Zip losses worsen despite record revenue result

Losses at buy-now pay-later (BNPL) player Zip Co (ASX: ZIP) have blown out to $240 million despite the company achieving record group revenue in the half year ending 31 December 2022.

The company, helmed by co-founder and CEO Larry Diamond, saw users push transaction volumes to new heights in the period, hitting a record of $4.9 billion - up 10 per cent year on year.

Record transaction numbers were also achieved by the BNPL company, with 42.2 million transactions recorded across the half year - up 17 per cent year on year.

Improvements to the company’s bad debt situation have continued too, with group credit losses now accounting for just 1.9 per cent of total transaction volume (TTV), an improvement on 2.4 per cent in 1H22 and now inside the group’s target range.

Diamond, who recently relocated to New York City to better manage the group’s growing US operations, says he is pleased with the first-half results as Zip accelerates its path to profitability.

“Although topline growth has been tempered by deliberate adjustments to risk settings, our strong net margin performance is a very clear proof point of the successful execution of our strategy to increase revenue margins and reduce credit losses,” Diamond says.

“In an environment of rising interest rates and high inflation our results demonstrate the increasing relevance of our products to customers and merchants. In Australia, the strength of our brand and product offering continues to resonate and is attracting new merchants such as eBay AU, Qantas, Jetstar and Uber which all launched during the period.

“The expected consolidation of our sector has begun and there are significant opportunities for Zip as this dynamic continues to play out. We have already experienced an increase in inbound merchant inquiries following recent developments in the market.”

The CEO adds that Zip has made a number of decisions to finalise the outcomes of a strategic review during the half, including the divestment, restructure or winding down of non-core businesses. This will deliver cash inflows during the second half and neutralise the cash burn in the non-core markets.

This means the planned wind down of its operations in the UK, Singapore and Mexico is now complete. Zip also commenced the wind down of its Middle Eastern business unit Spotii in the half.

“With these proceeds and the improvements we are seeing in the core business, we have sufficient cash and liquidity to deliver on our target of group positive cash EBTDA during HY24,” Diamond says.

Zip’s US business delivered positive cash earnings in November and December, and remains on track to join the Australian business in being profitable by the end of the financial year.

“The US opportunity remains in its early stages with the total addressable market estimated to be almost US$10 trillion and BNPL penetration still under 2 per cent of total payments, demonstrating the sheer size of the opportunity that we are positioned to capture,” Diamond says.

Deeper customer engagement drove a 9 per cent year-on-year increase in spend per active customer in the US, while 23 per cent revenue growth was achieved in Australia thanks to strong rollout of enterprise merchants including eBay, Qantas, Jetstar and Uber.

Shares in Zip are down 4 per cent to 54 cents per share at 12.30pm AEDT.