Zip Co to shut global operations except Australia and the US in bid to push for profitability by 2024

Zip Co is set to retreat from its remaining international outposts, leaving the firm to operate in the US, Australia and New Zealand, in a bid to push for profitability and preserve cash.

Zip Co chief executive Larry Diamond and co-founder Peter Gray.

Zip Co is set to retreat from its remaining international outposts, leaving the firm to operate in the US, Australia and New Zealand, in a bid to push for profitability and preserve cash.

The walk back from the 14 countries Zip targeted in its international expansion comes as the buy now, pay later sector faces a financial reckoning as higher funding costs pincer its lending base.

Zip Co announced on Thursday it had slimmed down its cash losses to $33m in the six months to December. This was down on the $60.5m losses reported at the 2022 full year.

The buy now, pay later player said it expected the loss to improve by 50 per cent in the second half “with continued benefits from actions to simplify and streamline the core business”.

But analysts are warning the BNPL lender may be running out of time to turn its losses around, with dwindling cash and uncertain expectations when or if it can deliver a cash profit.

Zip chief operations officer Peter Gray told The Australian the lender was confident it would deliver cash returns in the 2024 financial year.

“The buy now, pay later model is here to stay and it’s demonstrating in all markets it’s very resilient,” he said.

Mr Gray said Zip had changed its strategy to expand into international markets after a deterioration in the funding environment.

“The strategy was very sound and certainly supported by capital markets,” he said.

“Growth companies have had to reset their foundations, to deliver profitability.”

Zip said it had completed its review of international operations and would move to shut down its business in the Middle East, central Europe and the Philippines.

Zip pulled out of a deal to merge with Sezzle amid concerns the two buy now, pay later providers would not survive a higher rates environment. Picture: Getty Images

This comes after Zip ruled a line under its Singapore and UK businesses last year.

Mr Gray said the cash return required for Zip’s businesses in these countries was “not appropriate”, with plans to sell or close all operations by the end of the financial year.

“That process will lead to cash inflows in the half, whether or not the business is sold as part of a divestment, or restructured and wound down which releases capital,” he said. “We’re very well progressed on either divestment or wind down.”

Zip is expected to repatriate almost $40m-$60m from exiting these markets. The consumer lender announced it had achieved record group revenue in the half, hitting $351m. Cash gross profit was up 20 per cent to $121.7m.

Mr Gray said Zip Co had no plans to reduce its headcount in Australia in order to hit its profitability target, or raise cash to pad out its balance sheet.

RBC Capital Markets analysts issued a note warning that Zip was facing constraints on its liquidity runway. “With non-operating cash inflows uncertain and the expectations for continued operating cash outflows, we remain concerned about Zip’s liquidity runway position,” they wrote. 

Jarden analysts Elise Kennedy and Tim Halliday said Zip’s latest result showed the challenges of a rising rate environment.

“Despite cost measures made to contain cash flow, Zip still is faced with headwinds on funding that weighs on the outlook,” they wrote. “Zip has to work hard to stand still and deliver on its outlook targets. Against a softer macro environment, this may become harder again.”

Latitude Financial, which reported earlier this week, announced it was looking at walking away from its buy now, pay later business. Latitude chief executive Ahmed Fahour said the firm was reviewing the business

“We’re much more interested in the regulated business, our interest free, sales finance business – it’s a big part of our business,” he said. Mr Fahour noted every 100 basis points increases in the cash rate saw Latitude take a $40m hit to its funding model.

The Reserve Bank of Australia has jacked up rates from a low of 0.1 per cent in April 2022 to 3.35 per cent after the latest 25 basis points rise on February 8.

Shares in Zip closed down 6.19 per cent to 53c.

The tough funding market has seen fellow buy now, pay later lenders mauled.

Shares in lender Humm sank 9.7 per cent to 56c on Thursday after announcing a 40 per cent slump to $16.7m in interim cash profit after failing to sell its BNPL business to Latitude.