The Zip Co Ltd (ASX: Z1P) share price is dropping again this morning after giving a FY22 half-year update. There was some negative US news.
Zip is one of the largest buy now, pay later operators on the ASX with operations in Australia, the US and several other regions.
Zip’s solid start to FY22
The BNPL business has given investors a sneak peek into its performance for the FY22 half-year result.
It said that it continues to grow its revenue and transaction volumes at a strong pace. The goal is still to become the “first payment choice everywhere and every day”.
Here are some of the highlights from the update:
- Revenue jumped 89% to $302.2 million
- Transaction volumes surged 93% to $4.5 billion
- Transaction numbers jumped 147% to 36.3 million
- Customer numbers soared 74% to 9.9 million
- Merchants on the platform increased 113% to 81,800
We’ve already seen some of these numbers thanks to the quarterly updates.
Margins and profitability
There’s no doubt that the business is doing well at growing its footprint.
Investors seem to be more worried about the profit potential of the business as well as more competition, hurting the Zip share price.
In the half-year, the revenue margin remained “strong” at 6.7%.
Zip spoke of a healthy cash transaction margin of 2.1% reflecting changes in business and geographic mix, as well as an increase in bad debts.
The Zip book is ‘recycling’ approximately every three to four months on a blended basis. That essentially is saying that Zip can ‘lend’ out the same $100 every three to four months – remember that BNPL agreements with customers aren’t usually for a whole year, just a few months.
Zip’s weighted average margin on loans outstanding at 31 December 2021 was 3.30%, down 0.37% year on year. This reflects recent repricing activity in Australia. Management said the company is well placed for continued benefits on repricing to offset any increase to the broader interest rate environment.
Net bad debts were 2.6% of transaction volumes (excluding the “movement in provisions”) reflect the inclusion of less mature expansion markets and “a change in the external environment in the US” which is impacting the industry. The easing of government stimulus is affecting consumer portfolios. This is very interesting commentary – it will be interesting to see how this develops. And how much has its bad debt provisions changed?
Cash EBTDA
This is almost like EBITDA, without the I – interest.
Cash EBTDA is expected to be a loss of $108.1 million, driven by the investment in growth, geographic expansion.
Available cash for growth
Zip said that it’s undertaken a series of cost-saving initiatives while still focusing on driving growth and increasing profitability in core markets. But it’s also adjusting capital allocation to markets where there is a near-term pathway to profitability. This is expected to improve cash flow and reduce annualised costs.
The capital allocation to the UK growth has reduced, resulting in the impairment of goodwill by $44.7 million.
The BNPL ASX share said that it still has significant headroom with undrawn funding across its debt facilities, with available cash liquidity of $212.5 million.
Final thoughts on the Zip share price
Zip revealed that it’s still in discussions with Sezzle Inc (ASX: SZL), though there is still no certainty of a deal.
The company’s management remains “confident in the outlook for the business, with healthy unit economics and continued strong growth in core markets driving cash flow generation.”
It’s interesting that the Zip share price has fallen so much. Down 43% in 2022, and down 80% over the last 12 months. There is more competition and regulators are talking about making it easier for merchants to pass on fees. But is there good value at some point on this downward slide?
I’m not sure if Zip is a buy. How much is an unprofitable business worth with a worsening profitability outlook? If it can start making cash profits in some markets, that would help. It wouldn’t surprise me if an Australian or US bank became interested at some point.
