Cost blow outs and asset writedowns crunched the bottom line performance of leading buy now pay later provider, Zip Co Limited, in the 12 months to the end of June.
Zip’s share price came under pressure on Wednesday after it announced a record full year net loss of A$653 million.
The bottom line loss in 2020 was $19.9 million.
The company’s scrip closed down 19 cents or 2.6 per cent to $7.13 on above-average turnover.
A big bottom line loss was widely anticipated by the market because most of the company’s mark-to-market adjustments on the carrying value of the recently acquired QuadPay business in the US were included in the first half accounts.
Non-recurring cost items, including the $306 million QuadPay writedown, were a major contributor to the negative bottom line.
Zip was forced to write down the acquisition after it decided to unify the branding of its global operations.
That decision rendered the QuadPay brand intangible valueless.
However, Zip also reported big rises in operating expense lines, including bad debts and expected credit losses which more than doubled to $123 million.
The other big cost blowouts included bank fees and data costs (up $58 million), administration (up $17 million), marketing (up $61 million) and share based payments (up $122 million).
While total revenue more than doubled to $402 million, the soaring costs drove the business to a pre-tax loss of $718 million - a material increase on the $20.5 million pre-tax loss recorded in 2020.
The bottom line result was enhanced by a fat tax benefit of $65.2 million.
In commentary included in the financial accounts, Zip’s directors downplayed the significance of changes in some cost items such as the big rise in bad debts.
“Reported bad and doubtful debts as a percentage of underlying volumes fell from 2.6 per cent to 2.1 per cent,” the directors stated in the accounts.
“Excluding the impact of the movement in the provision for doubtful debts, net bad debt write-offs remained consistent at 1.3 per cent of underlying volumes.
“Zip continues to refine its underwriting criteria to maximise the operating income opportunity whilst managing bad debt performance.”
Directors attributed part of the overall cost blowout to higher processing costs in the QuadPay business and indicated they were looking at ways to bring average expenses in the US in line with the Australian business.
“Processing costs incurred by QuadPay in the US, acquired during the financial year, are higher than in Australia and New Zealand due to the cost of processing in the US,” the directors said.
“Zip is exploring opportunities to lower its cost of processing through leveraging its global processing requirements.”
Tighter cost management is likely to become a theme for Zip and other standalone buy now pay later providers this year as major domestic banks such as CBA and NAB launch interchange-based BNPL products that will be cheaper for merchants to accept.
Merchants are now incurring fees of around 80 basis points for accepting payments through CBA’s StepPay product compared to 2 to 4 per cent for the “zipPay” offering.
This pricing difference could potentially incentivise merchants to offer customers discounts