The Zip Co Ltd (ASX: ZIP) share price is down around 5% after the buy now, pay later business reported slowing growth.
Zip is, or was, a large buy now, pay later business on the ASX.
FY23 second quarter update
The company revealed that it achieved record quarterly revenue of $188 million for the three months ending 31 December 2022. This was an increase of 12%. It was based on transaction volume of $2.7 billion.
Pleasingly, the company said that the cash transaction margin was 2.6% for the quarter, which it called a “great result” with rising interest rates. This compared to 2.2% in the first quarter of FY23.
The revenue margin was “solid” at 6.9%, which reflected seasonality. The FY22 second quarter revenue margin was 6.4%.
US profitability improves, Australia growth continues
Zip revealed that its US business achieved positive cash EBTDA (that’s EBITDA, but includes interest) in November and December with a “very strong seasonal performance”. The company said the US business is on track to exit FY23 being cash EBTDA positive on a “sustainable basis.” I think this would be supportive for the Zip share price in the longer-term.
The US segment saw credit loss rates improve from 2.4% in the FY23 first quarter to 1.1% in the second quarter. Zip said it exited the quarter with an expected loss rate of 1.4% and 1.6% for the November and December cohorts, which it described as a “very strong result”.
In Australia and New Zealand, Zip reported revenue growth of 17% year over year. It added a number of new enterprise merchants including Qantas Airways Limited‘s Jetstar, (ASX: QAN), Uber and eBay AU. In the US it has launched with Barnes & Noble College across all campus stores.
It finished with a total of 7.4 million active customers, while merchants on the platform rose 19% year over year to 97,500.
The company says its $78.5 million of available cash and liquidity is expected to be enough to get through to cash EBTDA profitability.
On 13 December 2022, it retired $70 million of its $400 million zero coupon senior convertible notes (debt). The transaction was “highly accretive” for Zip with the combined share conversion and cash payment, implying a payment of just $0.23 in the dollar for the notes retired.
Final thoughts on the Zip share price
It’s good to see that Zip is getting closer to overall cash profitability, which would make it a sustainable business.
However, it’s processing an enormous amount of transactions and only just talking about getting to breakeven at the EBTDA level. I don’t think Zip’s profitability outlook looks as promising as it used to be.
There are other hard-hit ASX growth shares that may have a stronger profitable outlook.
