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Afterpay (ASX:APT) share price rises on FY20 result

The Afterpay Ltd (ASX: APT) share price is edging higher at lunchtime after jumping nearly 6% in early morning trade. Here’s my take on Afterpay’s results.

Operating leverage on show

Having pre-reported its earnings and major metrics, there was little in the way of surprise for Afterpay shareholders today.

Underlying sales were up 112% to $11.1 billion, revenue jumped 103% to $502.7 million and the net transaction margin sat at 2.3%.

It’s important to distinguish between underlying sales, which is transactions processed by Afterpay, and revenue or income, which is the fee charged to merchants; the latter being key to profitability.

Management indicated that annual transaction growth is currently running at $15 billion, even before recently-announced expansions into Canada, Europe and Asia.

The company reported a net loss of $22.9 million, far better than the $52.4 million expected by analysts, supported by another fall in gross loan losses to 0.9% of their book.

Interestingly, just 14% of Afterpay’s income is now sourced from late fees, with the remaining 86% paid directly by merchants for the pleasure of offering Afterpay’s service.

How did each region perform?

The company’s incredible growth continues unabated, hitting 9.9 million active users and 55,000 merchants, but barely scratching the surface overseas, where the US now has 5 million customers despite just a few years of operation.

Australia remains the core profit centre, delivering $142 million in EBITDA during the year, yet the US’ contribution doubled to 36% and the UK recently reached 5% of sales in a single year of operation. Given the European market is estimated to be $300 billion, there is a huge runway of opportunity ahead.

Innovation remains at the core of the business with the announcement of the Pulse rewards program, offering more flexible payment options, discounts and other benefits for those who consistently repay on time.

Summary: Another great result, but a difficult company to value.

For a detailed write-up on Afterpay’s results, check out this article from Rask Media’s Cathryn Goh: Your guide to the Afterpay Ltd (ASX:APT) FY20 report

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Disclosure: At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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