Zip Co zaps loan losses, but profits are still a year away

The company’s quarterly result shows its cash burn continues, but transaction volumes hit a record $2.7bn and cash transaction margins lifted.

Zip Co says it is months away from profitability – with the buy now, pay later operator on track for positive cash flow in the first half of the next financial year.

The company told investors it had positive cash earnings in the US in November and December and revenues of $188m for the three months to the end of 2022, up 12 per cent year-on-year.

Transaction numbers were at record levels, up 15 per cent at 22.6 million in the quarter, as was the volume of transactions, up 22 per cent at $2.7bn, Zip said.

But the company continues to burn through cash, with $78.5m in its account at December 31 compared to $140.7m in September. It told investors much of the cash burn was the deferred consideration and performance payments after its acquisition of QuadPay and Payflex, and for investments in its debt funding program.

“Zip remains confident that based on its current trajectory and plan, including actions to improve cash flow, margins and costs, and outcomes from the (Rest of World) strategic review process, that its current available cash and liquidity position is sufficient to see (it) through to generating positive cash flow,” Zip told investors on Monday.

Zip, in a bid to reach profitability, is closing its businesses in the UK, Singapore and Mexico.

“During the quarter Zip continued to make great progress on the strategy to deliver sustainable growth, right-size our global cost base and accelerate our path to profitability,” said the company’s chief executive, Larry Diamond.

“We continue to provide increased benefits to both customers and merchants in today’s high cost environment and are well-positioned for any potential ­future regulatory changes.

“The underlying business remains strong, and we are pleased with the benefits and reduction in cash burn from the ongoing simplification of the business footprint and focus on core products and core markets.” The BNPL provider is keen to demonstrate its staying power after investors punished the business after years of cash burn.

Shares have fallen from highs of $12.36 in February 2021 – achieved after Zip rapidly grew its footprint in the US, UK, Singapore, Mexico, Poland, South Africa, India and the UAE.

Revenues from its US business increased 28 per cent on the previous quarter to $85.7m, while Australian revenues were up 7 per cent at $88.6m in the same period.

However, customer numbers had fallen slightly over the year, affected by a 7 per cent decline in the US, the company said. Zip recorded a $1.01bn loss last year.

UBS equities analyst Tom Beadle said Zip’s cash burn was his “main focus”, saying the firm had “consistently missed cost ­estimates historically”.

RBC Capital Markets analyst Wei-Weng Chen said Zip’s second quarter was “better than expected” but said it only had 7½ months of liquidity remaining.

But Zip global chief operating officer Peter Gray insisted the company had more than 7½ months’ cash, noting much of the cash burn in the latest results was incurred in October. “Not accurate at all. They’re implying that the burn for the last quarter was $30m but what they’re missing is a significant improvement we continue to make in regards to the cash burn,” he said.

Zip pulled out of a $491m merger with Sezzle in July.

Zip shares closed down 15.6 per cent, or 13c, at 70c. They are down 79 per cent in 12 months.