Zip share price edges higher amid third quarter update

Zip shares are on the move on Thursday following its third quarter update…

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Key points

  • Zip has released a mixed third quarter update this morning
  • The buy now pay later provider reported solid (but slowing) top line growth
  • It also reported improvements in its cash margin but worsening credit losses 

The Zip Co Ltd (ASX: ZIP) share price is having a subdued but positive start to the day.

This follows the release of the buy now pay later (BNPL) provider’s third quarter update under the new ticker code ZIP.

At the time of writing, the Zip share price is up slightly at $1.22.

Zip share price edges higher following quarterly update

  • Quarterly transaction volume up 27% year on year to $2.1 billion
  • Group quarterly revenue up 39% year on year to $159.2 million
  • Active customers up 78% to 11.4 million
  • Merchants up 90% to 86,200
  • Cash transaction margin improved to 2.3%
  • Credit losses worsen

What happened during the third quarter?

For the three months ended 31 March, Zip reported a 27% increase in quarterly transaction volume to $2.1 billion. This reflects transaction growth of 28% in the US, 7% in the ANZ region, and the inclusion of Rest of the World transaction volume of $154.8 million.

Zip’s revenue came in 39% higher year on year at $159.2 million thanks to an improvement in its cash transaction margin to 2.3%.

While this top line growth was solid on paper, it is a slowdown on what the company recorded during the first half. During the six months, Zip reported transaction volume growth of 93% and revenue growth of 89%.

Also potentially holding back the Zip share price today could be its credit losses. Management advised that due to a combination of both internal and external factors, credit losses increased outside the company’s target range during the quarter.

Zip is addressing this by executing on adjustments to its risk settings to drive down credit losses towards target levels, while still maintaining top line growth. This includes through the rollout of new machine learning models and comprehensive diagnostic analysis.

Positively, these adjustments have seen an immediate improvement in February and March cohorts in the United States. Though, it is worth noting that even these cohorts are still outside Zip’s target range at this stage.

As for costs, the company is taking steps to reduce its operating costs by trimming its workforce. This is expected to reduce staff costs by $30 million+ in FY 2023. Additional initiatives across procurement and automation are also underway, and these will be realised in the coming quarters

Management commentary

Zip’s Co-Founder and Global CEO, Larry Diamond, appears to be pleased with the progress the company made during the quarter. He said:

“In the half year results we acknowledged a change in external factors and announced several adjustments to our strategy – with a refined focus on sustainable growth, strong unit economics and fast tracking profitability.

The quarter saw us continue to deliver top line growth and strong revenue margins, while beginning to implement this refreshed strategy. The Sezzle acquisition remains on track and will deliver significant scale and synergies, directly supporting our objective of accelerating and winning in our core US market, and building a profitable business at scale. Our merchant pipeline is exceptionally healthy and we look forward to welcoming game changing merchants to the platform in Q4.

The underlying business remains strong, we are well funded and positioned to execute on the significant market opportunity as we aim to take control of our future. We are well on our way to disrupting the unfair and broken credit card, with a better and fairer digital alternative for the customer of tomorrow.”

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended ZIPCOLTD FPO. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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