Zip shares drop despite surge in users, revenue

Declaring the credit card model broken, Zip Co says it now has 2m active customers in Australia and NZ, with revenue up 91pc.

Zip says it now has two million active customers. Picture: AAP

Shares in Zip Co tumbled on Wednesday, closing more than 6 per cent lower, despite the number of active customers using the buy now, pay later platform surging to two million across Australia and New Zealand.

Zip Co said that nearly 200,000 customers in Australia and New Zealand added to the platform in the last quarter as shoppers turned online for their retail therapy amid the coronavirus lockdown.

Those figures failed to impress investors and shares in the company fell as much as 9 per cent, before closing down 6.7 per cent at $6.57 each, against a 1.9 per cent rise in the S&P/ASX 200 Index.

Zip Co, which is the second largest buy now, pay later player on the ASX by market capitalisation, said in its quarterly update that it continued to capitalise on a pivot away from credit cards.

The latest data out of the Reserve Bank revealed that in May, the number of credit card accounts dropped by 1.22 million year-on-year, while credit card debt dropped to its lowest level since 2007.

“We continue to believe the credit card model is fundamentally broken with customers demanding flexible, responsible, interest free alternatives,” chief executive Lary Diamond said in the market update.

After the company unveiled its fourth quarter figures on Wednesday morning, including a 91 per cent hike in full-year revenue, co-founder Peter Gray told The Australian that the shift towards online retail spending as a result of the coronavirus crisis was likely to be permanent.

“We’ve seen throughout COVID-19 an acceleration in not only the shift towards online but also the shift away from cash so we expect that those will be two factors that will persist when things return to some level of normalcy whenever that may be,” he said.

“We anticipate that the government is very likely to extend certain components of the stimulus to package to support areas of the economy that remain negatively impacted by COVID-19, so we are confident that our numbers and our business model will remain as resilient as they have done to date.”

Zip Co, which has operations across Australia, New Zealand and the UK with associates in the US and South Africa, said the number of merchants on its platform increased to 24,500 in FY2020, up 51 per cent on the previous financial year.

Cotton On, Camilla & Marc, Carpet Court, Oscar Wylee and OzSale were among the retail brands sign on.

“Pleasingly, we beat the goals we set for the company in 2019 with a target of $2.2bn in annualised transaction volume, which was supported by a number of marquee merchants and a top-10 rated app,” said Mr Diamond said.

“The business model was tested during COVID-19 and proved extremely resilient – in terms of transaction volume, strong revenue mix and outstanding customer repayment performance.

“Our product differentiation, strong proprietary credit platform and penetration into defensive, everyday spend categories delivered in spades.”

Analysts said the update was in line with expectations.

“Today’s update is generally in-line with forecasts, however we note it comes following a significant rerating in Zip’s share price,” RBC analysts said.

“The strong shift to online spending has benefited Zip Co and other buy now, pay later players through the months of April and May as these companies acquire many customers at checkout.”

In March, Zip Co moved to tighten credit for new and existing customers as a result of the coronavirus crisis, adjusting its application underwriting algorithms to actively monitor account behaviour and adjust limits accordingly.

The company announced in June that it would acquire US-based buy now, pay later platform QuadPay for $403 million to accelerate its global expansion.

The move would mean that Zip Co operates across five key markets – Australia, New Zealand, US, UK and South Africa.

Zip Co said on Wednesday that QuadPay continued its growth, processing over 1.4 million transactions in the quarter, up 982 per cent on the same period the prior year.

The transaction remains subject to a number of closing conditions, including shareholder approval.