Looking to buy Zip shares? Here’s what to look for in tomorrow’s results

The Zip Co Ltd (ASX: ZIP) share price will be in the spotlight this week as the company gears up to release its FY22 results.

The ASX buy now, pay later (BNPL) provider is slated to unveil its full-year report tomorrow.

While once all the rage, Zip shares have experienced an almighty fall from grace.

As the BNPL hype hit a fever pitch across the ASX, the Zip share price reached the lofty heights of $13. At these levels, the company boasted a market capitalisation of nearly $7 billion.

Fast forward 18 months and the market has well and truly fallen out of love with ASX BNPL shares. 

The Zip share price has crumbled almost 80% this year to 92 cents, giving the company a market cap of $630 million.

Shareholders will be hoping to see their fortunes turn tomorrow when Zip releases its FY22 results. 

Here’s what we know so far

Based on Zip’s unaudited quarterly reports, the ASX BNPL share’s FY22 results could look something like this.

• Total transaction volume (TTV): $8.6 billion – up 51% from $5.7 billion in FY21
• Transactions: 75 million – up 81% from 41.3 million in FY21
• Revenue: $606 million – up 55% from $392 million in FY21
• Customers: 12 million – up 64% from 7.3 million in FY21
• Merchants: 90,700 – up 77% from 51,300 in FY21

It’s worth noting that Zip completed its acquisition of QuadPay on 31 August 2020. So, the company’s FY22 results will benefit from an extra two months’ contribution from QuadPay compared to FY22.

What I’m watching in Zip’s FY22 results

When Zip hands in its full-year results tomorrow, I think the following things will be worthy of a closer look.

Unit economics

The key to a company’s sustainability, and ultimate profitability, lies in its unit economics.

For ASX BNPL players like Zip, this is all about how well they can convert the transaction value that flows through their platform into revenue. And from there, how much of this revenue they can collect from customers.

For Zip, the key metrics to watch here are the company’s revenue margin, cash cost of sales (which includes bad debts), and cash transaction margin.

In the first half of FY22, Zip’s revenue margin retreated to 6.7%, down from 6.9% in HY21.

Its cash cost of sales performance also deteriorated on the back of rising bad debt expenses. As a percentage of TTV, cash cost of sales jumped from 3.2% to 4.6%.

Ultimately, this didn’t bode well for Zip’s cash transaction margin, which subtracts cost of sales from the revenue margin. This figure stood at 2.1% in HY22, down from 3.5% in FY21, and 3.7% in HY21.

In February, management noted it was taking direct action to improve bad debt performance. Investors will be keen to see if these initiatives have been bearing fruit.

Zip has a medium-term target of achieving cash transaction margins between 2.5% and 3%.

Balance sheet health

Zip’s business model is heavily reliant on debt funding. 

And due to the nature of its services, a lot of its revenue sits in customer receivables, waiting for customers to repay their instalments. 

As a result, it’s important to pay close attention to Zip’s balance sheet.

The key line items to focus on include cash, customer receivables, and borrowings.

Investors will also be able to glean further insights from the relevant accounting notes for these line items.

Operating expenses

Zip is undeniably in a growth phase, overlooking earnings in order to chase long-term gains.

But as the company continues to burn through cash while its unit economics deteriorate, Zip has recognised something has to give.

In response, management is undertaking what has internally been dubbed Operation Blue Sky. It’s all about cutting costs in order to make the company’s operations more economically viable.

This will see the company rein in its employee expenses by $30 million, put new financial services products on the back burner, tighten new lending, and step back global expansion. 

So, Zip’s operating expenses are sure to be in the spotlight tomorrow. 

The first of these cost management initiatives kicked off in April this year, so the benefits are unlikely to meaningfully show up until FY23.

Nonetheless, investors will be hoping to see a deceleration in expenses growth tomorrow, particularly compared to the first half of FY22.

The big expenses to watch will be employee costs and marketing costs.

The post Looking to buy Zip shares? Here’s what to look for in tomorrow’s results appeared first on The Motley Fool Australia.

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Motley Fool contributor Cathryn Goh has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in 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 Scott Phillips.

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