There is a lot in this update to absorb but here are the most...

There is a lot in this update to absorb but here are the most interesting points in my view:

The good

Transactions
Afterpay's transactions growth is in line with what it was the same time last years so not slowing down as some people may have expected. In fact, the this March was the Group's third underlying sales month on record. In the Global Expansion section Afterpay notes that at this point their ambitions to exceed their underlying sales mid-term target of approximately $20b by FY22 and NTM of 2% remains in place. If Afterpay was seeing signs of significant stress these targets would have been scaled back. Very positive.

Bad debt
Gross losses are estimated at 1% so there is no increase in bad debt in relation to COVID-19 (yet). This is something that I've been talking about for some time, with all the announced stimulus packages and the small nature of Afterpay debt, there is no reason for people not to pay this debt.
I should note that this is by far my favourite part of this business update because in my view the recent times would have been the most vulerable times for bad debt to increase. That's because COVID-19 came somewhat unexpected and some people would have, very unexpectedly been laid off while being stuck with this debt. Going forward this becomes less and less of an issue because those people who have lost their jobs or who have uncertainties surrounding their employment are less likely to take on huge debt. On top of that, Afterpay has taken other measures to limit any losses including reducing the limit to customers and in some cases they have dropped them completely. They are also getting people to pay the first installment straight away which instantly reduces exposure by 1/4.

I'm very impressed!

Income margins
Income margins have increased in March and in FY20 YTD compared to H1 FY20. I have no explanation for this at all. How can margins increase in this kind of environment?! I'm baffled.

Mature markets profitability
This is something to note for all the downrampers that continue to question how a business that doesnt turn a profit is valued so high. It's very simple. The mature markets are profitable. The reason why the overall company isn't is because they are expanding world wide so that one day those mature markets will also be profitable. Once the business has finished its expansions it'll start racking in cash and holders should be rewarded with some decent dividends. Also note the use of the word "highly" profitable.  

Capital position
Again something I've been talking about for a while, the business has a strong balance sheet and liquidity position which means they do not need to raise capital in the foreseeable future. I thought the Group had around $400m in cash, well now they are sitting on $541m. Even if their bad debt were to increase they have so much cash it would take years to burn through if they scaled back expansion and just focused on core markets. They also mention downside scenario modelling which also supports the view that operations could be supported for years if the stressed environment continues.

US
The US operation continues to gain momentum. The company noted that underlying sales in this quarter is on par with the previous quarter which is incredible since last quarter included Christmas period and black Friday/ Cyber monday sales. If you take a forward looking view it makes you question what this year's christmas period will look like and what the US operations look like in 2022 when COVID-19 should be under control.

Analytics
Afterpay is demonstrating it's ability recognise trends with them noting an increase in personal care and homeware categories before trending back towards lifestyle and luxury categories while trave, ticketing and entertainment categories remain significantly depressed. They don't show this here but they have shown in the past that they can identify individual items that are being sought out by customers. I enjoy seeing this kind of analytics in action. This will be a goldmine in 10 years time.

Ebay
Ebay appears to be performing strongly with Afterpay noting that Ebay has become "a top performing Australian merchant within a few days from launch". I don't think this is overly shocking given the size of Ebay however strong uptake is very positive.

Risk Management
As a risk analyst to me this is the most interesting part of the report and they are touching on a lot of points that I've been noting over the last few weeks. Ability to assess transactions in real time due to their quantitative credit risk models. Suspending customers immediately if a single payment is late ensures that bad debt charges don't blow out. It's very likely that many of the "reject" for a lack of a better word will move to competitors such as Klarna and Sezzle meaning Afterpay's book will be higher quality.


Wix
I don't know much about Wix and cloud-based development platforms but this reads as a big positive to me. Happy for others to comment on this further.


The bad

UK
I'm not overly impressed with the underlying sales growth in the UK. It's not too surprising to me as I've been monitoring Clearpay on Google trend and some other review platforms which suggests growth isn't following the same path as it did in the US. The big difference in the UK is that Afterpay isn't the market leader there. Clearpay is to Klarna what Zippay is to Afterpay in Australia. However maybe I'm being a little harsh. Afterpay did note a strong increase in customer growth in the UK (as well as US).

In-store sales
While in-store sales have declined, this is completely expected. I probably shouldn't even include this here but there is little else to put in the "bad" basket so might as well.

Uncertainty
Company has not identified any sustained trends in any of its operating regions. This uncertainty isn't unexpected but it's uncertainty nonetheless which is never good.

In-store US
Again not unexpected but likely delay to in-store use of Afterpay in the US. Given that no one is really shopping in-store at the moment this is something of a mute point.


I'm only halfway through the report. There is a lot more to get through which I may do later but for now I have to start work. As always I'd encourage people to use objective analysis to discuss all of the above and please don't waste your time with 1 liners about unemployment rates and other noise. Let's stick to facts and how Afterpay's business is affected. Cheers.