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Earnings call: Zip Co Limited sees robust half-year '24 performance

EditorNatashya Angelica
Published 29/02/2024, 03:16 am
© Reuters.

Zip Co Limited (ASX:ZIP.AX) has reported a strong financial performance for the first half of 2024, with a significant turnaround in cash EBITDA and a robust increase in transaction volume and revenue. The company has also made strategic advancements in product innovation and market expansion, particularly in the Americas and Australia/New Zealand (ANZ) markets.

Key Takeaways

  • Zip Co Limited achieved a positive cash EBITDA of $30.8 million, marking a $64 million improvement year-over-year.
  • Transaction volume reached $5 billion, with a revenue increase of 28.9% to $430 million.
  • The company reported strong growth in active customers to 6.3 million and a 9.3% increase in merchants to over 76,000.
  • Zip launched a new product, Zip Plus, in Australia and focused on responsible lending and sustainability.
  • The company expects to deliver results at the upper end of its target range for revenue as a percentage of TTV and aims to maintain cash OpEx at no greater than FY '23 levels.

Company Outlook

  • Zip is committed to profitable growth, product innovation, and operational excellence.
  • The company is well-positioned to capitalize on opportunities in the core markets of ANZ and the Americas.
  • Momentum is expected to continue into the second half of 2024, with the right settings and platforms for growth.

Bearish Highlights

  • The company anticipates a stronger first half and a slower second half in both the ANZ and US markets.
  • Total transaction volume (TTV) growth is expected to be tempered for the remainder of FY '24.

Bullish Highlights

  • In the Americas, Zip experienced record top-line growth with $3.1 billion in transaction volumes and $214.7 million in revenue.
  • Zip's strategic priorities include driving profitable growth, unlocking new customer and merchant segments, and investing in processes and systems for scale.
  • The company aims to expand its merchant base and enter new verticals in the US market, with a focus on existing customer growth and higher engagement.


  • No specific misses were discussed in the earnings call transcript summary provided.

Q&A Highlights

  • Gordon Bell discussed the impact of seasonality on revenue margins, stating they are not significantly affected.
  • The company is well advanced in refinancing a funding facility set to expire on March 10th, with details to be disclosed soon.
  • Management expects credit losses, which were anticipated to peak in October and November, to improve in line with expectations.

In summary, Zip Co Limited is on a positive trajectory with its half-year '24 results, showing a strong financial performance and strategic focus on growth and innovation. The company remains optimistic about its future prospects and is preparing for further advancements in FY '25.

Full transcript - Zip Co Limited (ZIP) Q2 2024:

Operator: Thank you for standing by and welcome to the Zip Co Limited Half Year '24 Results Briefing. [Operator Instructions] I would now like to hand the conference over to the Director of Investor Relations and Sustainability, Vivienne Lee. Please go ahead.

Vivienne Lee: Good morning, and thank you for joining Zip's first half '24 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; Group CFO; Gordon Bell, and the Group Executive Team [indiscernible]. We will start this call with some prepared remarks and then open up to questions. With that, I'll now hand over the call to our CEO, Cynthia Scott.

Cynthia Scott: Thanks, Vivienne. Good morning, everyone and welcome to Zip's first half '24 results presentation. [Indiscernible] we said that we would achieve positive cash EBTDA during the first half of '24. We achieved this important milestone in Q1 and have gone on to record a strong positive cash EBITDA results for the half of $30.8 million. This result was driven by successful execution of our strategy in our two core markets, ANZ and the Americas, and we're focused on maintaining that discipline and execution through the remainder of FY '24. Our key financial highlights are set up on Slide 3. As you can see from the chart, the positive group cash EBITDA of $30.8 million for the half is a turnaround of $64 million from the prior corresponding period. Cash net transaction margin expanded 90 basis points to 3.5%, and cash gross profit was up 45.9%, with credit losses remaining stable at 1.9% of TTV. This performance was achieved despite a challenging external environment, and a significant increase in interest rates, reinforcing the continued relevance of our products and the important role they play for our customers and merchants. Turning now to operating highlights on Slide 4. In the first 6 months of the year, we delivered $5 billion in transaction volume for more than 38 million transactions. This was driven by particularly strong performance in U.S volumes and increased customer engagement. Group revenue was up 28.9% to $430 million and our revenue margin increased 130 basis points to 8.5%. Active customer numbers finished the half at 6.3 million, with customer growth impacted by our deliberately conservative risk settings. Merchants on our platforms grew 9.3% to over 76,000 reflecting a strong demand for merchants to have this available to their customers. Turning to Slide 5, and our progress against our FY '24 strategy. At the beginning of the year, we set out three clear priorities aligned to our regional strategies, capabilities and competitive position. We said that we would focus on driving profitable growth in our two core markets, innovate new products for our customers and merchants and continue to strengthen our balance sheet and deliver operating leverage. As you can see, on the left, the U.S had a particularly strong seasonal half, with record volumes up 33.3% year-on-year. This was achieved while maintaining strong credit performance, in line with our strategy to deliver sustainable profitable growth. In Australia, we launched a new product in November, Zip Plus, driving the next horizon of growth and designed for an environment where we may see higher for longer interest rates. In delivering on operational excellence, we took further actions to strengthen and simplify our balance sheet with a new $150 million 4-year corporate debt facility. We also saw continued deleveraging of the balance sheet, with this convertible notes reducing from a total of 340.2 million in June to 68.8 million at 31 December. Finally, we took actions to simplify our shareholder register completing a small shareholding sale facility, which will deliver administrative cost savings to Zip. The collective impact of these actions can be seen on the next slide, which captures the significant improvement in our financial performance. 12 months ago we reported a loss of $33 million. Today's result of positive cash EBITDA of $30.8 million reflects disciplined execution of our simplified strategy and reinforces our position as a self sustaining business. Turning now to Slide 7. Zip is committed to delivering sustainable outcomes for all its stakeholders. For our customers, we remain committed to responsible lending, advocating fit-for-purpose regulation with strong consumer safeguards, like Zip add [ph] in place, and supporting customers to develop financially responsible behavior, such as [indiscernible] way forward. For our financial education modules, we provide U.S customers through our apps. Zip remained focused on continuous improvements to our cybersecurity resilience, and the protection of customer privacy and data. And during the half, we have lifted our policies and controls to align with the latest International Information Security Standards. We're committed to driving gender balance at all levels of the company. Female representation is currently 43% of our total workforce, with 60% female representation on our Board. Finally, we continued our commitment to being climate neutral, and progress our work on climate related disclosures. We measured and disclosed our Scope 1, 2 and 3 greenhouse gas emissions, and invested in carbon offsetting initiatives to neutralize our emissions as we've done for the past 3 years. Before I step into the detailed performance of each regions, Slide 9 is a reminder of the important and unique role each of our core market polls in the longer term opportunity for Zip. As we continue our focus on driving sustainable profitability, in ANZ, we will leverage our position as a profitable at scale business with significant market share in unsecured consumer finance solutions. We're continuing to focus on product innovation that will drive the next phase of growth in Australia. This will include new capital light products that broaden our financial services offerings, increase our engagement with customers and deliver new revenue streams. In the U.S., having reached cash EBITDA profitability, we're well-positioned to drive incremental profitable growth and scale, while we continue to innovate for our customers and merchants. Onto Slide 10, to discuss the performance of the Americas business. [Indiscernible] (725) earlier this month in the U.S., I was reminded of the sheer size of the $11 trillion payments opportunity, and how early the point of sale credit journey is in the U.S., which is still below 2% of the total payments, and which Zip is well-positioned to capture. There's a tremendous opportunity -- growth opportunity across both online and in-store for Zip's products. With more America wanting to budget in a way that is inclusive and flexible, Zip is playing a greater role in providing short-term unsecured credit to the other 100 billion adult Americans underserved by the traditional finance industry. With a firm focus on strategy execution, the Americas business generated strong positive cash EBITDA in the first 6 months of FY '24, demonstrating the potential of this market. Record top line growth is $3.1 billion in transaction volumes, and $214.7 million in revenue was generated during a particularly strong seasonal uplift during the half. This was driven by increased customer engagement through higher margin channels such as the app and install. As reflected in the chart, TTV and transactions per active customer were up 36.2% and 30%, respectively, well ahead of FY '23 levels on an annualized basis. While customer numbers declined slightly versus the first half of '23, we've seen good momentum in the customer base with MTUs up 10% on average versus the prior corresponding period. Our product strategy is progressing very well with high engagement through our app. We're demonstrating product market fit with our physical cards, which is continuing to drive incremental volume and engagement. We've continued to add cardholders who are now generating over 30% of install volumes, up 311% year-on-year. And we've outperformed relative to the macro environment, with this volume growth at 33% highlighting the strength of our product offering. Turning now to Slide 11. This slide covers U.S credit performance in more detail and shows that as volume growth has accelerated, we've successfully maintained bad debt performance below our target levels. This reinforces the capabilities of our sophisticated credit positioning platform that enables us to provide appropriate credit to American underserved customers and respond quickly to changing market conditions throughout the credit cycle. Our focus on credit performance, so Zip maintained loss levels at or below 1.4% of cohort TTV as we scale new product features to drive responsible repayment behavior. These included features such as enabling self service, the payment date changes, flexible installments and gamified repayments. We've continued to strengthen our proprietary credit positioning capabilities with cash flow underwriting, and new machine learning models for returning customers, which will provide ongoing support to business as we scale further. Turning now to ANZ on Slide 12. The ANZ business continues to deliver very strong results. Revenue was up 23% year-on-year, with revenue margins expanding 320 basis points to 11%, reinforcing the strengths and benefits of our two sided business model. While TTV and customer growth was hampered by deliberate adjustments to our credit risk setting, we delivered a solid cash EBITDA result as revenue growth more than offset the significant increase in funding costs over the period. With 2.3 million active customers and over 10 years of operating data, we have a deep understanding of our customer needs. In November, we launched a new product in Australia Zip Plus to an existing group of Zip customers, providing access to greater spending power and financial flexibility. Zip Plus has been designed for an environment where we may see higher-for-longer interest rates, and is expected to drive TTV and margin growth over time. While it's early days, customer engagement has been strong with 93% of customers liking or loving the new product, and recent transactions to MTU has been doubled, that's for Zip Pay customers. During the half, we also launched with a number of new merchants in targeted verticals, including [indiscernible] and bolstering our presence in health care with HBF dental. Verticals where we continue to see ongoing consumer spending despite a softer retail environment. Our strong market position in the travel vertical is performing well, and our differentiated Zip Money product positions our strong [indiscernible] vertical. Moving to Slide 13, for more detail on the performance of the Australian loan book [ph]. With our account base product construct in Australia, and well over $2 billion in receivables return to metrics on the loan book is the best way to think about the performance of the business and the significant future [indiscernible] The chart on the left hand side shows the return on the loan book or excess spread, similar to a net interest margin measure. Highlights from the Australian portfolio with the improvement in yield to 17.5%, up 338 basis points over the last 12 months and the increase in excess spread. Excess spread was up 106 basis points to 6.2% despite a $27 million increase in funding costs versus the first half '23, demonstrating the resilience of Zip's business model in a rising interest rate environment. The right hand side provides further detail on our credit performance. The chart shows an improvement in [indiscernible] we saw in the second half of '23 as a result of the softening in the broader consumer credit market. As we've consistently demonstrated, we have a proven ability to manage credit outcomes through different external cycles. Our product construct and capital recycling provides Zip with a unique advantage and the ability to respond quickly and adjust risk settings as needed. Actions such as tightened lending criteria and reduced exposure to higher risk customer cohorts have driven an improvement in credit quality and loss performance, which you can see particularly as we exited the first half of '24 and we expect net bad debts to continue to trend down during the second half. I'll hand over now to Gordon to cover Zip's financial performance.

Gordon Bell: Thanks, Cynthia. Moving to the income statement on Slide 15. As highlighted earlier in the presentation, Zip achieved an outstanding positive cash EBITDA results of $30.8 billion. I'll focus my comments on the overall P&L and provide detail on specific line items shortly. For the half, Zip delivered a statutory net profit after tax of $73 million. The main movements on the rest of the P&L include movements on noncash items. Firstly, a decrease in effective interest on convertible notes due to the reduction in face value outstanding, as Zip undertook liability management activities and following [indiscernible] conversions during the period. Secondly, the provision for expected credit losses has fallen to 4.9% of receivables compared to 5.5% at the end of last year, primarily as a result of the improved performance of our Australian receivables portfolio offset by an increased macro overlay. And finally, the corporate and one-off adjustments line includes the impact of a $139.7 million gain on Zip's senior convertible notes post the consent solicitation process, which, although announced in June 2023, was completed in July 2023. Slide 16 covers unit economics, showing strong results across the board. And Slide 17 provides a chart illustrating the key movements in cash NTM. Turning to Slide 17. This shows the very strong improvement we delivered in margins despite the rising interest rate environment. The 130 basis point improvement in revenue margin was the main contributor to NTM expansion, driven by the benefits of Zip's two-sided revenue model and growth in higher margin products. This increase more than offset the 50 basis point increase in interest expense. Net bad debts remained stable at 1.9% of TTV, reflecting ongoing discipline with credit settings and portfolio management in both core markets. The resulting 90 basis point increase in our cash transaction margin is a very strong result in the current environment. Onto Slide 18, the cash OpEx. Overall cash OpEx was down 4.4% on the first half '23 levels, reflecting continued discipline to manage costs across the group and deliver operating leverage as the business scales. Salaries and employment-related costs declined 12.9%, reflecting actions taken in FY '23 streamline our operations and cost base. Marketing costs also declined 18% year-on-year due to lower merchant commitments, particularly in the U.S. The movement in IT costs reflected proactive actions taken to review and rationalize our supplier costs. And finally other operating costs increased due to higher professional service fees and costs relating to corporate debt facilities when compared to prior periods. Turning to Slide 19 and the balance sheet. I'll cover our cash position in a little more detail on the following slide. Starting with receivables, on Slide 19, the growth which is reported net of unearned income and allowance for bad debts, reflects revenue growth primarily in the Americas business. The increase in trade and other payables was driven by an increase in merchant payables as a result of higher transaction volumes, particularly in the U.S and the increased pre-funding by our partners to cover trading days prior to 31st December. The movement in borrowing includes an increase in the corporate loan balance from the new $150 million corporate debt facility we executed and put in place in December 2023. This was offset by reduction in convertible notes, which is shown in the other liabilities line at the outstanding face value of these convertible notes reduced from 340.2 million at 30 June 2023 to 68.8 million at 31 December 2023. If I move to Slide 20, that shows the walk from our reported to available cash position. As you can see on the left hand side, on 31 December, Zip had $303.8 million of cash. After [indiscernible] cash held at balance state that was unavailable and including cash that may be withdrawn from our funding vehicles, Zip has what we deem 81.3 million in available cash and liquidity as at 31 December 2023. On the right hand side chart, you can see the improvement in our available cash position. And this is driven by both operating and non-operating cash flows. Pleasingly, operating cash flows comprising cash EBITDA, CapEx, working capital and funding requirements contributed a positive $4 million of inflows. This was driven by the Group's stronger operating results, offsetting a substantially higher funding requirement at this time of year for seasonal peak volumes. Non-operating movements included additional cash and liquidity from Zip's corporate facility, the release of restricted cash from funding facilities and the repayment of $10.8 million in principal and interest for the CBI convertible notes. Collectively these actions delivered a $24 million improvement in our available cash balance since June, further strengthening our balance sheet as at 31 December 2023. If I move to funding update, now on Slide 21. In line with our focus on operational excellence, we made great progress on our funding facilities during the period. This funding facilities are made up of two distinct components. The first are the asset backed components, which funds consumer receivables in warehouse facilities and in public term deals. The second component is the corporate debt component, which supports working capital and this has made with our corporate debt facility and our convertible notes. In December, as Cynthia highlighted, we strengthened and simplified our balance sheet with a new $150 million corporate debt facility. And this was used to repay a maturing facility fund the cash component of the incentivized conversion of the remaining 40 million CBI notes and to provide additional liquidity for growth. On receivables funding, we are well placed to support our strategic growth initiatives. In Australia during the period, we completed a $300 million [indiscernible] with the senior tranche rated AAA and refinancing, we also refinanced one of Zip's receivable warehouses. In the U.S., we refinanced our $225 million facility in December, with a 3-year term to December 2026. Across Australia and the U.S., we have ample funding headroom to support receivables growth, currently standing at 237 Australian dollars headroom in Australia, and US$D78 million headroom in the U.S. Finally, and pleasingly our years of that progress is evidence of the strong support we're seeing from existing and new investors. And we are well progressed on upcoming refinancing and new funding transactions. I'm confident we have the sufficient capacity available to fund receivables growth in the second half and beyond. If I move to Slide 22, as Cynthia mentioned, we've delivered a significant reduction in Zip's convertible note funding as a result of actions taken to deleverage our balance sheet. The combined impact of the consent solicitation process and the subsequent conversion of Zip's senior convertible notes as well as the incentivize conversion of the CBI convertible notes collective reduced Zip's convertible notes outstanding face value from 340.2 million to 68.8 million during the first half. In addition to this, since the end of the first half, we've seen a further conversion, reducing the balance again to 34.6 million as of last Friday the 23rd of February and this delivers approximately $5 million of interest cost savings to us on an annualized basis. Now I'll hand back to Cynthia to make some comments on our strategy, full year '24 priorities and our outlook.

Cynthia Scott: Thanks, Gordon. Moving Slide 24, which is a reminder of our FY '24 strategic priorities that we set out at the beginning of the financial year. They aligned with our regional capabilities and competitive position and we remain committed to these priorities in the second half of FY '24. Firstly, we'll maintain our focus on driving profitable growth in our two core markets through customer engagement initiatives, further penetration of targeted verticals, and strong credit performance outcomes. Secondly, we'll continue to unlock new customer and merchant and market segments as we scale with Zip Plus offering in Australia. In the U.S., we will scale initiatives such as cash flow underwriting, and progress testing of Pay-in-8, providing customers with new ways to pay and budget responsibly. Finally, we will continue to invest in our processes, platforms and systems to support further scale and deliver operating leverage as we continue to grow. Turning now to the outlook on Slide 25. The medium term targets we presented at the FY '23 results remain unchanged. You'll see that in the middle column we've updated our comments for expected FY '24 outcomes, reflecting the year-to-date achievement, our expectations for the second half and external conditions. 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. For FY '24, we expect our results to be at the upper end of this target range. We continue to target cost of sales as a percentage of TTV of between 5% and 6%, and cash NTM for FY '24 is expected to be around the midpoint of our target range of 3% to 4%. On OpEx, we expect to benefit from the actions we took in FY '23, and we'll continue to exercise a disciplined approach as we scale. We remain on target for the dollar value of cash OpEx to be no greater than FY '23 levels. On cash EBITDA, we expect to deliver 1% to 2% of TTV in the medium term, which is unchanged from prior guidance. As we approach this range in FY '24, our earnings over the full year will be weighted towards our first half results to $30.8 million, which includes a very strong seasonal performance delivered by the U.S business in the second quarter. Turning now to the final slide. So I'd like to make some closing remarks about how Zip is positioned for the second half of '24 and beyond. Zip is absolutely delivered on becoming a stronger, simplified and profitable digital consumer finance company. And we remain committed to the three strategic pillars we've prioritized for FY '24; profitable growth, product innovation, and operational excellence. Zip is very well-positioned to capitalize on the near and medium term opportunities we see in our core markets of ANZ and the Americas. Our strong momentum has continued into the second half, and we have the right settings, platforms and business models to drive continued profitable growth and long-term value for our stakeholders. On behalf of the group executive team, I would like to thank the entire Zip team for their focus and execution in the first half of '24, and to our customers, merchants, partners and shareholders for their ongoing support. 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 John Marrin with CLSA. Please go ahead.

John Marrin: Hi, Cynthia, Gordon, great job on delivering everything you said you would, Peter, I think we could take that back as far as 24 months ago. So back when things are looking pretty tough, but some kudos from me for riding the ship, guys. I just like to hear some more about the opportunity in the U.S. It's pretty clear that you've now earned the right to grow stronger access to funding. And just hoping you could discuss what you're looking at in terms of the composition of that growth in the U.S and understanding it's about MTU growth and engagement. But maybe if you could just highlight the levers that your are pulling on to drive each? And then maybe also discuss any updates you have on the merchant acquisition strategy and shifting dynamics there on pricing.

Cynthia Scott: Yes, absolutely, we'll do. Thanks, John. So I'll just make some comments and then I might pass to Larry, who's also on the call just to give some added perspectives as well. So just in terms of the composition of U.S. growth, you are right, the bulk of the growth that we've seen in the first half has been from existing customers. And we do expect that that will continue. So existing customers are performing well and we're seeing those customers transacting more often in our higher margin channels, as we discussed in the comments. But we're also seeing a higher level of engagement from those existing customers and higher average order value. So that's all very positive. And we anticipate that that will continue. And that being said, we are also anticipating that customer growth will reestablish in the U.S market. So through FY '23, we really did [indiscernible] growth in customer numbers in the U.S. and we're starting to see that open up again. And as you say, John, a big part of that is going to be driven by merchant growth. And we do have a focus and Larry, in particular, is very focused on bringing new merchants onto the platform in the U.S and given the earlier stage of the U.S market, that customer growth will be driven by those new merchants coming onto the platform and we'll be looking forward to announcing some great new merchant names over the second half to you. And as part of that we will be seeing an expansion into new verticals in the U.S. So a lot of the merchants that are on our platform at the moment in the U.S are more typically from fashion, retail marketplaces, et cetera. But as we've seen, BestBuy come onto the platform who were exclusive, we are moving into electronics, white goods, you'll start to see them getting into some of those other verticals where the products can be used and where the average order value is particularly a bit higher. So I might -- sorry, Larry, that if you’re on the line, Larry if you want to make any additional comments. You can unmute Larry maybe or perhaps not. So, John, I'm not sure -- we don't think we have Larry able to be unmuted, but hopefully that gives you a enough and sufficient answer on merchants U.S growth.

Operator: Thank you. Your next question comes from Siraj Ahmed with Citigroup. Please go ahead.

Siraj Ahmed: Thanks. I will ask two questions. Just first one, just to clarify, in terms of U.S momentum, clearly, in the chart is showing that, its accelerating in December, should we think about it still picking up on the line charts going up? Just -- can you just clarify on that.

Cynthia Scott: Yes. Thanks, Siraj. Remember, December like that quarter is absolutely our seasonal peak. So we've been indicating that 20% to 25% growth in the U.S and that's how you should think about the U.S growth over the medium term.

Siraj Ahmed: Yes, so just to clarify, so 2025 second half are you seeing a pretty meaningful deceleration or do you think it's possible …?

Cynthia Scott: No, it's not a deceleration, we're just saying that the strongest period of growth is typically that October, November, December period in the U.S.

Siraj Ahmed: Okay, got it. Got it. Okay. But you had a positive start to the second half?

Cynthia Scott: Just clarifying that you had a good start to the second half in the U.S with things improving.

Cynthia Scott: Look, as we've indicated across the portfolio the strong momentum that we saw in the first half is continuing in the second half, yes. But we've been [indiscernible] obviously we have our seasonal pay in that future.

Siraj Ahmed: Got it. In terms of the excess spread in ANZ, how should we think about that in the second half '24? Because I know there's a few moving parts here. I think revenue you'll be expecting to go up, but you have some funding renewal. So can you just talk us through how you think of the excess spread?

Cynthia Scott: Yes, absolutely. So in terms of the two components, yes, as we've indicated, revenue margin should continue to increase in ANZ and that's particularly as a result of the actions that we took in '23, that are now flowing through for the full year in the portfolio. But also as Zip Plus continues to come online, that is providing that revenue margin accretion that we've indicated. So we are starting to see the early signs of that, which is very encouraging. And on the funding side, there's two components to it. Obviously, there's the absolute level of interest rates and while interest rates have obviously gone up over the last 12 to 24 months. That means as we roll off old, no issuance and old refinancing or financing, that absolute level of interest rates is likely to be higher now than it was when we put those old -- older facilities in place. But then the other dynamic is the credit spread and pleasingly we are beginning to see the credit markets responding to the transformation of Zip's financial performance. And we're beginning to see improved interest in investing in this credit and that's resulting in great [indiscernible] and those spread coming down.

Gordon Bell: The other input, Siraj will be continued improvement in credit performance. Obviously, we declared our losses were breaking in early Q2 and early stage [indiscernible] are trending down and losses will continue to follow that trend.

Siraj Ahmed: So all that particulars, can I confirm that you would expect a better excess spread in the second half?

Gordon Bell: That’s the objective.

Siraj Ahmed: All right, thanks.

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

John Marrin: Oh, hey, guys. Sorry, I didn't really realize I'd be so quick in the queue again. Just on the pay-in product, can you just discuss the motivation there? Like, what you're thinking about this product, how it might be rolled out to the customer base and what the key KPIs are relative to the pay-in-4?

Cynthia Scott: Yes, sure. And, John, I think we have got Larry on the line now. And so maybe Larry can give a bit more of a granular answer, but the sort of strategic rationale behind the pay-in-8 is that it gives our customers the ability to make your largest -- larger scale purchases with a higher average order value that they can then obviously spread over a longer period of time, and that our customers are responding very well to that ability to spread their expenses and to budget responsibly over a longer period of time. It also enables us to unlock different verticals, as I referred to earlier. So that's sort of the strategic rationale to keep that payment flexibility and control of budgeting put back in the hands of our consumers. But Larry, are you unmuted now? No, all right. We thought you're unmuted but perhaps not. But John hopefully that gives you enough of an indication in relation to the rationale. And I will say that the -- as the U.S team have done a great job building out the technology to enable pay-in-8 which is in early [indiscernible], we've actually built the flexibility to offer pay-in so we can -- over time, we can look at further product refinements in the U.S.

Gordon Bell: It's good point of differentiation and also opens up additional verticals that we might be able to target strategically, John, and obviously we've developed a core competency for credit. So we're certainly well placed to support larger ticket purchases.

John Marrin: Okay, great. And just I know when people hear about underserved populations, I mean, it is a mistake that's pretty common about underserved being also undeserving. I mean, can you just clarify some of that for us and who are these people? Why they -- why are they underserved? Why -- and how are you targeting them and et cetera?

Cynthia Scott: Yes, it's a really good point. And look, this is one thing that really hit [indiscernible] spent time with the team in the U.S earlier this month. There's a 100 million adult Americans who are underserved by traditional financial services providers. And so that to your point, that doesn't mean that they are all lower socio economical that they are all lower FICO scores. And certainly, we are talking about customers who typically have a FICO score of less than 700. However, it's also customers who have a thin file or no file, it's also customers who might have just relocated to the U.S or emigrated to the U.S and don't have a credit history. And so these customers absolutely have an ability to pay, they just don't have access to traditional credit products or traditional financial services in the U.S. So just -- John, just on that -- in relation to our strategy, as you've seen, we've talked about some of the financial inclusion and financial education work that we've been doing in the U.S., we've also talked about the gamification of repayments. So our strategy is really to look for those customers, where throughout credit decisioning, we can identify that we bring them onto the platform, and we have what we refer to as a loan growth strategy. We bring them on, we help them responsibly budget and repay, and then on the back of that, a proven credit history, we will then look at giving them moderate credit limit increases.

John Marrin: Okay, that's great. Thanks. Thanks, guys.

Operator: Your next question comes from Jonathan Higgins with unified Capital Partners. Please go ahead.

Jonathon Higgins: Hey, team, great set of results. Appreciate you taking the time to answer some questions today. My first one is just more broadly just asking you a question following on from Siraj with regards to the international environment. We've seen some of the comp codes, the larger comp codes that you have sort of doing a number of different things on product contract fees, subscription, and we're seeing sort of rising margins like sector wise, can you talk more broadly as to where the sector currently sits in regards to that how you see that playing out with your product in the U.S?

Cynthia Scott: Yes, sure. Thanks, Jonathon. I think you're talking specifically about the U.S market and the competitive landscape?

Jonathon Higgins: Yes, I suspect so. I mean, I think it's probably best to focus on that one, just because I think that's where most of the International guys have got a lot of their volumes. Thank you.

Cynthia Scott: Yes. So just a couple of comments. We've got a very rational competitive environment in the U.S. So given the scale of opportunity for the industry in the sector to grow, yes, we still are seeing very rational behavior. Some of the things that you call out at, John [indiscernible], our construct about products in the U.S and ANZ is that we do have the unique two-sided revenue model. And so we have installment fees, and we have merchant service fees. And so yes, we have seen [indiscernible] similar sort of structure to end up also with a two-sided revenue model. But it's interesting and others are innovating in and around the product set. Obviously, we're doing the same. And we've had very good success from the product innovation that we've undertaken in the U.S in terms of physical card and in terms of gamifying repayments, variable, first installments, et cetera. And so I think it's just an indication that there is room for everyone to grow in the U.S market, because there's really strong demand from customers and from merchants to have these sort of flexible consumer finance solutions [indiscernible] checkout.

Jonathon Higgins: Appreciate the context. Just a couple more for me. When a business is undergoing a turnaround, sometimes hard to sort of use seasonality, particularly when you're putting through changes in yields on the product and sort of throttling TTV in one market and sort of releasing in another market. My sort of back of the envelope normally the U.S is almost like a 50-50 market when you've got growth coming through in that market and usually there's a bit of a slower second half in the second half in ANZ. But can you just remind us just is that sort of the expectation you'd think playing out noting there's an exit in the U.S that was pretty strong, and it's been sort of going through the half?

Cynthia Scott: Yes, I mean, you are right, Jonathan. There has been a transformation in the business across both the ANZ and the U.S. But it is typically the case that we do have a stronger first half and second half, and that was the case in '23. So that's certainly our expectation. So '24 there is momentum in the business, absolutely. But it is typical that our peak seasonal period is in the first half, not in the second half. So we expect the same for '24.

Jonathon Higgins: Appreciate that. Last one for me just on the seasonality approach with the margins. When I was looking at your Australia and New Zealand performance, you can see sort of the excess spread opened up in December, understanding that you did make some product changes, I think in November, December, and usually there's some seasonality to customer fees in both ANZ and also to a lesser extent in the USA. Could you comment on what sort of seasonality you'd expect in terms of revenue margins in Q3?

Gordon Bell: Yes, I think the revenue margins probably less based on seasonality. John, our small combination of initiatives that we've undertaken, academy over the previous 12 months, obviously, a huge contributor to the improvement in December was the improvement to credit losses. And as we had indicated, they were likely to peak in October and November, and it's running according to management expectations that they will continue to improve as well. So there's marginal uptake through three seasonality, I guess, with regards to increased transaction volume, but obviously, as a percentage of receivables, margin improvements sort of don't significantly due to seasonality.

Jonathon Higgins: Appreciate the context. Cracking results, guys, thank you.

Cynthia Scott: Thanks, Jonathon.

Operator: [Operator Instructions] The next question comes from Siraj Ahmed with Citigroup. Please go ahead.

Siraj Ahmed: Just a quick follow-up. In terms of the funding facilities, I think you have one coming up in April, any intended share on how you're tracking on that? And also the margin that you're discussing, I think you sort of mentioned, it's a bit better, but the same clarity on that will be helpful. Thank you.

Gordon Bell: Yes, Siraj, Gordon. We're well advanced on the refinancing for [indiscernible], which has a rollover date of the 10th of March. And we expect to be disclosing that in the very near future. In terms of margins, pleasingly, we've seen a significant improvement to what we saw in the second half of calendar year '23. And that's true to both existing and new investors looking to be a part of that trade. So we'll have more details on that shortly, but very well advanced.

Siraj Ahmed: Thanks.

Operator: The next question comes from Roger Samuel with Jefferies Australia. Please go ahead.

Roger Samuel: Well, good morning, guys. Very good result. Just one question on ANZ that appreciate that your revenue margin should improve in the second half. But what about the TTV? Do you expect the TTV to grow over second half '23? Or is it continuing to decline in the second half?

Gordon Bell: Yes, hi, Roger. So I think for the remainder of FY '24, we do expect TTV to be tempered. We have obviously adjusted some portfolio settings over the previous 6 months, which is delivered, there's a significant improvement to performance and the reset of margins and take the business for high for longer interest rates. That's where we sort of expect TTV to significantly start to [indiscernible] in FY '25. Off the back of that reset and further penetration of new products like Zip Plus, so reasonably tempered for the remainder of this financial year, but accelerating again quite strong in FY '25, not dissimilar to how the U.S has sort of reset their business probably on a [indiscernible] 6 to 12 months head of IND.

Roger Samuel: Okay, got it. Thank you.

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

Cynthia Scott: Thanks very much. And I'll just finish by saying thanks very much, everyone for joining us today. We look forward to catching up with many of you over the next couple of weeks as we head out on the road. And if you have any further questions, then I'm probably the first instance it's best to send them through to Vivian so thanks again for joining us.

Operator: That does conclude our conference for today. Thank you for participating You may now disconnect.

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