Zip Co Limited (ASX: Z1P) shares rose 6% this morning following the release of the quarterly update. So… what was so good about the report?

About Zip Co

Zip Co provides customers with a revolving line of credit to finance their retail purchase with its brands of Zip Pay, Zip Money and Pocketbook. It is one of the largest buy-now, pay-later providers in Australia, competing with companies like Afterpay Touch Group Limited (ASX: APT) and Splitit Payments Limited (ASX: SPT). Some of its largest clients include Bunnings Warehouse, Appliances Online, EB Games and Officeworks.

The 5 Key Points

  • Record quarterly revenue of $23 million, up 20% on the second quarter
  • Receivables increased 16% to $565.3 million
  • Customer numbers increased 14% to 1.2 million
  • Market-leading credit performance with net bad debts 1.75%, down from 1.81%
  • Chemist Warehouse, Lorna Jane and General Pants joined the platform

Management Commentary

Zip Co’s CEO Larry Diamond noted that the third quarter is typically slow for retail and transaction volume fell slightly as a result.

We are pleased to report another record quarter with revenue of $23 million, and strong growth in receivables, in what is traditionally the weakest seasonal quarter in retail sales and transaction volumes”, he said.

“Although transaction volume fell 8%, total transaction numbers were flat over the quarter as our focus on driving monthly active usage generated positive results. We continued to sign well-known enterprise clients to the platform – Chemists Warehouse being the standout.”

The App and Other Important Figures

The Zip app launched in August 2018 and has seen 740,000 downloads across iOS and Android platforms.

Zip Co achieved positive operating cash flow for the fifth consecutive quarter and the cash cost of sales continued to fall to 8.2%. Revenue yield decreased slightly from 17.8% to 17.2%.

My Take

I’m trying to avoid buy-now-pay-later companies because there’s a lot of hype around them, pushing the share prices to levels that I think are above the true value of the business. Having said that, I think Zip Co is currently in a better position than Splitit solely based on the financials (Splitit quarterly report). If I had to invest in one today, I would pick Zip Co because of the positive cash flow and the significantly higher number of users, as well as the quality of the merchants using the platform.

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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).

Disclaimer: At the time of writing, Max does not own shares in any of the companies mentioned.