Zip shows its resilience despite challenging macro conditions with Q4 revenue rising 21%

Australia’s largest pure play listed BNPL company reports strong quarterly growth despite the challenging macro environment.

Zip Co (ASX: ZIP) has released its Q4 results showcasing impressive performance with increased group revenue, transaction volume and transaction numbers as well as delivering a significant reset to its balance sheet.

The US-based, ASX-listed business exited FY23 cash EBTDA positive on a monthly basis and the company continues to reiterate its guidance of reaching EBTDA profitability during 1H FY24.

Transaction volume for the quarter rose 6.4% YoY to $2.3 billion but Group Revenue for the quarter grew at a faster clip, up 21.1% to $193.8m, thanks to a strong increase in revenue margin.

The company’s core cash transaction margin increased to 3.1% for the quarter (up from 2.8% in Q3 FY23) – a strong result considering the current rising interest rate environment.

Encouragingly, contrary to concerns in some quarters about Zip’s cash burn, the Company reported an increase in cash and available liquidity in Q4 to $57m versus $51m in Q3.

Discipline leads to strong growth

CEO Larry Diamond said the strong growth was the result of the disciplined approach of Zip’s management team to running the business in a tougher environment for consumers.

“Today we delivered another strong set of results driven by particularly strong revenue growth of 21.1%, improved margins and a disciplined approach in how we grow and run our business,” said Diamond.

“We’ve seen the cash transaction margin for the core business improve again to 3.1% and we are pleased to deliver such a strong result despite the rising cost and interest rate environment.

“This performance yet again demonstrates the resilience and strength of the business in a challenging macroeconomic environment.”

Zip delivered a substantial improvement in credit loss rates in the US, from 2.7% a year ago to a mere 0.85% in Q4, describing the result as “a standout”.

Expansion of enterprise merchants

The company secured new key enterprise merchant partners in its core markets during the quarter with several notable brands. In Australia, the company signed partnerships with Sheike, Webjet, Peloton and Hewlett Packard.

In the US, Zip partnered with WHP Global, Mitchell and Ness, Fevo, Hanes Brand and Lovely Wholesale.

Strategic divestments neutralising cash burn

Zip divested its businesses in Central and Eastern Europe (Twisto), South Africa (Payflex), and the Middle East (Spotii). This move aligns with Zip’s objective of neutralising cash burn from its Rest of the World (RoW) footprint by the end of FY23, streamlining its operations for increased efficiency.

Additionally, the company undertook a significant liability management exercise, resulting in a $192.2 million reduction in convertible note liabilities. This transaction reset Zip’s balance sheet and materially improved its financial position without any cash impact.

“We’ve continued to deliver on our strategy – we’ve reduced our cost base and exited our non-core businesses in RoW. With these successful transactions, we have neutralised cash burn from our RoW footprint by the end of the financial year as planned,” said Diamond.

“Liability management was a key highlight of this period, with the exercise undertaken in June reducing our convertible note liability from $330.0m to $137.8m, at a significant discount to face value.

“The exercise provides Zip with a materially strengthened balance sheet and positions the company for future profitable growth in FY24 and beyond.”