Afterpay’s loss widens nearly 700pc even as revenues keep growing, rival Zip’s headline loss even bigger

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Afterpay’s loss has widened by nearly 700 per cent, even as the company came close to doubling revenues last year, with success bringing some of its own costs.

Rival Zip’s results, also out today, revealed the same story of rapid expansion dramatically boosting costs, even as revenue grew strongly.

To devotees of the business model, it is further evidence of future success.

To critics, including some small business owners who use the services, it remains an unsustainable model.

‘Investment for the future’

In its latest release to the ASX, Afterpay revealed a $156.3 million net loss, 689 per cent worse than its $19.8 million loss last financial year.

The Australian buy now, pay later (BNPL) giant attributed most of the worsening profit result in the face of rising revenue to rising financial liabilities, namely the increased value of options held in its UK operations by ThinkSmart, and rising share-based payment expenses for its staff as its stock value has soared.

An increased marketing spend and staff numbers also chewed up cash as it expanded into Europe.

But co-founder Anthony Eisen is not worried about the increasing cash burn.

“That is an investment for the future and you’re seeing that show up in the strong pipeline of merchants that are coming on board in the first half of this current financial year,” he told ABC TV’s The Business.

“Maintaining that investment and that growth trajectory, but not letting margins slip, has been a good focus.”

Many big shareholders are literally buying into the narrative.

Jason Orthman is lead portfolio manager with Hyperion Asset Management, which owns about 3 per cent of Afterpay and also has a stake in Square, the US payments company taking it over.

“Investing really heavily in the business, in future growth initiatives, new products, so when you look at how much you’re spending on marketing, how much you’re spending on staff, that’s growing at higher and higher levels,” he told The Business.

“That top-line growth, that’s what we’d expect them to do.”

Mr Orthman is patient in waiting for Afterpay’s first profit, even after its looming tie-up with Square.

“We believe that the profits would come over over the coming years, and certainly well within a 10-year investment timeframe.”

The investment is showing up in total income, which was up 78 per cent to $924.7 million.

The company said it had a 63 per cent increase in active users to 16.2 million, 77 per cent growth in merchants to 98,200, and 90 per cent rise in underlying sales using its service.

It has since cracked 100,000 merchants in the early weeks of the new financial year.

Afterpay’s net profit margin on underlying sales fell from 2.3 to 2.1 per cent over the financial year.

Afterpay’s share price closed down 1.2 per cent to $133.50, although investors remain more focused on the looming Square takeover than today’s results announcement.

Zip’s loss widens even more

Rival Zip’s financial results were even more extreme, with a bigger 150 per cent increase in revenue (to $403 million) but also a much larger loss of $652 million, 3,159 per cent bigger than last financial year.

In Zip’s case, much of both the revenue growth and widening loss came from aggressive acquisition activity, notably the full acquisition of US BNPL company QuadPay last August.

The group’s operating costs roughly trebled over the past year, with staff and marketing costs increasingly sharply as it incorporated new businesses and chased customer growth.

Today it continued that expansion by announcing the full takeover of South African BNPL firm Payflex.

Zip now has 7.3 million customers and 51,300 merchants using its services across 12 countries.

With many of the key figures already flagged ahead of today’s results, Zip’s share price was flat at $7.32 by 11:50am AEST.

Afterpay’s rapid growth

Founders Nick Molnar and Anthony Eisen have made the  modern-day lay-by service so popular that earlier this month it became the subject of a $39 billion takeover by US payment giant Square.

It was Australia’s biggest ever corporate takeover.

The company only listed on the Australian Stock Exchange in 2016.

Afterpay has grown its consumer base of millennials and Gen Z customers, who have been spending more online during the pandemic and are increasingly ditching their credit cards in favour of the buy now, pay later platform.

Co-founder Nick Molnar told The Business that is where its growth will continue to come from.

“The millennial and Gen Z consumer will represent 50 per cent of all retail spend globally by 2030,” he argued.

“It is the core consumer base that retailers are focused on in acquiring because it has the greatest short-term impact, but also long-term lifetime value.

“So to be able to provide insights into those demographics and those spend profiles and how, retailer by retailer, we can give them insights on how they can grow their business by leveraging the information present on our platform.”

Mr Orthman is also enthusiastic about the company’s youth appeal.

“We believe credit and credit cards are old technology, and businesses like Square and Afterpay understand that there’s a generation that’s not being serviced properly,” he said.

Mr Orthman said Hyperion is currently planning to hold onto the ASX-listed Square stock it will receive in the Afterpay takeover.

“If we were given cash as part of the proposed Square deal we would have been actually quite disappointed,” he told The Business.

“So the ability to actually roll that Afterpay stock in into Square stock in early 2022 is quite actually exciting for us.”

Since 2018, Afterpay has grown its list of fashion, beauty and health retailers including Urban Outfitters (and sister brand Anthropologie), Kim Kardashian’s KKW Beauty, Forever 21, Boohoo, Bed Bath and Beyond, Adidas and Pandora.

The business, started by the two neighbours in their homes in the affluent Sydney suburb of Rose Bay, now has more than 16 million customers and nearly 100,000 merchants around the world.

It is aiming to move in on global competitors such as Klarna, Affirm and Zip Co.

Afterpay faces stiff competition

But Afterpay’s scale is still low when compared with Swedish competitor Klarna Group, which CBA has taken a stake in.

Klarna has about 90 million consumers and 250,000 merchants using its platforms across 17 countries.

Online payments giant PayPal and tech behemoth Apple are also now playing in the BNPL space.

Many businesses, big and small, that use Afterpay and other BNPL services hope the growing competition in the sector will start to push merchant fees down.

Sasha Wicker offers Afterpay in her Melbourne fashion store and gets charged 6 per cent in fees for each transaction.

“For a small business like myself, it eats into my margin,” she said.

“Whereas I think with the bigger big box retailers that have a bigger margin, it’s definitely something that wouldn’t affect their margins as much as mine.”

Mr Molnar, 31, and Mr Eisen, 49, will join US-listed company Square as employees once the takeover deal is completed in the first quarter of 2022.

The pair are already billionaires, ranking in the AFR’s list of richest bosses as well as richest individuals.

Last year Afterpay and Westpac announced a partnership to allow the BNPL platform to provide Westpac transaction and savings accounts and other cash flow management tools to its 3.3 million customers in Australia.

Afterpay wants to further capitalise on its base of repeat and loyal customers by offering a new mobile app called Afterpay Money that will help them better budget.

But now Square wants to bring its Cash App to Australian users.

Afterpay has been subject to constant regulatory pressure, but so far Australia’s corporate watchdog ASIC has stopped short of regulating the sector in the same way as it does with credit card companies.

A recent review from ASIC found that one in five consumers using BNPL services missed payments, but stopped short of imposing new regulation on the sector.

By business reporters Nassim Khadem and Michael Janda (Original ABC Article)