Zip Co Ltd (ASX: ZIP) shares have gone through a lot over the last few months and years. Just look at the graph below.
The buy now, pay later ASX share is facing several areas of uncertainty – regulation, higher interest rates, uncertain spending for households and a retreat from several global markets by Zip to focus on Australia and the US.
There are a lot of worries and fears, but the quarterly update was promising by the business, and could suggest that there's light at the end of the tunnel.
Solid update
The ASX BNPL share said that quarterly revenue of $193.8 million was up 21.1% year over year, while transaction volume increased 6.4% year over year to $2.3 billion.
Zip ANZ experienced annual revenue growth of 26.1% and Zip US revenue rose 13.6%. The revenue margin for the core business improved to 8.5% (from 7.6% in the fourth quarter of FY22).
It noted that the cash transaction margin for the core business improved again to 3.1% for the quarter, up from 2.8% in the third quarter of FY23. Zip boasted that this was a "strong result" in a rising interest rate environment.
Zip US credit losses were 0.85% of total transaction volume in the FY23 fourth quarter, an improvement from 1.2% in the FY23 third quarter and 2.7% in the FY22 fourth quarter. Zip US was cash positive on a monthly earnings before tax, depreciation and amortisation (EBTDA) basis.
However, Zip ANZ saw net bad debts of 3.11% of TTV because of a variety of factors, including "the external environment impacting consumer credit more broadly, and the impacts of some one-off issues with third party payment processing."
Is this the start of something special for the Zip share price?
The company has neutralised its cash burn from its 'rest of the world' footprint by the end of FY23. It has also reduced its annualised base salary costs by around $16 million across the US, ANZ and its corporate divisions. It's also winding down the 'Zip business capital' in ANZ.
At the end of June 2023, it had cash and liquidity of $57.3 million.
Aside from the net bad debts in Australia, the company reported excellent revenue growth and a good margin improvement.
It's somewhat surprising to me that ANZ has seen such a worsening of its bad debt situation, while the US is doing well and improving each quarter.
Zip is doing the right things to improve its financial position – cutting expenditure in areas where it makes sense, growing revenue and seeing an improvement in the cash transaction margin. If it keeps growing revenue, then its bottom line (ignoring bad debts) should be able to get to a net profit after tax (NPAT) position.
The key question is what happens with bad debts. There's no point making a decent margin on buy now pay later if it's then losing a lot of that profit to bad debts. If the US can continue to grow and outperform Australia, then it could more than offset any local problems.
With a market capitalisation of just $364 million, the market isn't expecting much of the company.
It's at such a low price, with low expectations, that it could outperform if it does a little better than the market is expecting. Zip is working with a large revenue base, so a small positive shift in the margins or bad debts could make a big difference to profitability. But, I'm not confident this is the worst it's going to get in terms of Zip's bad debts and the economy in general.
However, Zip isn't the sort of ASX share I'd personally invest in, so I'd rather look at other opportunities where growth and profitability seem clearer.
