Zip dumps overseas operations in bid to stem cash burn
Embattled fintech Zip Co will shut down, restructure or sell a series of overseas operations as it looks to reduce its cash burn and start making profits for its shareholders in the second half of this calendar year.
At its half-year results on Thursday, buy now, pay later operator (BNPL) Zip provided new details on how it plans to meet its guidance to deliver positive earnings before tax, depreciation and amortisation (EBTDA) in its next financial year.
Even so, some in the market remain concerned about how quickly the company is burning through cash, despite its loss narrowing in the six months to December.
Zip said it would end its operations or divest from India, Turkey, Czech Republic, South Africa, Poland and the Philippines, alongside previously disclosed moves to exit the Middle East, United Kingdom, Mexico and Singapore. Zip, which is the biggest local rival to Afterpay, will be left with operations in Australia, New Zealand, the United States and a small position in Canada.
The move to cut ties in a range of overseas markets is a stark reversal of Zip’s plans two years ago to become a global business, at a time when BNPL firms were racing to expand all over the world.
But like many loss-making tech companies, Zip has been forced to slash costs as interest rates have risen, and investors have been less willing to speculate on profits arriving in the long-term future.
Co-founder Peter Gray argued the strategy of shrinking overseas would position the company to start making profits, pointing to Zip’s $78.5 million in cash reserves, and the further cash it would receive from exiting overseas markets.
“The cash burn will be neutralised from the total rest of world business unit, and we will receive some cash inflows as part of that process,” Gray said.
Zip said its preferred measure of core cash EBDTDA – which excludes the businesses it plans to divest – was a $33.2 million loss in the first half, an improvement of $27.3 million on the same half a year earlier.
On a statutory basis, Zip made a loss of $241.2 million, which the company said reflected one-offs including share-based payments and writedowns relating to its convertible notes.
Several analysts were cautious on the stock, which has tumbled by about 75 per cent in the past year amid a wider plunge in valuations on loss-making tech companies.
BNPL firms such as Zip provide interest-free digital instalment loans as an alternative to credit cards, and the sector boomed during COVID-19 amid a wave of cheap debt and surging online shopping. However, the industry has faced challenges from growing competition and rising interest rates, with small rival Openpay going into receivership this month.
Gray said Zip could benefit from consolidation among BNPL operators by expanding its market share. “We have been of the view that consolidation would occur in our industry, and that’s what we are seeing now,” he said.
In early afternoon trading Zip shares were down 4 per cent to 54 cents.
Several analysts were cautious on the stock, which has tumbled by about 75 per cent in the past year amid a wider plunge in valuations on loss-making tech companies.
Citi analyst Siraj Ahmed said Zip’s core earnings had improved in the December quarter, and a key focus for the market would be on the proceeds Zip received from selling its overseas operations.
UBS analyst Tom Beadle said Zip had taken steps to reduce its cash burn, and this issue would remain a focus. Beadle, who has a “sell” on Zip shares, also pointed to a note in Zip’s accounts from independent auditors Deloitte, who said “a material uncertainty exists that may cast significant doubt on the group’s ability to continue as a going concern”.
RBC Capital Markets analyst Wei-Weng Chen also said Zip’s liquidity runway was a “key concern”.
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Source: Thanks smh.com