How does Zip plan to become a cash flow positive ASX company?

With the Zip share price down again today, the company has mapped out its strategy to become cash flow positive.

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Key points

  • Zip has mapped out its plans to become cash flow positive in its annual report today 
  • The Zip share price is down by more than 90% over the past 12 months 
  • There is a three-point plan to becoming cash flow positive, including focusing on its core markets of Australia and New Zealand and the United States 

The Zip Co Ltd (ASX: ZIP) share price is down 0.44% today to 68 cents. What a shocker this company has had in 2022. The Zip share price is down 84% in the year to date and down 90% over the past 12 months.

That's nothing short of a horror story for ASX shares investors. Worse than Poltergeist. Worse than Freddy Kruger. In fact, worse than the two of them put together, with the shower scene from Psycho on top. Am I getting carried away here?

At any rate, Zip shareholders are tired. And clearly, Zip management is also fed up with how things have been going.

As my Fool colleague Mitch has previously reported, Zip is changing course. It's going from seemingly being all about ballooning company growth to wanting positive cash flow and profitability.

In July, Zip and Sezzle Inc (ASX: SZL) mutually agreed to abandon plans to merge. Zip is also closing its Singapore and United Kingdom businesses, which form part of its non-core 'rest of world' market.

This will leave the company clear to focus on its two core markets — Australia and New Zealand (ANZ) and the United States — at least for a while.

Zip has mapped out its strategy to become cash flow positive in its annual report released today.

A simplified strategy is the first step

In its annual report, Zip explains its plans to simplify the business and focus on the best bits:

We have reviewed and refined our priorities with a focus on accelerating our path to profitability and have made progress with our three strategic priorities – sustainable growth, unit economics and cost management.

Our FY23 strategy is to allocate capital and focus effort on areas of our business that demonstrate the right characteristics to accelerate our path to profitability.

Specifically, we have simplified our strategy to focus on core markets ANZ and the US which are either already generating positive cash EBTDA or have a clear and near path to positive cash EBTDA; and products with proven market fit and sustainable unit economics.

So, what's the plan to positive cash flow?

Zip outlined three key elements in its path to positive cash flow and group profitability. They are growth in the ANZ and US businesses, an improvement in unit economics, and reducing the global cost base.

One way it plans to grow in ANZ and the US is by continuing to recruit new enterprise merchants. Its most recent big player sign-ups include Best Buy Co Inc, Bed Bath & Beyond Inc, Footlocker, Inc, JB Hi-Fi Limited (ASX: JBH), Qantas Airways Limited (ASX: QAN), and Virgin Australia. The company says it now has more than 90,000 merchants. That's a 77% increase year over year (yoy).

Attracting new customers is another way. In FY22 in ANZ, Zip signed up 400,000 net new customers to grow to 3.2 million in total. In the US, Zip's customer base grew by 45% yoy to 6.4 million.

For the record, the ANZ business has been cash flow positive for four years and had a record profit in FY22. The US business is not yet there but has "a clear and near-term path to achieving positive cash flow", according to Zip.

In terms of improving unit economics, Zip is "targeting a reduction in cash cost of sales as a percentage of TTV to 4.0%-4.5% in the medium term with improving credit performance a key driver".

It also aims to reduce processing costs and offer customers increased payment flexibility. This includes personalised repayment schedules and enhancing the rewards program.

Zip says: "As part of our strategic review, we are also working through and will finalise actions related to our remaining non-core global businesses, reducing group cash burn."

Zip said its balance sheet is "strong with available cash and liquidity of $278.6 million as of 30 June 2022".

Furthermore: "With our current plan, we believe this is sufficient capital to see us through to group positive cash flow."

BNPL still in its infancy as a payments system

Zip says buy now, pay later is only in its infancy worldwide, so the future looks bright:

The COVID-19 pandemic accelerated the rise in the use of digital wallets and the addressable opportunity for BNPL remains significant, with BNPL expected to be the fastest growing ecommerce payment method over the next two years.

As consumers are increasingly seeking products that are fair, transparent and provide seamless customer experiences we expect continued market penetration of BNPL as a payment method.

Across our core markets, ANZ and the US, penetration is less than 2% of the total addressable market with significant opportunity, particularly in the US which is still early stage and expected to more than double by 2025.

Motley Fool contributor Bronwyn Allen has positions in Qantas Airways Limited and ZIPCOLTD FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Best Buy, Block, Inc., and ZIPCOLTD FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Foot Locker. The Motley Fool Australia has positions in and has recommended Block, Inc. The Motley Fool Australia has recommended JB Hi-Fi Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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