Zip losses blow out to $240m despite record revenue result

Rising interest rates, a blow out in losses and a lack of cost control could be “baking” in a “disaster” for this well known Aussie firm.

Buy now, pay later provider Zip has revealed its losses have blown out to $240 million with one analyst describing the result as “terrible”, despite the company achieving record group revenue in the first half of the financial year.

The company, which has seen its shares take a battering in the past year, reported its revenue was up 19 per cent year-on-year to $351 million, while it also had a record 42.2 million transactions across the half year.

It also reported a record of $4.9 billion for transaction volumes – up 10 per cent year on year.

But Financial Services CEO Grant Halverson described Zip’s continuing losses as “really bad”.

“Zip losses blow out to $242 million or a 42 per cent increase on last year – this from the Zipsters who spin they will make profits in 2023,” he said.

“The key figure of active customers only grew 300,000 or 4.3 per cent – 7.3 million customers is below the mid-year 7.6 million.”

Zip has continued to haemorrhage money from its operations. Picture: NCA NewsWire /Gaye Gerard

He also noted the BNPL player had implemented a “massive cut back in marketing” by 61 per cent to $42.7 million “which is really bad news going forward for customer growth and spending”.

“Funding has doubled to $73 million and will continue to grow as rates go up – this is the threat to the business as it’s clear interest rates will continue to go up, staying high for much longer,” he added.

“This offsets a drop in bad debts, reducing by $55.6 million to $79.6 million – so one step forward, but two steps backward.”

Mr Halverson also noted that salaries had grown by 12 per cent and were now costing the company $12.7 million.

“Other expenses up $16.7 million or 64 per cent highlighting the lack of cost control across the business,” he noted.

Zip Co CEO Larry Diamond and co-founder Peter Gray. Picture: Zip

But Zip co-founder and CEO Larry Diamond said the company was accelerating its path toward profitability with a “strategy to increase revenue margins and reduce credit losses”.

“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,” he said.

“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, who recently relocated to the US to oversee its operations there, was referring to the spectacular collapse of OpenPay with ASIC documents showing it had not turned a single profit since its debut on the Australian stock market in 2019.

Mr Diamond said closure of its business in the UK, Singapore and Mexico, as well as restructuring elsewhere, would deliver cash during the second half of the year and neutralise the cash burn in the non-core markets.

Zip lost millions when a deal to acquire US BNPL provider Sezzle fell over. Picture: Pavlo Gonchar/SOPA Images/LightRocket via Getty Images

Its US business also delivered positive cash earnings in November and December, the report revealed.

“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,” Mr Diamond said.

But Zip’s “big problem” is the debt owed on corporate convertible notes with $400 million due by 2025 which earn interest as well as possible conversion to shares, Mr Halverson said.

“In April 2021, Zip issued $400 million in debt that could be converted to shares later assuming the share value increased,” he said.

“The terms of the issue allowed bond holders to convert their holdings at $12 a share, but the sharp decline in Zip’s share price to 60 cents has rendered the conversion of securities worthless.

“If Zip cannot reissue this $400 million in debt, at higher rates, it goes down as they won’t be able to raise equity to pay it. The market is pretty much baking in this disaster, with the stock at 60c – saying the equity is nearly worthless.”

But Zip said it had retired $70 million worth of debt in December, so the figure now stood at $330 million, while it also has the ability to defer the expiry until 2028.

Zip could be badly impacted by rising interest rates. Picture: NCA NewsWire / John Gass

Zip’s shares are down a whopping 79 per cent in 12 months and earlier this year it had been described as entering a “cycle of death” as the company would need to make profits as soon as possible given it had not been profitable since 2013.

It comes as BNPL providers in Australia face being subject to tightened credit laws, which could impact their bottom line.

An Australian financial authority tore into sector earlier this year for failing to help customers, especially vulnerable ones, and also not adequately assisting those who have been scammed through the service.

In a submission to the Treasury inquiry into the BNPL industry, the Australian Financial Complaints Authority (AFCA) revealed that they had received nearly 4000 complaints about the unregulated companies operating in Australia.

The sector is facing immense pressure in the current economic climate too with many sceptical they can ever reach profitability.