As the BNPL fad continues deepening into irrelevance, market leader Zip Co (ASX: ZIP) insists profitability is on its horizon. You just have to overlook any timelines for such to be achieved, and their $1 billion loss for FY22 which includes $276m in customer delinquency write offs.
Consumers have been happy to utilise Zip’s BNPL services whose FY22 revenue jumped 57% to $620 million which was generated from $8.7 billion in total transaction volumes – a 51% YoY increase – but those jumps are irrelevant when they are losing any earnings from bad customer debts.
It seems that few Zip users worry about the consequences of failed repayments with Zip writing off $276.1 million in bad debts and credit losses. That’s almost half of their revenue!
The $276.1m in write-offs represents a 109% increase on last year’s $131.5m in bad debts. This means that bad debts are effectively growing faster than revenue.
Being a growth company, cash burn has always been a concern for Zip which has tried to scale internationally. Combining these efforts with their bad debts, the Company delivered shareholders a net loss of $1.01 billion for FY22. That figure ballooned out from last year’s $697 million net loss.
Nonetheless, Zip Co-Founder and CEO Larry David insists that there is still a clear pathway to profitability for shareholders.
“In our Half Year results we acknowledged changes in the external environment were quicker and more severe than first anticipated. Against this backdrop, we changed strategy and shifted to delivering sustainable growth, right-sizing our global cost base and accelerating the path to profitability,” said David.
“To that end, I want to share that we have already delivered on a number of initiatives to reduce cash burn, manage credit losses and improve unit economics. Our ability to pivot and adapt to the new world, showcases the resilience and viability of our business model as we focus on the opportunity ahead in FY23.
“While FY22 has been a year of change and consolidation, our mission and values remain constant. In times of heightened inflation and cost of living pressures, BNPL has become even more of an important budgeting tool for everyday consumers. That is why we have never felt more passionate about giving people the knowledge, access and the ability to control their financial lives so they can live every day with confidence.”
As of 30 June 2022, Zip had $279m of cash on hand but will be able to continue its ambitious recovery courtesy of $600 million in debt funding between their Australian and US operations.
The Company is desperate to drive down their credit losses, which they concede have exceeded their internal target range, by tightening their credit limits and optimising their collections process. How they intend to do this hasn’t been explained but it’s fair to say there’s a quite a few Australians walking around with nice new jackets and not a care in the world about their future credit profiles.
Other attempts to stem cash burn include the previously announced plan to shut down their Singapore and UK operations while actioning mass layoffs to reduce their payroll by at least $30m in FY23.
Smaller business divisions in Australia for trade finance will also be shut down while growth projects have also been de-prioritised such as their crypto products.
But don’t worry Zipsters, profitability is still on the agenda.
Alfred Chan is a Business Reporter at The Sentiment specialising in ASX-listed small cap companies, a bloodstock enthusiast and former equities analyst.
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