer base, particularly in Australia, they will be revenue margin accretive. And so on that basis, we're comfortable increasing our medium-term target on the revenue side to between 8% and 9%. I think your other question, Siraj, was relating to OpEx target ranges in terms of the increase, why we've increased the range. Just a couple of comments I'd make in relation to our OpEx ranges. Firstly, that's OpEx as a measure of TTV. And that original range was put in place when we had a business that was operating in considerably more markets, and we had a larger TTV base to measure that against. We remain very committed to bringing down our absolute level of cash OpEx. So we do expect the absolute level of cash OpEx for FY '24 to be lower than AUD 23 million. But when you look at it as a percentage of TTV, we have to take into consideration the higher interest base rates and the fact that our convertible bond now has a coupon that's going to impact that cost base. And then secondly, just that moderation in TTV growth that we've referred to. So we really are focused on profitable growth, not just top line TV growth.

Operator: Your next question comes from Roger Samuel with Jefferies Australia.

Roger Samuel: First question is with regard to the disposal of your rest of the world businesses. Have you received other proceeds? I can see AUD 5.8 million in the FY '23 accounts. Any more to come in terms of [Audio Gap] sales?

Martin Brooke: So all of the sale transactions have completed, there is a deferred consideration on the Twisto transaction of about AUD 1 million that we received in 2 installments over the next 12 months.

Roger Samuel: Okay. Got it. And second question is in terms of funding. It looks like there was more appetite now for consumer receivables. But yes, the margin has gone up. Can you just tell us maybe what's the appetite from the lenders? Are they more cautious with regards to BNPL?

Cynthia Scott: Well, there's a couple of comments maybe that I will make, Rogen, in relation to funding and the balance sheet. Firstly, as we outlined in our prepared remarks, we have already refinanced and extended a number of our facilities, and we undertook 2 ABS transactions this year that recycled our capital and released headroom. So we will continue to access the capital markets to recycle our warehouses and to release headroom for funding. In terms of appetite for exposure to it, we've got a number of conversations with a diversified group of funders, and we're seeing still very strong support for lending to Zip. I will note, though, that the comments that we made in relation to a new product, we will be initially distributing that product to existing customers, and so we will fund that within our existing funding envelope.

Operator: [Operator Instructions] Your next question comes from Lucy Huang with UBS.

Lucy Huang: I've got 2. Just on the revenue margin side as well. I think you talked about the new product that is likely to be accretive coming into next year. But are there any other initiatives that could drive revenue margins higher, such as higher account fees? Can you push pricing up on that or higher, I guess, take rate -- merchant take rate?

Cynthia Scott: Yes, I might -- I'll ask Pete to comment on that. I mean part of the dynamic that we'll see in FY '24 is we did take a number of actions through FY '23 in relation to the sort of things that you're referring to, Lucy, whether that's repricing higher interest rates, higher merchant service fees and we'll see the full year benefit of that. But Pete, was there anything else?

Peter Gray: Yes. So just reiterating what Cynthia said, some of the actions we've already taken, we will receive the full benefit this year. There's no initiatives on the road map to further increase fees. As we touched on, we are very excited to be launching revenue margin accretive products. And also, we look to optimize business mix. So our Zip Money product has a slightly higher yield, for example, than Zip Pay and how we cross sell some of those product customers to higher-margin products.

Lucy Huang: Yes. No, that's very useful. And then just secondly, with the U.S., I think given that we are below the target range for bad debt, how should we be thinking about the growth in TTV moving forward? Is it going to be from more new customers? Or will you be looking to drive more penetration from existing customers? Just wondering what that mix could look like in the next year.

Cynthia Scott: Thanks, Lucy. Well, as we highlighted in the notes, we're already seeing really strong momentum in the U.S. coming into FY '24, both in terms of TTV growth and the losses performance. But I might ask Larry to add some comments specifically in relation to the U.S.

Larry Diamond: Yes. I think just building on that, FY '23 was obviously cycling a lot of work that we've done to drive growth more with profitable customers. That's both new and existing and obviously deliver on that particularly towards the second half of the fiscal year. And as the chart showed earlier in the deck, we are cycling now 20% growth TTV north of that. And that's being driven both by the app, which is a reasonable chunk of the business, and that's existing customer penetration being involved with more of their short-term liquidity needs. And then, of course, on the go-to-market side, we're pretty excited to have Andy in train, which is all about new merchant acquisition, and that will drive new customer acquisition [indiscernible] been focused on the group in FY 2024.

Operator: Your next question comes from Wei-Weng Chen with RBC Capital Markets.

Wei-Weng Chen: Just a question from me on TTV and revenue composition. Just wondering if there are differences in your TTV and revenue composition based on kind of the verticals you operate in. So specifically, I guess you've seen a bit of growth in Australia, at least with the travel vertical. Is this lower TTV margin?

Larry Diamond: No, no, it's not. It would be in the medium range of the merchant services fee. And obviously, we have customer revenue with the dual-sided revenue model as well. So given that some of our strategy to penetrate that vertical is Zip Money related, that's very healthy merchant services fees.

Wei-Weng Chen: Yes. Okay. And then I guess, in context of your growth, but I guess as the broader market experiencing a bit of a retail recession, can you maybe give us some color on, I guess, which verticals are outperforming for you guys and which ones are under performing?

Cynthia Scott: Yes, sure. So I mean, I think what really differentiates Zip when you think about the retail environment is that our products span discretionary and non-discretionary and online and offline. So we see everything from everyday spend through to life's bigger purchases. You're right, there's definitely some softness out there, and we have seen some softness, particularly in discretionary. What's interesting, though, is the slight change we're seeing in the composition of discretionary. So slightly less spend on things like furniture and homewares. And as you flagged, we're seeing much stronger spend on sports, fitness and in particular, travel. So an interesting anecdote that we've seen in our numbers in light of the higher utility costs at the moment. Obviously, inflation is having a real impact on people's cost of energy and electricity. We've seen a really significant increase in solar. And so our customers are using their Zip accounts to invest in solar. I think that's just a really good example of our savvy customers are really budget conscious. And in this environment, some of our largest merchants who provide solar to Australian homes are seeing double-digit growth in the pipeline of inquiries around solar.

Operator: The next question comes from Brendan Carrig of Macquarie.

Brendan Carrig: Just one from me, maybe for you, Martin. Just on the payables, there's a big uptick in the amounts due to merchants and other parties. And there is a footnote there, but I just wondered, can you maybe explain that a bit clearer as to what has driven that sort of bigger uptick in the trade and other payables because the cash flow does have -- doesn't seem to have gotten -- the cash flow seems to have gone down. So it feels like there's sort of something at play there. I just wanted to better understand what the driver of that is.

Martin Brooke: That's largely driven by the U.S. So as we've pointed out in the U.S., WebBank is our partner. And as part of that arrangement, they essentially prefund transactions on the open loop network. So they're putting cash into a restricted cash account. And the other side of that is the trade payable account. So when we have a 30th of June is a Friday, we have extra money in there to fund those transactions over the weekend, which is why the trade payables number pops up at 30 June and also the restricted cash is also popped up.

Brendan Carrig: So it's a 3-day balance if it's 30 June is on Friday as opposed to a usual 1-day one.

Martin Brooke: Correct.

Brendan Carrig: Okay. And then yes, just on sort of the top line side of things, obviously, the expectation that sort of slows a little given sort of as you were explaining earlier. But I guess I'm just trying to better understand how we should be thinking about it given sort of the tighter risk settings, the less marketing spend and ultimately, how you're thinking about overall top line growth in both Australia and the U.S. on the back of those drivers, given that whilst costs remain flat, you still would want to continue to deliver that operating leverage in a competitive environment.

Cynthia Scott: Yes. No, very much so. But what we're really focusing on is driving profitable growth. So you're right. We have moderated our risk settings and that has, particularly in FY '23 had an impact on our TTV and our customer growth and particularly in the U.S., given that we're seeing now a strong improvement in TTV numbers. We are seeing a marginal change to our credit loss numbers. I don't know Pete or Larry you guys want to add anything specific.

Larry Diamond: I think I would say, though, that there's definitely -- yes, a strong focus on growth, profitable growth. I think each market, we can probably add a couple of comments for the U.S. You can just look at the TTV growth year-on-year, but then also compare that to June and then post June into July. So you can see once we've done that work, we're now cycling a pretty healthy year-over-year TTV comps. I think also there's been a bit more moderating happening in the marketing side, co-marketing checks that we used to sign merchants have become a bit more modest and a bit more fair given some of the consolidation out of the market. So we feel very confident in our ability to continue to drive that growth in the market and the demand continues. Consumers need the infill to help budget and spend and merchants are still looking for those options at checkout.

Brendan Carrig: Would your peers have been doing that as well, Larry, just in terms of pulling back that co-marketing spend? I think they would have, but is that something you're seeing as well?

Larry Diamond: Yes. Without knowing exactly the inside P&L, it's definitely the sense that we're getting from talking to merchants and just some of the deals that we're now able to strike with merchants. They're definitely more conservative than they were a few years ago.

Operator: Your next question is a follow-up from Siraj Ahmed with Citigroup.

Siraj Ahmed: Just 2 questions. I mean following up from the U.S. discussion, how are you seeing the Australian business trend? I mean -- I know you said there's a bit of few offsetting factors, but how is that trending into this year?

Cynthia Scott: Just from a growth perspective, Siraj, you're saying?

Siraj Ahmed: Yes, the growth perspective on the top line?

Peter Gray: Yes. So, Siraj, obviously, there's 2 aspects to the response here. So we have tempered growth off the back of some risk settings that we've sort of undertaken understanding some of the headwinds consumers steering into in the rising cost environment and the general softening of consumer credit more broadly. I think secondary to that is we really are looking to transition to a next-generation financial services company and building out and delivering new and innovative products that will certainly provide significant medium-term growth. So we are using the opportunity of these more tempered risk settings to build out the capability to continue to launch new products to our existing customers as we transition to that next-gen financial services. So they will deliver significantly higher revenue margins in the short term and very strong TTV growth in the medium term.

Siraj Ahmed: So, Pete, just confirming, does that sort of imply right now, it's down year-on-year? Just clarifying that...

Peter Gray: [Audio Gap] '24?

Siraj Ahmed: Yes, right now, year-to-date, is that trading down?

Peter Gray: Yes, it would be very stable TTV growth given the external and that strategy.

Siraj Ahmed: Okay. And just a follow-up on that. So in terms of new products, I mean, is this like a pay in for in Australia that you're thinking? And I guess higher yield sort of implies higher bad debts as well. Just keen to understand how you're managing -- how you expect to manage that.

Peter Gray: Yes. Look, it's definitely not a pay in for. I think higher margin doesn't necessarily mean higher losses, although it can tolerate higher losses. I think as Cynthia touched on, in particular, with Phase 1 of the launch of the new products. They actually will be to our existing customer base. So we have the opportunity to segment based on credit quality and also demand that we are receiving from our meeting of customers. So in terms of -- in the initial stages, the way to think about it, it will be significantly revenue accretive, it will be TTV accretive, but loss levels should remain reasonably in line with current levels or marginally better, given that we should be growing receivables from our better customers.

Operator: Your next question comes from Elise Kennedy with Jarden.

Elise Kennedy: I've just got 2 quick questions. Just on the increased median targets and percentage of TTV, now you are more reliant than you previously were on the assumptions around delivery from Australia than the U.S. in that? And then the second question was the assumptions into going into the group TTV, there was a bit of a question around the U.S., but is there more reliance there? Or what's the mix between the active customer growth versus the transaction frequency? I think you mentioned about the credit product in Australia. I just wanted to understand at the group level, the mix between those and some of the initiatives being made.

Larry Diamond: Yes. I think to the first part of the question, Elise, most of the revenue margin increase will be delivered by Australia. I think if you look, we're in the process of delivering new products in a more mature market that will be revenue margin accretive, where the U.S. effectively will continue to grow largely off the back of products in market. There are some enhancements that will be added to that, but their opportunity is to grow as the market expands and grows in the early stages of market maturity. So quite different sorts of growth strategies, I think, in the short term for both markets, but most of the margin improvement would be ANZ.

Operator: Your next question comes from John Marrin with CLSA.

John Marrin: Welcome, Cynthia. The question I have here is if you could just focus a little bit more in a discussion around merchant sales leadership, I guess, the change with Andy Stearns and what we should see on that front in terms of getting new merchants on board in the U.S.

Cynthia Scott: Over to you, Larry?

Larry Diamond: As I touched on, really excited to welcome Andy to the team and his most recent engagement was leading Capital One's commercial card business as part of the founding team, just sort of a multi-million-billion dollar business. And so he has joined. He has been with us now for a few months. His step 1 was rebuilding the sales leadership team as well as taking point on a number of large commercial enterprise and platform deals. So we've been really impressed with Andy's, I guess, ramp-up. We've also hired some additional product leadership as well into the commercial side of the business to really partner with him and VP of Engineering there as well. So I feel like we've got a really good combination between those 3 individuals to really drive product innovation and check out, close some of the exciting partnerships in the pipeline and forge really into new territory where we think Zip actually has an edge, an edge around our product, our customer segmentation, FICO banding and dual sided revenue model.

Operator: There are no further questions at this time. I'll hand the conference back to Ms. Scott for closing remarks.

Cynthia Scott: Thanks very much. So that just leads me to reiterate that we begin FY '24 with clear and simplified goals, strong operating momentum and the balance sheet and platforms to enable accelerated and profitable growth. So thanks very much, everyone, for joining us today and for your ongoing support of Zip. And if you've got any further questions, we'll follow up directly or please contact Vivienne. Thank you.