Zip Co said its QuadPay acquisition in the United States will drive user numbers and payments volume higher this year and has confirmed its COVID-19-delayed launch in Britain will be in the coming half year.
Zip reported 87 per cent growth in transaction volume over its platform to $2.1 billion for the year to June 30, as older cohorts used its app more frequently. This delivered revenue of $161 million, up 91 per cent, and cash earnings before interest, tax, depreciation and amortisation (EBITDA) of $3.5 million, which was below market expectations due to higher credit loss provisions.
But investment in its expansion into the US and Britain has pushed its bottom line deeper into the red: Zip's loss of $20 million was up from $11.1 million last year.
Zip shares were down 3.7 per cent to $9.29 shortly before the close, after trading as low as $8.75 earlier in the day. They gained an extraordinary 27 per cent on Wednesday, when the company announced a partnership with eBay for it to enter lending to small businesses.
Zip has also partnered with Amazon Australia to provide instalment services on its retailing platform and Amazon is set to become a shareholder in Zip as warrants issued as part of that deal vest. Westpac is also a large shareholder.
Zip said it had 2.1 million customers in total, up 62 per cent, and was working with 24,500 retail partners, up 51 per cent. But QuadPay, the US provider it will formally integrate into Zip next week, has a further 2 million users. This will bring Zip's user base and merchant number to just below half the number of Afterpay's.
Once QuadPay is included, annualised revenue is tracking at $270 million for 2020 and expected to grow from here, although Zip provided no firm guidance on financials for the 2021 year.
Chief executive Larry Diamond said credit cards continue to see a sustained decline in users, while the pandemic would drive e-commerce volumes higher after the crisis subsides. “The next 24 months is expected to see continued rapid adoption” of instalment services globally, he said.
He said Zip will push into new segments, including providing consumer credit and small business credit, which distinguishes it from Afterpay, which only provides an interest-free, instalment product. But Zip does not break out its earnings based on its buy now, pay later product ZipPay, and its line of credit, ZipMoney.
Bad debts tick up
Despite the coronavirus, Zip saw monthly arrears decline to 1.33 per cent of receivables, from 1.89 per cent in 2019.
However, Zip took an extra provision of $11.9 million to cover expected credit losses from the crisis and "the uncertain economic environment", bringing total credit provisioning to a total of $25.8 million, which was higher than expected. Its bad and doubtful debt expense of $53.6 million was up from $21.9 million.
After loosening credit underwriting standards before the crisis arrived –management flagged at the end of 2019 that bad debts had been too low – net bad debts rose to 2.24 per cent of receivables, up from 1.63 per cent at the end of 2019. Zip said this was "in line with management expectations and significantly outperforming the market".
It expects these to tick lower after it tightened credit underwriting standards when the crisis began. It said balances subject to COVID-19 hardship were less than 0.1 per cent of the loan book.
Like Afterpay, it pointed to improving credit risk from customers that have used the service for longer and said older cohorts of users are transacting at a rate 3.5 times higher than in their first year.
On the earnings call, analysts sought to understand how QuadPay's partnership with Fiserv, a large US payments processor, would help connect its large merchant base with QuadPay's instalment plans. Mr Diamond said higher US retailer integrations are expected due to the relationship.
The British market launch was delayed as a result of the pandemic, but Zip said it is expanding the team in preparation to push the go button in the first half, where it will compete with Klarna and Afterpay's Clearpay brand. Zip said Britain "remains a massive opportunity", pointing to online penetration of non-food sales of more than 40 per cent.
"Zip have the most widespread and differentiated offering in the buy now, pay later space," said Shaw & Partners analyst Jonathon Higgins.
"US buy now, pay later penetration is likely to accelerate and rise materially, whereas in Australia it sits at over 25 per cent and is eating traditional card and banking business models. The first half of 2020 will further be a massive period for the entire sector and stocks will likely get even more expensive."
Zip will hold an EGM for shareholders next week to approve an equity investment of up to $200 million from Susquehanna Investment Group to help fund the US growth.
Zip has a $200 million debt facility with Goldman Sachs to support US lending growth, and $1 billion in receivables funding from Australian banks and public markets after launching the world's first buy now, pay later master trust program.
Zip's rival Afterpay has also reported full-year results on Thursday, showing revenue and new customers doubled over the past year.
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