The Zip Co Ltd (ASX: ZIP) share price is heading in the right direction at long last on Thursday.
In afternoon trade, the buy now pay later (BNPL) provider's shares are up just over 1% to $1.22.
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Why is the Zip share price rising today?
Investors have been bidding the Zip share price higher in response to the release of the company's third quarter update.
For the three months ended 31 March, Zip reported quarterly transaction volume growth of 27% year on year to $2.1 billion and quarterly revenue growth of 39% to $159.2 million. This was underpinned by a 78% year on year jump in active customers to 11.4 million and a 90% lift in merchants to 86,200.
How does this compare to expectations?
Despite what you might think by the performance of the Zip share price today, this top line growth appears to have actually fallen short of the market's expectations.
For example, a note out of the extremely bearish UBS highlights that Zip's transaction volume growth of 27% is tracking well short of consensus second half estimates of 53%. As a result, it will now need a stellar fourth quarter to hit these estimates.
This softer growth appears to have been driven by lower usage among its customer base. For example, during the quarter, Zip reported 5.6 million transactions in the US. However, it has 6.6 million active customers in the country. This means at least 1 million customers were inactive during the period.
And while transactions per customer are still more than 3x in the ANZ market, transactions fell by almost a quarter during the three months despite customer numbers increasing.
UBS believes this is a sign that there are a lot of soon to be inactive customers among its customer base.
It said: "We see this as further evidence that there is a tail of inactive customers that have not yet fallen out of Zip's base."
Credit losses worsen
Another area of concern which has analysts talking, but hasn't stopped the Zip share price from climbing today, is its worsening credit losses.
Management revealed 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 now executing on adjustments to its risk settings to drive down credit losses towards target levels, while still maintaining top line growth. It notes that this will be done the rollout of new machine learning models and comprehensive diagnostic analysis.
And while it is already having a positive impact in the US with new customer cohorts, it isn't quite hitting its target just yet.
One positive, which may be helping the Zip share price today, is management accelerating its path to profitability. It is aiming to achieve this by downsizing its workforce. The company sees potential savings of over $30 million in FY 2023.
Time will tell how these initiatives turn out.
