Zip Co Limited (ZIP) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Zip Co Limited HY '25 results briefing. [Operator Instructions] I would now like to hand the conference over to Director of Investor Relations and Sustainability, Vivienne Lee. Please go ahead.

Thanks, operator. Good morning, and thank you for joining us for Zip's first half FY '25 results. To open, I'd like to begin by acknowledging the traditional owners of the land on which we meet today, the Gadigal of the Eora Nation, and pay our respects to elders, past and present. This conference call is also being webcast and an archive will be available on Zip's website. I'm joined today by Zip's Group CEO, Cynthia Scott; and Group CFO, Gordon Bell, who will present today's results. We also have U.S. CEO, Joe Heck and ANZ CEO, Peter Gray, who will join us for Q&A. We will start this call with some prepared remarks, and then open up to questions. With that, I'll now hand over the call to our Group CEO, Cynthia Scott.

Thanks, Vivienne. Good morning, everyone, and welcome to Zip's results presentation for the first half of financial year 2025. I'm very pleased to present an outstanding set of results for the half with record financial performance, a continued focus on exceptional experiences for our customers, and a strengthened balance sheet to support future growth. Our U.S. business delivered excellent results, and our ANZ business returned to growth. This is well positioned to capitalize on the significant growth opportunity in our 2 core markets as we continue to drive scale and deliver material operating leverage. This continues to be a strong and sustainably profitable business, with unique competitive advantages as set out on Slide 4. And I'll touch on each of these in more detail, as we go through the presentation. Our key financial highlights, are set out on Slides 5 and 6. In the first 6 months of the year we delivered $6.2 billion in transaction volume, up 24% year-on-year from over 45 million transactions. This was driven by a particularly strong performance in U.S. volume and increased customer engagement across both markets. Total income was up nearly 20% to $514 million. Our revenue margin of 8.2% remains within our 2-year target range. The year-on-year movement reflects the increased contribution from the U.S., now representing 70% of TTV. Active customer numbers were up 1.5% to 6.3 million with the U.S. recording customer growth in both Q1 and Q2. And we continue to add new merchants, with almost 82,000 now on our platform, reflecting strong demand to have Zip available for their customers. Turning to Slide 6. Zip continues to demonstrate strong unit economics. Cash gross profit was up 30.1% and credit losses improved 22 basis points to 1.6% of TTV, reflecting strong credit performance in both markets. Group cash EBTDA of $67 million was up 117%, versus the prior corresponding period, reinforcing Zip's ability to deliver significant operating leverage as the business scales. Turning to Slide 7, and how we've delivered against our FY '25 strategy. At the beginning of the financial year, we set out 3 clear priorities; growth and engagement, product innovation, and operational excellence. Starting on the left, we saw increased customer engagement in both markets reflecting investment in brand awareness, and the rollout of Zip Plus in Australia. This was achieved while maintaining strong credit performance in line with our strategy to deliver sustainable, profitable growth. We continue to innovate for our customers including through the rollout of our Pay-in-8 products in the U.S. and the development of a new personal loan product in Australia. In delivering on operational excellence, we took further actions to strengthen and simplify our balance sheet, repaying all corporate debt in July. To support growth in both markets, we upsized our U.S. receivables financing facility to USD 300 million and refinanced $1.1 billion of funding in Australia. The collective impact of these actions can be seen on the next slide, with a record first half cash EBTDA result of $67 million. This was driven by outstanding growth in our U.S. business of 80% from the first half of financial year 2024. Now turning to Slide 9. At our FY '24 results, we introduced operating margin to our target ranges. Pleasingly, operating margin increased by 584 basis points to 13%, underpinned by disciplined investment in our cost base to ensure we capitalize on our growth opportunities, while delivering improved returns at the cash earnings line. Turning now to Slide 10. Zip's business model is built on being a responsible lender, and we've delivered solid progress against our focus areas of financial inclusion and well-being, employee engagement and environmental sustainability. A key highlight for the half was achieving our carbon neutral status for the fourth consecutive year. Before I step through the detailed performance of each region, Slide 12 is a reminder of Zip's unique business model. Acquiring both customers and merchants onto our platform is fundamental to our 2-sided business model. For customers, we drive engagement through repeat usage and greater frequency by providing fair, flexible, and transparent payment solutions that can be used for both discretionary and everyday spend online and in-store, which increases customer lifetime value. As our business continues to scale, we unlock efficiencies, generating material operating leverage and driving sustainable profitable growth. Slide 13, provides an overview of the unique role in both regions playing -- driving this longer-term opportunity. The U.S. market continues to present significant opportunity, with an addressable BNPL market of USD 130 billion. Displaying a greater role in providing short-term unsecured credit solutions to some of the 100 million everyday Americans underserved by traditional financial services. Our U.S. business continues to outperform the market, with TTV growth of 40.3% versus the weighted average annualized growth of our peer's comparable products of 30% to 32%. In ANZ, we're leveraging our market leading capabilities to drive product innovation including new solutions that broaden our financial services offering, increase engagement with our customers, and drive receivables growth. Onto Slide 14, to go through our U.S. performance in more detail. The 80% growth in cash earnings in our U.S. business, was driven by TTV and revenue growth of 40.3% and 42.3% respectively, underpinned by an exceptional holiday period and deeper customer engagement. Active customer growth up 6.2% year-on-year, was supported by our investment in direct-to-consumer marketing and brand awareness initiatives to drive customer acquisition. We continue to add new merchants in targeted verticals, including GameStop, Take 5 Oil Change, and Major League Baseball Ticketing Shop. We remain focused on unlocking the significant in-store opportunity in the U.S., which represents 84% of the total payments market. In the half, we delivered a 64% increase in in-store volumes, which now represent 22% of TTV, up from circa 12% 2 years ago, benefiting from increased adoption of the physical card by our customers. The U.S. business continued to optimize and scale its Pay-in-8 installment solution, which is now available to all eligible customers through the app. Pay-in-8 is the next offering of our broader Pay-in-Z platform, which will provide further flexible and personalized installment products for our customers. Turning now to Slide 15. The U.S. continues to present a significant growth opportunity to Zip, based on the sheer size and the early stage of the market maturity, with BNPL representing 5% of e-commerce spend and less than 2% of total payments, well below adoption rates in more established markets. Slide 16 provides some insights on the U.S. customer and our differentiated capabilities. Our customers are everyday American, a group of over 100 million Americans who have difficulty accessing or face higher costs to access traditional credit products. Our customers are more likely to use short-term unsecured credit products such as Zip, for flexibility and help them manage their cash flow. Over 90% of our customers either work full time, part time, or are self-employed and over 98% of all transactions are repaid in full. We have proven expertise in underwriting with more than 7 years of customer and transaction data, and the ability to swiftly adjust our risk settings to balance top line growth with loss rates outperforming traditional credit products. Finally, in the U.S., merchants are increasingly offering multiple flexible payment options at checkout, recognizing the incremental benefits different providers offer to different customers. Slide 17, shows the increased customer engagement we've achieved over time. As demonstrated by the chart, transactions and TTV per active customer are up 44% and 49% respectively over the last 18 months. This growth has largely been driven by existing customers. Our data shows that once a customer joins Zip, they spend more per month over time. With our data and underwriting capabilities enabling us to optimize credit lines, the most recent July 2024 cohort experienced 26% increase in average spend over the 6 months to December. We have a clear strategy to drive future growth, supported by an engaged customer base with monthly transacting users 33% higher than 2 years ago. Slide 18 covers U.S. credit performance on a cohort basis. Our cohort performance for July to December was commensurate with the growth in new customers, with the U.S. adding 400,000 active customers. As you can see on the chart, Zip continues to deliver significant growth while maintaining loss rates within our target range of 1.5% to 2% of TTV, reinforcing the strength and agility of our credit decisioning platform. Pleasingly, early indicators for January are well within our target range, with expected losses at 1.6% of cohort TTV. Finally on Slide 19, you can see that the U.S. has delivered a nearly $100 million turnaround in earnings over the last 2 years, driven by strong margin expansion, cost discipline, and scale benefits. Turning to the ANZ business now on Slide 20. 18 months ago, management took deliberate actions to change strategic settings to optimize margins in response to the external environment. After delivering improved margins and positioning the business for a higher for longer interest rate environment, the ANZ business has shifted its focus to initiatives to drive profitable growth, improve customer engagement, and new product offerings. As a result of these activities in the first half of FY '25, we've seen increased customer engagement and positive improvements to margin. The ANZ business is well placed to accelerate TTV and receivables growth at healthy margins in FY '25 and beyond. Moving to Slide 21. The ANZ business gained momentum through the half with TTV returning to year-on-year growth in the second quarter driven by increased transaction frequency. This momentum continued as we exited the half with Australian TTV for December up 10% year-on-year, and transactions per MTU are now at the highest rate in the history of the company, as more Australians use our products to manage their household finances. Innovation is at the core of this business, and we've accelerated the pace of innovation, growing from 3 to 5 products in ANZ in the past 18 months. During the half, we rolled out Zip Plus to new Zip customers, and at higher limits for eligible customers of up to $8,000. And we're seeing good momentum with the monthly acquisition of Zip Plus customers now more than double the acquisition prior to external launch and Zip Plus receivables are up 24% over the last 3 months. In January, we launched our Zip Personal Loan, a next generation lending product that rewards customers for on time repayment. We'll provide more detail on our new personal loan product construct and its performance later in the year. Turning to Slide 22, for more detail on the performance of the Australian loan book. With our account-based product construct in Australia, yield on the loan book and excess spread is the best way to think about the performance of the business. Increased yield, strong portfolio management, and ongoing initiatives to tighten funding costs delivered a 70 basis point expansion in excess spread from the Australian book. As you can see on the chart, arrears rates and net bad debts continued to improve in response to management actions and risk settings following the seasonal peak. Turning now to Slide 23. Initiatives focused on yield expansion and margin have increased revenues per active customer. In line with the usual movements from seasonality, revenue from peak volumes in the second quarter will be realized over the second half of the financial year. With the settings that we have in place and ongoing initiatives to increase growth from new higher margin products, the business is well placed to drive profitable growth. Turning to Slide 24. This slide is a reminder of the ANZ strategic assets that Zip has established in the region. These strategic assets provide strong foundations for our strategy, to become a next generation financial services provider with a highly engaged customer base of approximately 10% of the Australian adult population, products in market that are well suited to the current operating environment, and a business that's generating healthy excess spread. The ANZ business is strongly positioned to deliver on its strategy. Now as announced with our results this morning, having successfully completed the reset of the ANZ business, ANZ CEO and Co-Founder Peter Gray, will be moving to a newly created leadership role at Zip, Head of Strategic Growth. His role will focus on accelerating Zip's growth agenda across both markets, with an initial focus on ANZ. Pete's new role reinforces Zip's commitment to our innovation culture and delivering on our significant growth opportunity in both markets. Following a comprehensive search and succession planning process, I'm very pleased to announce Soraya Alali will join Zip as ANZ's CEO, from 12 May this year. Soraya brings over 20 years experience in the financial services sector, with a focus on driving scalable growth, digital transformation, and enhanced customer experience. I'll now hand over to Gordon, to cover group financial performance.

Thank you, Cynthia. Turning to Slide 26, I'll cover the group's financial performance. As highlighted earlier, Zip achieved a record group cash EBTDA of $67 million for the half, up 117.1% year-on-year. Cash gross profit reached $235.5 million, which was up 30.1% year-on-year. Underpinning these great results was total income of $514 million, up 19.8% from the first half of FY '24, driven by an outstanding U.S. business performance as well as continued portfolio yield expansion and improved excess spread in Australia. I'll cover operating costs in more detail, but at a high level, cash operating costs have increased 10.1% in the first half of FY '24 on a like-for-like basis. For the half, Zip delivered a statutory net profit after tax of $23 million. This is lower than the first half FY '24, due to one-off gains in the prior period relating to the convertible bond restructuring. The appendix shows the breakdown of the corporate one-off adjustments and non-cash items and the reconciliation from cash EBTDA to statutory accounting profit. The main movements relate to movements in credit provisioning, depreciation, and the early extinguishment of the corporate debt facility in July 2024. Moving to Slide 27, which covers our unit economics. Cynthia covered TTV and revenue, which were both superb outcomes for the half. Zip remains focused on improving all aspects of our business. For the half, this translated to improved unit economics and greater operating leverage, which has contributed to a 30.1% increase in cash gross profit. Net bad debts written off as a percentage of TTV of 1.6%. It is the lowest level in the last 2 years, reflecting ongoing discipline with credit settings and portfolio management in both markets. Interest expense as a percentage of TTV was 1.7%, an improvement of 21 basis points year-on-year. Notional interest expense increased as a result of volume growth in U.S. receivables. However, offsetting this was the rate benefit we achieved from margin reduction on our Australian receivables financing. The performance for all aspects of unit economics contributed to the 18 basis points of strengthening in our net cash transaction margin to 3.8%. Moving to cash operating expenses on Slide 28. Cost management remains a priority across the group, as we continue to make measured investments in existing business activities and attractive growth initiatives. Overall cash OpEx was up 10.1% year-on-year on a like-for-like basis. This includes adjusting the first half FY '24 reported number for the portion of the cash-based short-term employee incentives, which were fully accrued for in the second half of 2024 for that full year. When measured as a percentage of underlying volumes, cash OpEx has decreased 34 basis points year-on-year on a like-for-like basis. This reflects Zip's ability to balance measured investment spend and deliver consistent profitable growth. The investments made during the half in projects, people, and information technology will support the business at scale. Our investment was weighted to the U.S. businesses, take advantage of that significant growth opportunity in that market, and to enhance our risk and process capabilities to support sustainable future growth. Across both core markets, we invest in growth marketing to support brand and product awareness. Zip will continue to exercise strong discipline across the group in FY '25, to deliver optimal operating leverage as the business scales. Finally, other operating costs decreased mainly due to the early extinguishment of the corporate debt facility. The next few slides, starting with Slide 29, cover the group's liquidity, funding, and capital management framework. Slide 29 provides the breakdown of our cash position, along with the year-on-year movement in available cash. In the chart on the left-hand side, you can see the breakdown of Zip's $527 million total cash position. After allowing for cash held at balance sheet date that was unavailable and including cash that may be withdrawn from our funding vehicles, Zip had $195.5 million in available cash at 31 December, 2024. It's important to note that we do see typical seasonal volatility over the calendar year-end period, and as a result of the holiday season. We had a January 2025 month end position of $165.9 million. On the right-hand side, you'll see the material improvement in our available cash position was driven by both operating and non-operating cash flows. Pleasingly for Zip, operating cash flows comprised cash EBTDA, CapEx, working capital, and funding requirements, which contributed a positive $59 million of cash inflows. This was driven by the group's outstanding strong operating results, offset by floats working capital, which is required primarily for TTV growth in the U.S. Non-operating cash inflows of $56.1 million, includes the $50 million proceeds from Zip's share purchase plan in July 2024. Collectively, these actions delivered a $115.1 million improvement in our available cash balance since June 30 last year, further strengthening our balance sheet. Moving to Slide 30, which outlines the financing facilities in place, the Zip's receivables, and headroom for future growth. Zip is committed to preserving balance sheet strength to support our existing business and future opportunities. During the half, we completed 6 funding arrangements, which extended our maturity profile and diversified our investor base, and we continue to garner strong support from both existing and new investors. In October last year, we exercised the option to upsize our U.S. funding facility from $225 million to $300 million, which provides capacity and support future growth opportunities in the U.S. In Australia and New Zealand, during September 2024, we successfully established a new $300 million warehouse facility, labeled VFN4 and executed a $350 million rated public issuance labeled Series 2024-2. Both of these financings were used to repay the $663.5 million facility labeled 2021-2. Additionally, we extended 3 of our existing facilities during the half. Across Australia and the U.S., we have sufficient funding headroom to support receivables growth. As of 31 December, 2024, Zip continues to operate with no corporate debt. We will continue to review corporate funding options as the business scales and the needs of the group develop. Zip will continue to develop funding programs through consecutive engagement with existing and expanding investor networks. Refinancing for our 2 maturing facilities this calendar year is well-advanced. And I'm confident, we'll continue to successfully manage our financing arrangements, to support receivables growth in the second half and beyond. Moving to Slide 31. Slide 31 provides an overview of our capital management framework. Our framework aligns with our corporate strategy, and focuses on maximizing shareholder returns. Guided by the principles of this framework, decisions will be thoughtfully considered, to accomplish the balance of building long-term value and delivering maximum shareholder return, whilst preserving a resilient balance sheet. Attractive growth opportunities that enhance our competitive position are explored through a lens on risk, expected returns, and strategic alignment with regular evaluation, to ensure they are delivering the appropriate returns. Consistent with our strategy for FY '25, Zip has prioritized the investment of capital in our existing businesses through the half, and maximizing returns from attractive organic growth opportunities, especially in our U.S. business. We'll continue to evaluate opportunities and deploy capital to drive long-term shareholder value. I'll now hand back to Cynthia, to cover the group's outlook and strategy.

Thanks, Gordon. Moving to Slide 33. During the half, we refreshed our purpose to unlocking financial potential together, to better reflect Zip's strategic priorities and our growth opportunity. Our team is committed to delivering on our purpose, and is aligned on our updated mission to bring exceptional experiences, innovation, and partnership to every financial journey. Turning to Slide 34. Our FY '25 strategic priorities remain the same. In the second half, we will scale Zip Plus and personal loans in Australia, and continue to develop our Pay-in-Z platform in the U.S., and expand our merchant and strategic partnerships. We remain focused on product innovation, with initiatives to accelerate this further in both regions. And we'll maintain a disciplined approach to investment in our cost base, to capitalize on future growth opportunities, and drive operating leverage as the business scales further. Moving to outlook on Slide 35. The 2-year targets we presented at our FY '24 results remain unchanged. Importantly, we're on track for our FY '25 results, to be within target ranges across all metrics on this page, following the strong performance in the first half. For FY '25, revenue margin will reflect an increasing weight of the portfolio from the U.S., as well as initiatives to maintain strong Australian portfolio yields and excess spread. U.S. TTV growth and momentum has continued in January 2025. Cash NTM will reflect a balance of strong top line growth at acceptable credit outcomes, to deliver sustainable profitable margins. On cash OpEx, we expect FY '25 to be circa 10% higher than FY '24 cash OpEx of $306.9 million, and we'll continue to exercise a disciplined approach as we scale. On cash EBTDA as a percentage of TTV, we now expect FY '25, to be at least in line with our first half performance of 1.1%. And finally, we expect to deliver FY '25 cash EBTDA of at least $147 million. In closing, we're excited by the momentum in the business, and the significant growth opportunities in both markets. We remain focused on delivering exceptional experiences for our customers and driving scale and operating leverage. On behalf of the executive team, I'd like to thank our incredible team of Zipsters for everything they've accomplished in the first half, and our shareholders for their ongoing support. That concludes our formal presentation, and we'll now open the call for Q&A.

[Operator Instructions] The first question today comes from Phil Chippindale from Ord Minnett.

Firstly, just circling back, Cynthia, you made a comment about performance in the U.S. business since 1 January. I think your phrase was that the U.S. -- you continue to see growth in the U.S. business. I just wonder if we can just focus in on that. Obviously, your business has been growing really well. I think 39% growth in TTV in Aussie dollar terms in the December quarter. Is it growing at a similar level thus far in the current quarter?

Yes. Thanks Phil, for the question. So what I said -- so the 2 indications that we gave you for January performance, the first 1, as you note, was in relation to U.S. growth. And what I said was that momentum has continued into January. So we continue to see the momentum in the U.S. business from a TTV perspective in January that we saw in the first half. So what that means is that, as we've indicated, we see comparable product growth in the U.S. of between 30% and 32%. Our business, as you've noted, is growing closer to 40%, and we continue to expect that in the second half we will outperform market-to-market price levels of 30% to 32%. The other measure that we gave you an update on was the January performance of losses in the U.S. So we've indicated that that's 1.6% of cohort TTV, well within our target range.

My second question, I just wanted to touch on the Australian business. In terms of the outlook, you've mentioned the piloting of capital-light solutions. Perhaps you can just give us a sense of when you'd be looking to go to market and start to pilot those programs and when we can maybe hear more about it?

Yes, absolutely, Phil. I might ask Pete to make some comments on this as well. But the -- so the 5 products that we've got in market in Australia and New Zealand at the moment, including the 2 that we've recently launched being, Zip Plus now being scaled and Zip Personal Loans just been launched. They are all products that are on our balance sheet. But as we said when we outlined the FY '25 to '27 strategy, we are going to move the Australian business into capital-light solutions, because with the average age of the Zip customer being 39 now in ANZ, and obviously, they're highly engaged and it's nearly 10% of the Australian population, we do see really good opportunities for Zip to offer additional financial services products to that engaged customer base. And going forward, they will largely be capital-light. So I might hand to Pete just to give some comments on some of the work that we've been doing around opportunities and the pilots that we've got underway for FY '26.

Yes, Phil. So yes, Cynthia touched on, obviously, we have a very large strategic asset now in the Australian community in terms of our customer base. So some of these capital-light opportunities will possibly be part of my new [indiscernible] and how to test and learn with some of those exciting opportunities to identify additional growth other than those that Cynthia just touched on. So just in terms of time frame, I think you would expect to see some of those this half, and we'll probably have more to say on the exact approach and go-to-market, sort of confirming some of the outcomes of those tests, and testing and the way we're going to accelerate that opportunity at the full year result for sure. But you'll probably, if you're following closely like some of you do, you'll probably notice some things out in the wild.

The next question comes from Tim Piper from UBS.

Just first one on the cash EBTDA outlook of $147 million for FY '25. Just thinking about the moving parts, you've kind of given us OpEx growth, just back-solving it based on your top-line momentum. Would it be fair to say that you've kind of assumed a higher net transaction margin in the second half than the first half, i.e. higher than 3.8% in the second half? It would sort of imply that in the guidance?

Well, Tim, I'll ask Gordon to give a bit more of a detailed comment, but I will say we give, I think, pretty good guidance on 4 metrics plus the cash EBTDA. So Gordon, do you want to give some comments in relation to cash NTM?

Yes, look, the way we do give updates in terms of where we're sitting at the first half on the outlook ranges. The outlook ranges are, as the name implies, they're outlook ranges for 2 years and we're comfortable to reaffirm those today. We're not going to give outlook numbers for all of them. The primary measure that we gave today being the outlook of no less than $147 million for cash EBTDA, would be the number that I would primarily focus on.

But I mean, in the ANZ business, if we're talking about percentages of TTV, I mean, the Aussie business should uplift in the second half alone, right, just because of that seasonality in revenue to TTV margin percentage?

Yes, so you're right. And that's how the Australian business performs. We see revenue coming through in Q3 and Q4 off the back of the peak volumes in Q2. So you're spot on there. And we have positioned the Australian business for growth and we've seen some pleasing signals in December, as Cynthia outlined.

And just a second one on net bad debts in the ANZ business. You kind of gave us a January update for the U.S. business. Can you give us a bit of a sense on the January trajectory in net bad debts in AU? Is it still seeing that downward trajectory that it's kind of been on over the last 6 to 8 months or so in January?

Look, without giving anything in the materials, what I'd say is there's nothing notable to call out. We're very comfortable with our performance in Australia.

The next question comes from John Marrin from CLSA.

I guess, my first one. I just hope maybe we could just go back through the product announcements in Australia, the product road map, and maybe just hoping to get a refresher on what your longer-term thoughts are in this market. Just working on that consumer and merchant value proposition, especially now the business is on clearly good footing and you're thinking about, are you thinking about customer growth, stuff like that?

Yes. Again, I'll ask Pete to make some comments on this, but you're absolutely right. The attraction of this product for our customers, is the ubiquity that they can be used everywhere, in as many settings, for as many financial needs as possible. And so our customers are using our products for everyday spend, and also for more considered spend. And so the rollout of Zip Plus and now the launch of personal loans is an extension of that. But before I hand to Pete, the one final comment I'll make is that you're right, John, like the business is now being reset for growth, and looking at new customer acquisition as well as increased customer engagement, given our suite of products, is certainly something that the business is focused on. So Pete, do you want to talk about the product road map specifically?

Yes. John. Yes, as we've sort of touched on, we have launched 2 new products in the last 15 months, which has been a pretty significant sort of achievement for the business. If you consider historically, we've largely had 2 products in the previous 10 years. So they're very immature in terms of exercising that opportunity, and we remain very heavily focused on continuing to deliver growth, both new and existing customers, from those 2 products. I think if you sort of caught the commentary in the presentation that once we've gone above the line or to new customers to Zip Plus, we have started to deliver a significantly stronger sort of growth. So we believe with an expanding product set, not only do we have the opportunity to provide further benefit to our existing customers, but also some level of appeal to customers who might not have necessarily felt the utility of $1,000 Zip Pay account. So we're pretty bullish about those 2 products in the early stages of their maturity, and how we use marketing to drive some of that growth, and invest wisely in channels that can drive customer acquisition, for those new products is firmly on the road map. So I think in terms of the broader product road map, we will continue to focus very significantly on the 4 products that we have currently in market. And I think part of the exciting opportunity for me, and the business possibly with the newer function is to explore other things that might be bolted on to that, that sit outside the plan on the page that we're currently operating with regards to those products. So ways that we might be able to step change or accelerate that platform that is already delivering very strong EBTDA, but now in a growth setting.

Any hints on what that might look like over the longer-term? I mean, are we talking about…

Well, I think…

I think if we were going to market, then I don't know if it would be to the analyst community, but…

John, I think, yes, probably what we'll do is when we get to the full year, we'll definitely be able to give you more details. We've only just launched personal loans in January. So it's a bit too early to be talking about the product construct, and way too early to be talking about the performance. But when we get to the full year, absolutely, we'll give you a bit more color on the existing products we've got in market, but also we'll be able to give a bit more color in relation to his new role and some of the priorities going as we head into FY '26.

Maybe just one quick one then. Like the U.S., it's all BNPL, expanding that BNPL product. At what point do you think you export some new consumer product to that market?

Yes. It's a great question, John. And I will hand to Joe just to give his perspectives as well. But I guess my overarching observation would be, as we said in the prepared remarks, the BNPL product penetration in the U.S. is still less than 2% of total payments, and 5% of e-commerce. So very nascent relative to more mature markets. And our customer base in the U.S. of 4.5 million, is really just the start of the potentially more than 100 million customers. So we've got a lot of organic growth in the product that, we've got in market today. That being said, Joe and the team see great opportunities for us to expand that product set. So Joe, did you want to make some comments in relation to that?

Sure. John, we're really excited about where the U.S. stands today. As Cynthia previously mentioned, we've added over 400,000 new customers, and we're finding high, high engagement with that customer base, transactions and total spend rising 33% and 30%, respectively. So we see significant attractive growth ahead with our core product, and we'll continue to really listen to our customers, and what's going to drive ongoing engagement, and we'll continue to explore as opportunities arise.

The next question comes from Siraj Ahmed from Citigroup.

Cynthia, just on the U.S. January momentum, can you just clarify whether that includes any benefit from Pay-in-8? Or is that to come through the course of the half? And any comments on new customers as well -- in the January number, yes?

Yes. I won't go into great specifics breaking down the January number. But what I will say is that in the half, we expanded Pay-in-8 to all eligible customers in the app, and that happens through the course of the half. So you'll start to see that -- the impact of that momentum as we go into the second half, some of which will be in January. But really, what we're seeing from our customer base, as Joe just highlighted in the U.S. is high levels of engagement and strong demand from new customers to join, to have access to this product. So Siraj, I might just throw to Joe and see whether there's anything else he wanted to add in relation to the customer base, maybe Joe?

Yes. Great question. I think previously mentioned, we've had really significant consumer growth, but I think the engagement piece, Pay-in-8 plays a critical role in that. And we continue to listen to the customer, and we anticipate we'll continue to launch ways in which will drive better engagement, which ultimately drives better TTV and results for the U.S.

And Siraj, that's why when we refer to our Pay-in-Z platform, the full Pay-in-Z platform will be launched and live in FY '26. So Pay-in-8 is just the first iteration or the next iteration after our Pay in 4, but the Pay-in-Z platform gives us that flexibility that Joe is referring to. So we can listen to what our customers want and need, and we can create and ensure we've got -- giving them access to flexible payment solutions.

Second one, on Australia, I mean, interesting that December TTV was up 10%. I know there's a bit of lag in the Australian business given the book. Can you just help us as to how to think about TTV to receivables and revenue? Because I'm just trying to understand, given there's a skew to the second half on revenue, should we be thinking revenue would be more than 10% given the momentum? Just would be helpful.

You just break in the end, Siraj. But I think what you're asking is, if TTV was up 10% in December, what's the impact on revenue and business performance in the second half?

Yes.

So absolutely, you're right. So the TTV growth that we saw in Q2, the revenue in Australia from that growth will flow in Q3 and Q4.

And beyond, I think, Siraj, I think there's definitely seasonality, particularly if you're measuring things to volume. I think the way to possibly consider as part of the thinking is, obviously, we have a broader portfolio of products now and income or revenue is effectively a function of receivable. So that revenue margin on receivables and the excess spread, obviously, driving some of those metrics. And under the previous sort of focus on margin setting receivables, it was managed as part of that exercise, which effectively led that to shrink. So now as that grows with the growth setting, revenue will continue to flow from that. But in terms of the original question, yes, the second half in terms of seasonality of that revenue and those margins is healthy.

And can I ask also just a quick clarification? You haven't given an excess spread for February in Australia. I mean that should have expanded because of the rate cut, isn't it?

Yes, Siraj, it's Gordon. We haven't given excess spread for February. I think you may have been referring to January. No, we haven't given that information. I would say the -- we've been open before in terms of the impact of a rate cut. 25 basis points in Australia is about $5 million annualized, just purely off a $2 billion financing book. So to the extent that there are rate cuts, that's the numbers for modeling.

The next question comes from Roger Samuel from Jefferies.

Two questions from me. First one, you mentioned that you remain very disciplined with cost. So what metrics do you look at to make sure that you are getting the return on investments, whether it's TTV growth or customer growth? And also how easily can you lend in your costs when things do not turn out as well as you expect?

Yes. Roger, it's Gordon. I'll take that one. Look, the short answer is we do have discretion, and the ability to move our cost base and hence why we're very comfortable in the statements around disciplined investment and making sure we've got investment in attractive opportunities. So that's probably the opening statement. The second thing I would say is that we've been spending money in areas that really drive outcomes. And you'll see that coming through throughout the whole income statement. So the operating leverage remains in that statement, and where we've been investing in people, processes, brand marketing, et cetera, we're really seeing that driven by the TTV growth, and then the cash gross profit growth, and the cash EBTDA growth. So we see it throughout. On the philosophy, look, we will invest where we see the best return for shareholders. And right now, you've seen the outcome of that in the first half, with some of the investments in the attractive opportunities in the U.S.

My second question is just on the bad debt. Obviously, you guys have performed really well. But do you think that the bad debt as a percentage of TTV would increase, as you pursue growth in both regions? And I'm also conscious that you have a few new products as well, so personal loans, Zip Plus, Pay-in-8, Pay-in-Z. Is there any risk that the bad debt may increase or perhaps you can mitigate that by launching all these new products, which has got higher revenue margin?

Yes. I'll start, and then I'll ask Joe to make a comment on the management in the U.S. as well. First thing I'd say is at Zip, we're always very cautious and prudent in the way we roll out new products. So we generally go through 1 or 2 or even 3 pilot stages to get that right calibration of growth and adoption for bad debts and arrears. So we will be very judicious in the way that we allow new products to grow, to make sure that we're not doing that at the expense of bad debts or rising numbers. So that's our philosophy, and that will be the same philosophy for any new products. Joe, I might just ask you to give any comments on how the rollout with the Pay-in-8, which has been along that pilot phase.

Yes, I'll continue to echo what Gordon just mentioned. I think we take a really responsible approach to manage the upside opportunity with the risk that we take. We continue to anchor to a very strong underwriting experience and position. And we see the upside within the U.S. opportunity, one in which we'll continue to lean into responsibly, and stay within our target range.

[Operator Instructions] The next question comes from Julian Mulcahy from E&P.

Question for Cynthia. Just in relation to your confidence in the sort of medium-term outlook, given there's a lot of noise in the U.S. economy at the moment, Walmart saying consumers are tapped out, I think Domino's saying consumer under pressure, and then you've got whatever Trump is doing sort of day-to-day. And then you've got Afterpay being launched on the Cash App view. Do you see any of those things having an impact on this business? Or are you kind of in your own little sort of sphere now where you're in this really strong growth trajectory?

Look, what I would say is we are in a really strong growth trajectory, but we've also got access to a customer base who -- and we are in the early stages still of accessing that customer base, who really need our products and want our products for flexibility to manage their cash flows. So whether different retailers see the retail environment differently from their perspective. The advantage of our product is what we see is our customers just use our product in whatever retail setting they want, whether that is in-store or online and whether that's for everyday spend or larger, more considered purchases. But I might ask Joe just to make some comment on the resilience of the U.S. consumer, because we are certainly still seeing our consumers being very resilient in this environment.

Yes. No, it's a great question. And we -- as Cynthia mentioned, we are anchored in a consumer base that has shown incredible resiliency, and a need for our products in this particular stage. I think the U.S. is going through maybe a reduction in the regulatory pressure, which has made things a little bit simpler to operate within. And we continue to see just the availability of our credit vehicle being an attractive option in this environment, which I think is powering some of the tailwinds on the growth that we're seeing.

So just on that regulatory thing, I mean, there's been major changes since Trump came in. Does that potentially increase competition or just remove any sort of breaks that may have been put on by the previous administration?

Yes. So just on the regulatory landscape, we still have the same stance, and that is that we support fit-for-purpose regulation, and anything that supports the consumer from a regulatory perspective, but still enables innovation and growth, we are supportive of. Just on the competition point, the U.S. market, we've talked about this before. The U.S. market is interesting, because it is at such an early stage of penetration of the product and growth in the customer and merchant franchise. There's actually a lot of room for everyone to grow. And I think probably the biggest change that I've observed over the last 6 months, and this is a credit to Joe and the work that his team have been doing is a real recognition of how unique our customer base is. And from a merchant's perspective, the value that we add being at checkout, in terms of bringing an incremental customer to a merchant, and also then enabling that customer to have a higher average order value. So increasingly, what we're seeing is merchants are very comfortable having Zip at checkout play alongside an Affirm or a Klarna, because we do not have an overlap in terms of our customer base. So the competitive dynamic is actually very constructive.

The next question comes from Jack Lynch from RBC Capital Markets.

Well done on the result. Just the first question on the outlook for revenue margins in the ANZ business. Obviously, we've got the credit controls there and Zip Plus, looks like it's performing well. Just thinking how we balance those things for the second half. Are we expecting margin expansion in that business? And the second one, just on the outlook for the merchant pipeline, previously flagged there's been some merchants coming through maybe for the U.S. Has there been any changes to that business?

Yes. I might ask Gordon to make a comment in relation to Zip Plus and ANZ margins. And then Joe, I'll ask you to make a comment in relation to the merchant pipeline.

Yes. I think I'd just reiterate, I think you're thinking about it the right way, as how we describe it and the fact that we see the revenue from our Q2 peaks, if you like, coming through in the second half. The average tenure of our Australian -- our current Australian products is that sort of 7 to 9 months. So that's why we talk about the second half of seeing that revenue. So that will impact the margin. And I think second question.

Joe, I might -- second question was in relation to the merchant pipeline. And Joe, I might ask you to make some comments in relation to what you're seeing on the merchant side in the U.S.?

Yes. On the merchant side, we're extremely excited about where we're sitting. I think the pipeline is strong. In particular, we worked on a refreshed value prop and go-to-market that I think is yielding some early momentum across the board. The merchant channel in general, I think, has moved to a place of looking to optimize their checkout and one in which Zip plays a really, really significant role within. And then we're in the early days of activating our channel distribution partnerships, with the likes of Stripe and Adyen and others. And so when we look at upside within the calendar year, we're extremely excited about where the pipeline is.

And sorry, Jack, you did ask a question in relation to yield mix and spread. So I'll just ask -- thanks, Joe, for that comment. I will ask Gordon just to address your question in relation to yield.

Yes, Jack, you asked about revenue margin. We've had a couple of questions on an AU, and it's certainly something we talked to. The way that we actually monitor the portfolio and the way that we look to drive performance on the Australian product set is around the overall portfolio yield. And then the excess spread on that portfolio. With a slightly longer duration product, we see that as the better way to manage the moving parts there versus the shorter duration products. It also takes out the TTV variation month-to-month, quarter-to-quarter, et cetera. So Page 22 of the investor deck is probably where I would focus, and just talk to that excess spread number, which at 6.9% for December, we're really pleased with. And as Cynthia mentioned, that's about 70 basis points higher than 1 year ago, which points to a number of the moving parts in the Australian business, which Pete has been managing really well, top line yield, managing credit and managing interest costs. So just to round that one out, please.

The next question is a follow-up from Siraj Ahmed from Citigroup.

Just 2 questions. Just first one, Cynthia and Joe, just on the merchant pipeline, right? I mean, you've been talking about potentially strong enterprise merchant adds for maybe a year. Just wondering what's -- given your comments about merchants being happy having more than one player checkout. What's delaying that? And yes, just keen to understand, should we be seeing some strong merchant -- big merchant adds pick up in the course of this half?

I'll make a comment, and then I'll ask Joe to give his perspective as well. The thing with enterprise merchants, the sales lead time to actually sign the merchant, but then importantly, actually to do the tech integrations can be 12 to 18 months. So when Joe talks about the fact that we've got a really strong pipeline of merchants, we do, but it actually just takes time to complete the sales process and then do the tech integration before we go live. And so we wouldn't announce a merchant. And obviously, we need their approval before we can announce them. We wouldn't announce the merchant until we actually go live with them. So hence, you can get that delay. But I will say that we do have really strong -- a really strong pipeline of enterprise merchants that Joe and the team are working with. And we're also leveraging, as Joe said earlier, we're leveraging our channel partnerships with Stripe and Adyen and others to bring more merchants in targeted verticals where the average order value or the target spend is higher. So whether that's travel, automotive, and ticketing in particular. But Joe, do you want to make some additional comments or add some color?

Yes, yes. Really good commentary there as well. I think the timing is significant, but also refreshing the go-to-market, and really focusing on what makes Zip different with our merchants, and how we can bring incremental value to the merchants and our consumer base. I think the other area is on the channel distribution partnerships with the Stripe and Adyen. Those take a while to put in place, and they take a while to get alignment on sales acumen and target customers. And we continue to stay focused on building that pipeline out with these partners, and aligning the value prop with their BD folks. So I think net-net, we feel good about where we're at, and we think there's significant growth ahead throughout the next calendar year.

And one quick technical question for Gordon maybe. Just looking at provisions in Australia, I saw that actually increased to end the half. I must say a bit surprised because I thought the book is in a better shape. Just -- can you just talk to, is it just a macro overlay that you've taken in terms of the provisions?

Yes. In simple terms, Siraj, accounting provisions increased in the half. It was a very even split between the U.S. and Australia. U.S. is predominantly volume related. We've seen huge growth there, which is commensurate with everything in the U.S. And in Australia, it's just a mix of modeled outcome and overlay. So we're very comfortable with where we're sitting.

The next question is a follow-up from John Marrin from CLSA.

Just a quick congrats to Soraya for joining the team there. Pete, I do want to -- I want to put you on the spot here a little bit. I think we've heard bits and bobs about what your new role might entail. But just hoping to get a summary from you, on what your new remit is. Is it product focused? Partnership focused? What does head of growth -- strategic growth mean? And I guess it sounds to me like Zip is elevating its ambitions here longer-term versus putting an old co-founder to pasture, if you will. So just hoping to get some clarity there?

John, I know we are not putting...

The grass is very green over here, John. So I can tell you that the belly is pretty happy. Now look, it's really exciting for me personally to sort of [indiscernible] the business as well, but effectively very comfortable with the trajectory of the growth of the Australian business. But Cynthia and I are very aligned on, we want to be looking to medium-term and how we can actually accelerate or step change some of the numbers and the outcomes that we're delivering. So it is a pretty broad remit, with regards to your question. So it very much would be product related. It would also be strategic partnership related. There might be bolt-on opportunities or new technical capabilities that we can actually test and learn without disrupting the core, before getting traction and then implementing in the core. So it really is an opportunity to explore a broad range of opportunities that might deliver benefit to our customers or the core business. So very sort of excited, small team, very growth focused and, obviously, a narrower remit than what I've sort of been undertaking for the previous couple of years. So no past, just sadly, and I can safely tell you the Gold Coast haven't had a run for a number of years, and they're not likely to in the short-term.

Thanks, John. I think that brings us to -- I know I'm conscious we're at time. But I just want to thank everyone for joining us today, and thanks for the engagement and all of the great questions. We really appreciate your support. I suspect there might be a few more questions, and we aren't catching up with a number of you on the call today. In the interim, if you've got other questions, please do send them through to [ Susie and Dylan ], and we look forward to catching up again soon. Thanks for joining.