Zip Co said its US subsidiary Quadpay has delivered record transaction volume, revenue and customer numbers over the third quarter as US shoppers flock to its lending app.
In a trading update on Tuesday morning that exceeded market expectations and sent its stock higher, Zip said 674,000 new customers had joined Quadpay in the third quarter, bringing its total to 3.8 million, up 153 per cent year-on-year and 19 per cent higher than the second quarter. It has 46 per cent more customers in the US than its 2.6 million in Australia.
In the US, third-quarter transaction volume of $762 million was up 234 per cent year-on-year and 8 per cent compared to the second quarter which has historically been stronger given it includes the big trading days of Black Friday, Cyber Monday and Christmas.
Quarterly revenue in the US was $54.4 million, up 10 per cent on the second quarter. Merchant numbers in the US of 13,000 were 55 per cent higher than the previous quarter and CEO Larry Diamond said the “global merchant pipeline is extremely healthy”.
The growth is being driven by the popularity of interest-free payment plans for customers, funded by merchants to drive sales. As Quadpay continues to sign up new merchants, it also allows its app to be used anywhere a card payment is accepted; these transactions deliver lower revenue compared to signed-up merchants but help drive customer adoption rates. In contrast, Afterpay can only be used with integrated merchants.
Zip’s transaction volumes in Australia were 8 per cent lower quarter-on-quarter but up 61 per cent year-on-year, while revenue was 10 per cent up on the second quarter. Analysts expect local growth to continue after the recent high-profile signing of The Good Guys and JB HiFi which did not contribute to the latest results. Over 230,000 new accounts were opened in the quarter in Australia and New Zealand.
Zip said net bad debts in Australia fell to 1.78 per cent, from 1.93 per cent, but it did not report bad debts for the Quadpay business. However, it said its ‘net transaction margin’ in the US - which takes fee income from sales and subtracts bad debts and receivables warehouse funding costs - “continues to remain stable, well in excess of 2 per cent demonstrating very strong unit economics”.“Our US business was again a standout, confirming our position as truly one of the fastest growing global BNPL leaders,” Mr Diamond said.
Revenue for the group of $114.4 million was a record and 80 per cent higher than a year ago, while transaction volume of $1.6 billion was up 114 per cent on a year ago.
The quarterly update did not provide details on profitability. At its half-year results in February Zip reported an EBITDA loss for the first half of $14.8 million, as funds were spent on an aggressive global expansion where Zip is fighting Afterpay, Klarna, Affirm and Sezzle.
Shaw & Partners analyst Jonathon Higgins, who has a buy rating on, and is a long-term supporter of, Zip, said the third-quarter numbers landed ahead of his expectations.
“Overall, an extremely strong quarter from the group and well above Shaw expectations and the markets expectations,” he said in a flash note to the broker’s clients on Tuesday morning.
Zip shares are off heavily since hitting $14.53 in the middle of February, trading at 40 per cent below that level at $8.32 on Monday. The stock rose 6 per cent as the market opened on Tuesday to $8.83 on the back of the healthy result.
But Zip is trading at around a 60 per cent discount to its main rival Afterpay. Mr Higgins said this left room for a stock re-rating. Zip’s lower valuation has been a source of frustration for management who have been exploring options to list securities in the US. Investors consider Afterpay is a better bet given the strong network effects it has created and its larger scale.
After an incredible run-up in January and February amid market euphoria around growth stocks linked to e-commerce, Zip, Afterpay and other buy now, pay later players slumped heavily in late February and March, as global bond yields rose and investors rotated into value stocks.
Macquarie said in a research note in late March that the near-term outlook for buy now, pay later was “grim” given the explosive growth of recent years, however, over the medium term, the future is positive as the main players establish themselves in new regions and the industry consolidates.
Zip said on Tuesday the UK remained a key strategic focus and retailers including Homebase, JD Sports, Boohoo and The Fragrance Shop were all on-board. Zip Business was also a focus in Australia, where Zip Trade overs lines of credit up to $3,000 and Zip Trade Plus is providing $150,000. Zip lends to business with interest-bearing loans under its Zip Capital division.
Zip has has also launched in Canada and plans to enter the Philippines via an investment in TendoPay. It also has stakes in buy now, players in Europe and the Middle East in a global land-grab for instalment payments.
Zip said its $US150 million US facility with Goldman Sachs has been drawn down to $US112 million as Quadpay accelerates. Overall, it has $781 million in undrawn facilities. It said it expected its next issuance of senior notes, part of its Master Trust funding program, to receive a AAA rating that would further reduce its cost of capital.
At The Australian Financial Review Banking Summit just before Easter, Zip co-founder Peter Gray said it would enhance its app and digital wallet to include new budgeting tools, and potentially a “high coupon savings product” and crypto, to take on the major banks and Afterpay.
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