Zip : Q4 FY22 Results Update - Zip Executing on Core Strategy

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21 July 2022

Q4 FY22 RESULTS UPDATE

ZIP EXECUTING ON CORE STRATEGY

Zip Co Limited (ASX: ZIP) ("Zip", or the "Company") today announced its fourth quarter results for the three month period ending 30 June 2022 ("Q4 FY22").

KEY HIGHLIGHTS

• Group quarterly revenue of $160.1m (up 27% YoY).
• Transaction volume for the quarter of $2.2b (up 20% YoY).
• Transaction numbers for the quarter of 19.4m (up 37% YoY).
• Customer numbers increased to 12.0m (up 64% YoY).
• Merchants on the platform lifted to 90.7k (up 77% YoY).
• Signed key enterprise merchants, including Qantas (in AU) and Bed Bath & Beyond (in the US). Best Buy went live during the quarter and eBay is expected to go live in the coming months in AU.
• Cash transaction margin remained strong at 2.4% (vs 2.3% in Q3).
• Revenue margin remained healthy at 7.5% (vs 7.8% in Q3).
• As at 30 June, Zip had available cash and liquidity of $278.6m which is expected to be sufcient reserves to support the Company through to cash EBTDA proftability. The Company remains well placed with regards to its debt funding, with capacity of $396.9m in AU and US$183.1m in the US available to fund transaction and receivables growth.
• Earlier this month, Zip announced that in light of current macroeconomic and market conditions, Zip and Sezzle had mutually agreed to terminate the proposed acquisition of Sezzle by Zip.
• In line with its strategic objective to focus on the core markets of ANZ and the US, this quarter Zip has continued to make changes and decisions to right-size its global footprint and reduce group cash burn.

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CEO UPDATE

Zip Co-Founder, Global CEO and Managing Director, Larry Diamond said:

"We are pleased to announce another solid set of results across our key operating metrics in Q4, demonstrating the continued strength of the Zip business. All this was done whilst balancing and implementing our updated fnancial strategy to fast-track proftability, by reducing our global cost base, and refocusing our capital and eforts on core products and core markets.

Given the signifcant and swift changes to the broader macro and capital environment since signing, Sezzle and Zip mutually agreed to terminate the proposed transaction, both businesses opting to focus on their core strategy. As Directors we saw this to be in the best interests of shareholders - we wish Charlie and the Sezzle team all the best in FY23. This coupled with recent decisions made, as well as ongoing strategic initiatives, will see the group reach cash EBTDA proftability earlier than anticipated.

As we celebrate our 9th birthday, we refect on the incredible growth, from start-up pioneering the role of BNPL, to a publicly listed, global business with over 12m customers. Our role as a fnancial services technology provider is becoming even more crucial in the current climate as we support our customers and merchant partners through this infationary period. The resilience of Zip and its business model has us well placed to thrive through this next stage of the journey and even though we are nine years in, it genuinely feels like we are only getting started!"

BUSINESS PERFORMANCE

Zip continues to deliver solid top line metrics with strong results across its consumer operations in the United States, Australia, New Zealand and Rest of World ("RoW")1, despite growth being tempered by a deterioration in consumer sentiment and adjustments to risk settings.

Reported fgures based on Zip's unaudited fnancials as of 30 June 2022. Diferences in the growth rates presented below to the regional updates refect changes to exchange rates versus the prior corresponding periods.

• Rest of World includes Canada, Mexico, Payfex (South Africa), Spotii (UAE & KSA), Twisto (Poland & Czech Republic), the UK and Singapore.

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UPDATE ON GROUP STRATEGIC PRIORITIES

Zip continues to focus on sustainable growth, unit economics and delivering on cash EBTDA proftability and positive cash fow during FY24.

Growth

Sustainable growth in core markets remains a key focus. Despite adjustments to its risk settings, Zip has maintained solid growth in its customer and merchant numbers, engagement metrics and customer LTV5.

Zip continues to see increased demand for its products from both new and existing customers. In a world where consumers are experiencing cost of living pressures, Zip continues to provide day to day value and benefts in managing budget and lifestyle, and customers are transacting at a growing breadth of merchants. During the quarter, Zip AU customers transacted at over 450k locations capturing both everyday and discretionary spend.

New products and services delivered for customers during the period included:

• In the US, the launch of a physical card, key to unlocking the large addressable ofine opportunity and making it even easier for customers to pay with Zip in store.
• In AU, following a pilot in Q4, the ability to redeem Zip rewards in store was launched in July, providing Zip customers with the ability to earn cashback both instore and online, in real time.

Zip is also pleased to announce a new partnership with Qantas in AU, allowing customers to book domestic and international fights on qantas.com using Zip and earn Qantas Points. Qantas Frequent Flyers will also be able to choose to earn Qantas Points through Zip's loyalty program, Zip Rewards. Zip is now integrated at over 90k merchants globally.

Unit Economics

Zip remains focused on improving unit economics. Zip continues to take further actions to deliver better credit outcomes across credit decisioning, portfolio management and collections.

• In the US, these actions continue to see results trend toward short-term targets despite further deterioration in consumer confdence and the external environment. Zip US saw loss rates decrease to 2.7% of TTV for the quarter and exited the quarter with an expected loss rate of 2.2% for the late June cohort. Continued fne tuning and optimisation is expected to see losses below the target level of 2% on a cohort basis before the end of the calendar year.
• In AU, Zip experienced a peak in losses, with previous actions taken now positively impacting performance, resulting in a decrease in arrears roll rates (a forward indicator of losses), with losses trending down over the course of FY23.

• Lifetime value.

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• As previously disclosed at Zip's H1 results, H2 losses for the group are expected to remain at similar levels to H1, as losses from volume written in H1 are realised. The initiatives and actions outlined above are expected to drive improved performance in FY23, trending towards medium-term targets of <2% of TTV.
• For the group, revenue and cash transaction margins remained healthy at 7.5%, and 2.4%, respectively.

Zip has a number of levers at its disposal and is well placed to maintain margins in an environment of rising interest rates. In addition to the above actions and focus on credit losses, there are several initiatives undertaken or underway to maintain or increase margins. These include consumer and merchant repricing, increased activity to deliver improvements to customer repayment velocity and collections, and reducing processing costs.

Zip's product construct and capital recycling profle (i.e. very short duration loans) mean that the benefts of the above initiatives fow through the receivables and drive improvements very quickly. This makes Zip more resilient to a rising rate environment than credit cards and other consumer credit businesses. The US business in particular is well placed to maintain margins in a rising rate environment, with any 25bps rise in base rate only impacting cost of funds by ~2bps per transaction.

Cost management - Review global presence and reduce cash burn

In line with strategic objectives to focus on the core markets of ANZ and the US, Zip is taking actions to right size its global cost base and accelerate the group's path to proftability. Specifcally, steps undertaken during the last quarter included:

• Singapore: Zip is in the process of closing its Singapore business, consistent with the aim to reduce group cash burn. The closure is expected to be completed by September.
• Other RoW businesses: While Zip's RoW businesses continue to deliver strong growth, these assets are non-core, in an earlier stage of their lifecycle, and further away from proftability. Zip is currently undertaking a strategic review of its RoW businesses (including the UK). A more detailed update will be provided in the FY22 full year results.

Refecting current market conditions, the Company has reviewed the goodwill against the Spotti, Twisto and Quadpay assets and is assessing the need to take an impairment charge against the carrying value of goodwill in its FY22 accounts.

Cost management - Focus on the core

During the quarter, Zip made several proactive changes to its Australian business, simplifying and prioritising initiatives to focus resources on core products and drive increased cash EBTDA and further margin expansion.

• Zip will wind down Zip Business and exit the product suite of Trade and Trade Plus. Zip Business Capital in Australia and New Zealand is not afected by this change and will continue to operate as normal.