The Zip Co Ltd (ASX: ZIP) share price significantly outperformed the S&P/ASX 200 Index (ASX: XJO) in March 2023.
The buy now, pay later (BNPL) business climbed by around 10% while the ASX 200 fell by around 1%. It’s been rare for Zip to have such a positive month compared to the ASX.
But, there’s a very good reason for the company’s outperformance.
Cash flow breakeven?
Zip announced at the end of March 2023 that it had signed agreements to divest its businesses in South Africa (Payflex) and central and eastern Europe (Twisto). The BNPL business also said that it’s winding down its business in the Middle East.
The ASX share said that it expects aggregate net cash inflows of approximately $20 million to be received in the FY23 second half as a result of these moves.
Zip noted that cash earnings before tax, depreciation and amortisation (EBTDA) for its Europe, Middle East and African (EMEA) businesses was negative $10.2 million in the first half of FY23. As a result of the announced transactions and decisions, on completion of the moves by Zip, it will have “successfully delivered on its objective of neutralising cash burn from its rest of the world (RoW) footprint by the end of this financial year.”
In that announcement, the company said that it continues to progress other activities in line with its strategic priorities. It also said that this demonstrated its focus on the core businesses of the US, and Australia and New Zealand.
Zip noted that the expected cash inflows will “contribute directly to the group’s available cash and liquidity and Zip remains confident that it has sufficient available cash and liquidity to deliver on positive group cash EBTDA during H1 FY24.”
Is this good news?
The market definitely seemed to like it, with the Zip share price rising.
One of the biggest issues that Zip faced before this announcement is that it wasn’t cash flow breakeven, yet it had to grow to have enough scale to potentially be breakeven. Spending on growth activities uses cash.
On top of that, the environment has changed for BNPL. Interest rates have shot higher, which is problematic because interest is one of the main expenses for Zip. There is also increasing talk about regulators introducing regulation.
The business may be on track for breakeven, though there’s more to its future success than just that. With the business walking away from a number of markets, it’s now betting more on the US being able to provide a lot of the growth that it’s looking for.
The recent FY23 half-year result showed that US revenue was up 6% to $152.5 million, while ANZ revenue was up 23%. But, the rest of the world revenue had increased 374% to $18 million.
Zip share price snapshot
Since the start of 2023, Zip shares are flat compared to the start of the year.
