Zip to wind down non-core businesses, on the path to profitability

Australian buy-now pay-later (BNPL) firm Zip Co (ASX: ZIP) is exiting a number of non-core businesses, including its business finance arm, in order to reduce cash burn and right-size its global footprint.

The Sydney-based company, which claims to have enough liquidity to support it through to cash EBITDA profitability, says the decision was made so it can drive increased earnings and expand margins.

This strategy is intended make Zip profitable eventually and decrease global people costs by $30 million in FY23, and will see the company exit its Singaporean business by September, wind down its business finance arm Zip Business, ditch its product suite of Trade and Trade Plus, and retire personal finance app Pocketbook which it acquired in 2016.

Previously planned new financial services products, including crypto and investment products, have also been “deprioritised” under the strategy.

The announcements were made as part of Zip’s Q4 results update, which detailed group quarterly revenue increasing by 27 per cent to $160.1 million, and transaction volume for the quarter growing by 20 per cent to $2.2 billion.

Transaction numbers for the quarter also grew by 37 per cent to 19.4 million transactions, while customer numbers increased by 64 per cent to 12 million.

According to Zip, the company had cash and liquidity of $278.6 million, “which is expected to be sufficient reserves to support the company through to cash EBITDA profitability”.

The company claims to be well-placed with regards to its debt funding too, with capacity of $396.9 million in Australia and US$183.1 million in the US available to fund transaction and receivables growth.

The updates also come in the wake of Zip deciding to terminate its proposed acquisition of US competitor Sezzle, with the company blaming unfavourable market conditions for the deal’s demise.

Zip co-founder, global CEO and managing director Larry Diamond said the quarterly results demonstrated the “continued strength of the Zip business”.

“All this was done whilst balancing and implementing our updated financial strategy to fast-track profitability, by reducing our global cost base, and refocusing our capital and efforts on core products and core markets,” Diamond said.

“Given the significant 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 profitability earlier than anticipated.”

The company also claims to have “a number of levers at its disposal” to maintain margins in an environment of rising interest rates. 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 profile (i.e. very short duration loans) mean that the benefits of the above initiatives flow through the receivables and drive improvements very quickly,” Zip said.

“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.”

As part of a review of its global presence, the company says it has assessed the goodwill against a number of subsidiaries including its Middle Eastern BNPL offering Spotti, Prague’s Twisto and US-based Quadpay, and is determining whether it will take an impairment charge against the carrying value. If it does, that will be reflected in the company’s FY22 report.