The higher you dream the more hurt it will be when you fall, therefore sometimes it is much better to be realistic than to offer pie in the sky. This expression is probably what first comes to mind when seeing Zip Co’s (ASX: ZIP) latest update on their Q1 FY23 performance, especially for those who live by realistic principles.
Zip proudly announced that as of 30 September, they had available cash and liquidity of $140m that were expected to be sufficient all the way to cash EBITDA profitability. The balance at the end of the quarter was the result of some significant non-operating cash movements totalling $100m, which includes $16.3m paid to terminate the potential acquisition of Sezzle. Moreover, $15.9m cash and liquidity reported at the previous quarter is now reported as receivables following the full repayment of the Zip Business Trade and Trade + facility in July 2022. If customers make repayments this will become available as cash.
Looking from the broader perspective, we’re unable to determine how long the amount of cash at the bank will be able to sustain the business considering Zip incurred a net loss of $1 billion in FY22. Also, relying on customer repayments may be overly optimistic and give the impression of Zip’s interpretation of the struggling BNPL industry. The industry currently struggles with bad debts and Zip is no exception.
The Company had to swallow 2.38% of net debts on average from their worldwide operations. Their US operations did slightly better with 2.36%, but Australian operations struggled with 2.49%. However, these numbers were an improvement from the 2.7% net bad debts that had to be written off last year to the tune of $276 million.
Zip acquired a total revenue of $158.4 million in the September quarter from their US, Australia and New Zealand, and Rest of the World operations combined. Zip remains a favourable payment method amongst shoppers as it observed a 17% increase in active customer numbers and 15% increase in transaction volume compared to last year. This can be attributed to key enterprise merchants signed or launched in the quarter including Hoyts (in AU), Barnes & Noble College (in the US), and eBay AU (went live in October) that exposes more shoppers to Zip’s easy 8-weeks-interest-free installment. Jetstar will jump on the bandwagon in Q2 just in time for the peak travel season. Keep in mind, this is not a formal cash flow report which Zip has historically been a cash burning machine.
Moving forward, Zip’s co-founder and CEO Larry Diamond is still optimistic about re-routing Zip back to the pathway to profitability.
“With a more focused strategy on our core markets ANZ and the US, we substantially lowered credit losses, repaid $40m of debt, and completed an upsized $300m receivables funding transaction, demonstrating the resilience of the business model in the face of ongoing external volatility,” stated Diamond.
Other growth initiatives also include optimising repayment procedures to improve receivables turnover, consumer and merchant price renegotiation, introduction of profitable features, and cost cutting initiatives. However, it wasn’t directly mentioned in the announcement what the steps are that Zip has taken to minimise bad debts.
Zip will be walking a tightrope if it has to undertake extreme measures to beef-up the credit requirements. This would oppose Zip’s core principle to make their service simple, fair, easy to use, and disrupt the traditional credit card model. If the regulations are too complicated, customers may lean towards other payment options. On the other hand, it’s probably not worth the time and money for Zip to take legal action against each and every one of the customers who didn’t pay back the $200 or $300 that they owe.
Being tight on cash, adding legal expenditures to the list may fuel the cash burn further.
Clara is a Business Reporter for The Sentiment.
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