Zip Co Limited (ASX: ZIP) (“Zip”, or the “Company”) today announced its fourth quarter results for
the three month period ending 30 June 2022 (“Q4 FY22”).
KEY HIGHLIGHTS
● Group quarterly revenue of $160.1m (up 27% YoY).
● Transaction volume for the quarter of $2.2b (up 20% YoY).
● Transaction numbers for the quarter of 19.4m (up 37% YoY).
● Customer numbers increased to 12.0m (up 64% YoY).
● Merchants on the platform lifted to 90.7k (up 77% YoY).
● Signed key enterprise merchants, including Qantas (in AU) and Bed Bath & Beyond (in the US). Best Buy went live during the quarter and eBay is expected to go live in the coming months in AU.
● Cash transaction margin remained strong at 2.4% (vs 2.3% in Q3).
● Revenue margin remained healthy at 7.5% (vs 7.8% in Q3).
● As at 30 June, Zip had available cash and liquidity of $278.6m which is expected to be sufficient reserves to support the Company through to cash EBTDA profitability. The Company remains well placed with regards to its debt funding, with capacity of $396.9m in AU and US$183.1m in the US available to fund transaction and receivables growth.
● Earlier this month, Zip announced that in light of current macroeconomic and market conditions, Zip and Sezzle had mutually agreed to terminate the proposed acquisition of Sezzle by Zip.
● In line with its strategic objective to focus on the core markets of ANZ and the US, this quarter Zip has continued to make changes and decisions to right-size its global footprint and reduce group cash burn.
Growth
Sustainable growth in core markets remains a key focus. Despite adjustments to its risk settings,
Zip has maintained solid growth in its customer and merchant numbers, engagement metrics and
customer LTV
Zip continues to see increased demand for its products from both new and existing customers. In a
world where consumers are experiencing cost of living pressures, Zip continues to provide day to
day value and benefits in managing budget and lifestyle, and customers are transacting at a
growing breadth of merchants. During the quarter, Zip AU customers transacted at over 450k
locations capturing both everyday and discretionary spend.
New products and services delivered for customers during the period included:
● In the US, the launch of a physical card, key to unlocking the large addressable offline opportunity and making it even easier for customers to pay with Zip in store.
● In AU, following a pilot in Q4, the ability to redeem Zip rewards in store was launched in July, providing Zip customers with the ability to earn cashback both instore and online, in real time.
Zip is also pleased to announce a new partnership with Qantas in AU, allowing customers to book
domestic and international flights on qantas.com using Zip and earn Qantas Points. Qantas
Frequent Flyers will also be able to choose to earn Qantas Points through Zip’s loyalty program, Zip
Rewards. Zip is now integrated at over 90k merchants globally.
Unit Economics
Zip remains focused on improving unit economics. Zip continues to take further actions to deliver better credit outcomes across credit decisioning, portfolio management and collections.
● In the US, these actions continue to see results trend toward short-term targets despite further deterioration in consumer confidence and the external environment. Zip US saw loss rates decrease to 2.7% of TTV for the quarter and exited the quarter with an expected loss rate of 2.2% for the late June cohort. Continued fine tuning and optimisation is expected to see losses below the target level of 2% on a cohort basis before the end of the calendar year.
● In AU, Zip experienced a peak in losses, with previous actions taken now positively impacting performance, resulting in a decrease in arrears roll rates (a forward indicator of losses), with losses trending down over the course of FY23.
● As previously disclosed at Zip’s H1 results, H2 losses for the group are expected to remain at similar levels to H1, as losses from volume written in H1 are realised. The initiatives and actions outlined above are expected to drive improved performance in FY23, trending towards medium-term targets of <2% of TTV.
● For the group, revenue and cash transaction margins remained healthy at 7.5%, and 2.4%, respectively.
Zip has a number of levers at its disposal and is well placed to maintain margins in an environment of rising interest rates. In addition to the above actions and focus on credit losses, there are several initiatives undertaken or underway to maintain or increase margins. These include consumer and merchant repricing, increased activity to deliver improvements to customer repayment velocity and collections, and reducing processing costs.
Zip’s product construct and capital recycling profile (i.e. very short duration loans) mean that the benefits of the above initiatives flow through the receivables and drive improvements very quickly. This makes Zip more resilient to a rising rate environment than credit cards and other consumer credit businesses. The US business in particular is well placed to maintain margins in a rising rate environment, with any 25bps rise in base rate only impacting cost of funds by ~2bps per transaction. Cost management – Review global presence and reduce cash burn In line with strategic objectives to focus on the core markets of ANZ and the US, Zip is taking actions to right size its global cost base and accelerate the group’s path to profitability. Specifically, steps undertaken during the last quarter included:
● Singapore: Zip is in the process of closing its Singapore business, consistent with the aim to reduce group cash burn. The closure is expected to be completed by September.
● Other RoW businesses: While Zip’s RoW businesses continue to deliver strong growth, these assets are non-core, in an earlier stage of their lifecycle, and further away from profitability. Zip is currently undertaking a strategic review of its RoW businesses (including the UK). A more detailed update will be provided in the FY22 full year results.
Reflecting current market conditions, the Company has reviewed the goodwill against the Spotti, Twisto and Quadpay assets and is assessing the need to take an impairment charge against the carrying value of goodwill in its FY22 accounts.
Cost management – Focus on the core
During the quarter, Zip made several proactive changes to its Australian business, simplifying and prioritising initiatives to focus resources on core products and drive increased cash EBTDA and further margin expansion.
● Zip will wind down Zip Business and exit the product suite of Trade and Trade Plus. Zip Business Capital in Australia and New Zealand is not affected by this change and will continue to operate as normal.
● Due to the complexity and investment required to support and maintain Pocketbook, Zip
has decided to retire the product and brand (both the app and web services). Zip remains
committed to providing customers with tools to assist with their budgeting and financial
wellbeing and will be developing similar money management features in its app during
FY23.
● Previously planned new financial services products, (including crypto and investment
products) have been deprioritised.
As announced in the Q3 FY22 result, Zip executed on changes to its global cost base that are
expected to decrease global people costs by $30m+ in FY23. The actions also involved an internal
reorganisation to reduce complexity, and streamlining of operations to support more efficient
growth in the core ANZ and US markets.
Sustainability and Social impact
Zip continues to invest in social and financial wellbeing initiatives for its employees and the broader
community, including:
● Reviewed and revised Zip’s five-year measurable objectives (FY21 – FY26) for gender diversity to 40% women / 40% men / 20% any gender at all levels. This led to the revision of the target for Executives and the introduction of the same targets for the Board.
● Extension of Zip’s miscarriage bereavement leave supporting US Zip employees to travel to obtain out of state support if required to terminate a pregnancy.
● Continued to support financial literacy and entrepreneurial education in the community through skilled volunteering with Young Change Agents.
● Renewed Zip’s partnership with The Pinnacle Foundation, a not-for-profit supporting LGBTQIA+ youth across Australia through scholarships and mentoring and hosted a series of internal events to celebrate Pride Month.
