Zip Co shares surge as it vows to slow cash burn

Embattled fintech Zip Co has vowed to slow the rate at which it is burning through cash by cutting the number of products it offers and putting the brakes on overseas expansion, sparking a sharp bounce in its share price.

In a quarterly update on Thursday, Zip said it was taking action to move into profitability faster, after it dumped a plan to merge with rival Sezzle last week.

Zip shares - which have been smashed this year as part of the bloodbath in buy now, pay later stocks - surged 16.5 per cent, to 78c, and have now risen by about 60 per cent this month.

Zip Co co-founder and chief executive Larry Diamond.Credit: Dominic Lorrimer

Valuations of buy now, pay later (BNPL) businesses have tumbled this year as investors dumped loss-making technology companies amid fears over rising bad debts and growing competition. Shares in Zip, the key local rival to Afterpay, are still down more than 80 per cent so far this year.

Investors bid the stock sharply higher on Thursday, after it said it was taking steps to reduce cash burn, and that losses it had taken on bad loans in its core Australian business had peaked.

Revenue was flat for the June quarter compared with March, but up 27 per cent year-on-year, to $160.1 million. In its core Australian business, revenue grew 30 per cent year-on-year and net bad debts rose from 3.4 per cent to 3.82 per cent of accounts.

As part of its bid to cut costs and focus on its core, Zip said it would close its Singapore business, and it would review the goodwill against its BNPL businesses in the United States, Europe and the Middle East.

It also said it was winding down key business lending products, it has closed a financial management app Pocketbook, and it had “deprioritised” the development of new products including in cryptocurrencies and investing.

Chief executive Larry Diamond said the company would now reach profitability - on its measure of earnings before tax, depreciation and amortisation - “earlier than anticipated.”

“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,” Diamond said.

“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.”

Bad debts have finally caught up with buy now pay later operators and their growth-at-all-costs model.Credit: Bloomberg

As investor sentiment towards the BNPL sector has plunged in recent months, some have questioned the sector’s viability. Zip said it had available cash and liquidity of $278.6 million, and it expected this would be enough to support the company until it became profitable.

UBS analyst Tom Beadle said in a note that Zip’s update was heavy on “top-line details” (revenue), but it lacked meaningful metrics on profitability to allow an assessment of the company’s progress.

Beadle, who has a “sell” on Zip shares, said he remained concerned about the frequency of customer transactions in the US, after the number of transactions per active US customer fell slightly in the quarter.

Beadle said the US result for Zip was soft, its Australian performance was in line with expectations, and the company’s liquidity was “sufficient.”

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.