Zip Co’s bad debts jumped to 3.82 per cent in the June 2022 quarter, from 3.40 per cent in the March quarter (at least in its core Australian business) the company said in a trading update yesterday.
Arrears also lifted, barely, to 2.30 per cent from 2.29 per cent over three months.
Zip described the bad debt spike this quarter as “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)”, adding that it expects losses will “trend down over the course of FY2023”.
Total receivables (in the ANZ core) in June for the buy now, pay later specialist were A$2.25 billion, a rise of three per cent over the quarter.
In an upbeat pitch to investors, Zip said its revenue growth in Australia and New Zealand was 30 per cent, year on year – though revenue lifted by only two per cent over the quarter.
In the most recent quarter, at least, Zip’s revenue growth lagged the seven per cent lift in transaction volume.
As with its entire portfolio of businesses, Zip’s Australian operation is subject to drastic corrective measures.
“In line with initiatives to simplify the business and focus resources on core products and fast tracking profitability, Zip has begun the wind down of the Zip Business product suite of Trade and Trade Plus,” the company said.
However, Zip Business Capital in Australia and New Zealand “will continue to operate as normal”.
In the United States, revenue fell two per cent over the quarter, while transaction volumes lifted two per cent.
Having terminated the proposed acquisition of the US-focussed BNPL rival Sezzle, Zip said: “this decision allows the standalone Zip US business to focus on the core, fast tracking profitability and delivering on its strategy in the US market.”
For all other “rest of world” geographies, revenue growth was zero, quarter on quarter, though on a pro-forma basis, Zip put its annual revenue growth in these nine territories at 73 per cent.
On the funding front, Zip said it had plenty of headroom with facilities that support its lending in Australia (with $397 million undrawn) and also in the US (with US$181 million undrawn).
Rebutting a central tenet in Banking Day’s commentary last Friday, Zip said it “has no funding covenants linked to its market capitalisation”, and “remains above all funding covenant thresholds relating to the performance of its receivables within its funding facilities.”
Zip said that as of June 30, “Zip had available cash and liquidity of $278.6 million which we expect to be sufficient reserves to support the Company through to cash EBTDA profitability”.
In commentary on the rumoured (and reported) upheavals in many corners of its global operations, Zip said it was “taking actions to right size its global cost base and accelerate the group’s path to profitability”.
Zip said it is in the process of closing its Singapore business “to reduce group cash burn”.
The closure is expected to be completed by September.
For the remainder of its rest-of-world businesses Zip said: “while 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).
“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 FY2022 accounts.”
These are bound to be deep, and likely to encompass all its ROW entities, and not just three of the most valuable.
Goodwill comprised $894 million in Zip’s December 2021 half-year accounts, with $745 million relating to Zip US (formerly Quadpay).
It completed the acquisition of Spotti (operating in the Middle East) and Twisto (focussed on central Europe) in late 2021.
Zip is now in full reverse in every market in which it operates, bar its Australian core, and even in the domestic market its funders (including NAB) will be wary, given the slump in credit quality.
Whether it’s down to a re-rating or a short squeeze is hard to tell. From a low point of 44 cents in the last week of June, Zip’s shares have rebounded. They closed yesterday at 77.5 cents – up 11 cents (or 17 per cent) on the back of a trading update that buys Zip Co a little more time.