Loss now, profits later: Zip Co maintains rosy outlook

Total revenue was up 19 per cent to $351m, buoyed by record transaction volumes and improved credit margins.

Chief executive Larry Diamond expects earnings to improve by up to 50 per cent in the second half, leaving Zip on track for positive earnings for the first time in the 2024 financial year.

"Although topline growth has been tempered by deliberate adjustments to risk settings, our strong net margin performance is a very clear proof point of the successful execution of our strategy to increase revenue margins and reduce credit losses," he said.

But liquidity remains an issue for Zip, said RBC capital markets analyst Wei-Weng Chen. 

Cash outflows of $200m in the past half left Zip with just $78m in available liquidity. A further $16.6m of cash outflows are expected in the second half.

"With non-operating cash inflows uncertain and the expectations for continued operating cash outflows, we remain concerned about Zip's liquidity runway position," Mr Chen said, branding the company with a negative sentiment rating.

It has been a tough few years for buy now, pay later, as economic uncertainty, competition and the threat of regulation have loomed over the industry.

Zip shares dropped 4.4 per cent to 54 cents shortly after 11am, a loss of 95 per cent over two years. 

Despite having never posted a profit in almost 10 years of operation, Zip appears to be stabilising its fundamentals as it streamlines its business. 

The company has wound down operations in the UK, Singapore and Mexico, narrowing its focus to Australia, New Zealand and the US in an effort to reduce operating costs.

Mr Diamond believes the company is well placed to push through oncoming economic headwinds.

"In an environment of rising interest rates and high inflation, our results demonstrate the increasing relevance of our products to customers and merchants," he said, citing the addition of new partners eBay, Qantas and Uber as proof.

But the threat of regulation bursting the buy now, pay later bubble remains ever-present.

In a submission to a Treasury review into the sector, corporate regulator ASIC last week backed new rules that would subject companies such as Zip to the same lending rules as banks and credit card providers. 

"Zip continues to support fit-for-purpose regulation," Mr Diamond said.

Zip's existing credit checking processes for new customers and experience offering regulated credit through its Zip Money produce left the company well placed, no matter the outcome of the Treasury review process, he said.