Zip shares whipsaw on June quarter update: Bad debts rise, winding down products

Zip (ASX: ZIP) shares both rallied and then plummeted 6% in the first 30 minutes of trade. Investors seemed to have a lot of differing opinions about the company’s June quarter results. 

At face value, key performance metrics continued to grow at a reasonable pace.

Group quarterly revenue was $160.1m, up 27% year-on-year, active customers hit 12.0m, up 64% and 90,700 merchants are now on the platform, up 77%.

Cash transaction margins improved to 2.4% compared to 2.3% in the March quarter, but well-below FY21 margins of 3.5%.

Zip said it had sufficient reserves of $278.6m cash and liquidity to support its roadmap to breakeven by FY24. The cash balance represents a slight decrease from around $300m at the end of the March quarter.

Zip intraday chart

Bad debts on the rise

Bad debts in the US increased to 2.7% of total transaction volumes in the June quarter, up from 2.6% in the first-half of FY22 and around 1.0% a year ago.

Management reaffirmed to investors that continued fine tuning and optimisation will see losses below the target level of 2.0% by the end of the calendar year.

The bad debt narrative was worse for the A&NZ region, up to 3.82% for the quarter, compared to 3.40% in the March quarter and 182% a year ago.

Again, management tried to reassure investors that losses have peaked in the A&NZ region and arrears roll rates - a forward indicator of losses - are trending down in FY23. 

There was no comment about losses for the rest of the world. 

Rolling up the carpet

A year ago, Zip was proud to call itself a global player, having established its presence in 12 markets.

Now, the company is taking several actions to ‘right size its global cost base’ including job cuts, closing its Singapore operations, winding down Zip Business and retiring the Zip Pocketbook app. A strategic review for the ‘rest of the world’ is underway, and a more detailed update is expected in the company’s FY22 full year results.

Take note of goodwill

On a side note, Zip warned about a potential impairment charge against the carrying value of goodwill against Spotti, Twisto and Quadpay assets.

Last year, earnings took a -$44.7m impairment charge attributable to Zip UK.

This might be worth keeping an eye out for come August reporting season.

Zip 12-month price chart