Zip Conquering The US

Australia | 12:02 PM

A better than expected quarter for BNPL provider Zip Co was driven by a rapidly growing US customer base in a still underpenetrated market.

• Zip Co’s September quarter beats on US growth
• Earnings and margin exceed expectations
• Bad debts considered manageable
• US market remains underpenetrated

By Greg Peel

BNPL provider Zip Co ((ZIP)) last week reported September quarter cash earnings of $63m, which is almost twice that of a year ago and ahead of consensus forecasts.

The quarterly earnings 'beat' was driven by stronger than expected US total transaction value (TTV) growth as well as revenue yield and cost control, partially offset by higher than expected net bad debts.

US TTV grew 47% year on year in constant currency terms, picking up from 45% in the June quarter. Citi believes growth is being driven by increasing adoption of “Pay in 8” given average spend per customer grew 27% year on year versus transactions growth of 18%.

[Zip offers customers “Pay in 4” and “Pay in 8” options. For a minimum purchase of US$35, customers can pay back in four instalments over six weeks. For a minimum purchase of US$200, customers can pay back in eight instalments over fourteen weeks.]

Zip has upgraded its FY26 US TTV growth target to greater than 40% year on year from greater than 35% previously.

This momentum sets Zip up well for the seasonally stronger December quarter, UBS suggests, given the larger customer base and continued proof of engagement growth (spend per customer, higher average order value and frequency).

Despite opex growth accelerating to circa 18% year on year in the September quarter, an operating margin of 19.5% was above the top-end of FY26 guidance of 16-19%.

Ord Minnett views FY26 guidance as conservative given the second half typically sees a better operating margin, now forecasting 20% in FY26.

Yet, while US take-up is accelerating, the home Australia and New Zealand region is waning. US active customers grew 150,000 in the quarter, accelerating both year on year and quarter on quarter.

On the other hand, A&NZ TTV growth slowed to 11% in the quarter from 14% in the prior quarter, and A&NZ net customer decline accelerated to -56,000 from -37,000.

And Another Thing

US bad debts written off increased to -1.5% in September from -1.1% in June. Net bad debts of 1.65% were a touch above a consensus estimate of 1.6%.

Brokers are quick to shrug off this increase as a natural result of an increasing customer base. When active customer numbers are rising, bad debts are typically higher, Ord Minnett notes.

A pickup in this metric makes sense given greater growth from new customers (versus existing and re-activated dormant customer) and is still at a comfortable level, UBS suggests, balancing growth and profitability.

For US consumers, the outlook is nonetheless increasingly dire. Already having suffered through the post-covid inflation spike and subsequent high cost of living, consumers are now facing increasing prices once more thanks to Trump’s tariffs.

While inflation is ticking up at a slower than expected rate in the US, analysts suggest this is due to merchants easing in the impact rather than risking sticker shock from a one-time step-jump. On that basis, inflation is expected to continue ticking up.

Meanwhile, electricity costs are surging due to accelerating data centre demand. The US is facing the same demand/supply-driven housing crisis as is the case in Australia.

On November 1, Obamacare tax rebates will expire, driving health insurance costs potentially twofold or even threefold higher. The Republicans have shut down Congress, hence no negotiations to end the current government shutdown, driven specifically by Democrats’ objection to the said expiry of rebates, can proceed.

Federal public servants are not being paid. This has led to long lines at charity food banks, but it has also sparked a jump in the use of short term credit. Data show more and more Americans are using BNPL to pay for their weekly groceries.