Company Overview: zipMoney Limited offers point-of-sale credit and digital payment services to consumers and merchants. The Company provides a range of integrated Retail Finance solutions to small, medium and enterprise businesses across various industries, both online and in-store. The Company offers its services primarily to the retail, education, health and travel industries. Its products include zipMoney and zipPay. zipMoney is classified as a continuing line of credit and generally applied to various ticket purchases where a promotional interest-free period is applied, between 6 to 24 months. zipPay is a no interest ever digital shopping account and generally applied to various ticket purchases, such as fashion, accessories, food and hospitality. It supports prime, near prime and emerging prime borrowers by providing those customers with a revolving unsecured line of credit to finance their transactions. Its platform utilizes a range of variables to deliver real-time consumer credit responses.
 

ZML Details
 
zipMoney Ltd (ASX: ZML) has been working on initiatives that provide simple-to-use and consumer-friendly financial products and the interest-free digital wallet being offered by the group enables it to be very different from incumbents. The group’s focus is on use of conventional and non-conventional data for achieving better approval rates and lower loss rates. Recently, the group has been strategically partnering with many players to target more customers. ZML’s aim to deliver its first cashflow breakeven before the end of FY18 is also looked at as a major catalyst.

Expanding client base: zipMoney recently added Kogan.com who is a major pure-play online retail website, to the Zip platform. More than one million active Kogan.com customers would access the zipPay digital wallet at checkout, enabling shoppers a limit of up to $1,000 and the ability to pay flexibly over time for the interest-free purchases. Kogan operates in rapidly growing verticals like Kogan Travel, Kogan Mobile and Kogan Insurance, and offers over 70,000 products available to consumers at great prices. The group even made a strategic partnership with Quest Payment Systems Pty who is a major provider of payment terminals, payment infrastructure and retail technology. Quest will offer zipPay acceptance across Australian network of merchants, which comprises multi-store chain retail, petrol stations, pharmacies, grocery and public transport systems. With this partnership, Zip’s would add more new and important everyday spend categories. Fantastic Furniture also added the Zip interest-free payments platform. Fantastic Furniture comprises 77 stores in Australia and is part of STEINHOFF, an integrated discount retailer that manufactures, sources and retails furniture, household goods and clothing in Europe, Africa and Australasia. The group enhanced its merchant numbers to 5,900 across Australia with over 10,000 locations, online or in-store, which are currently accepting Zip. Merchant numbers have surged 34% in first quarter of 2018, driven by the rise in the mid-market and SMB segments, which benefitted from ongoing investment in channel and platform partnerships strategy. The group got around 50 inbound merchant enquiries per day, indicating the rising penetration of the Zip brand in the market.
 

Zip merchants as of first quarter of 2018 (Source: Company reports)
 
Aiming for cash flow break-even by FY18: The group is aiming for a cash flow break-even on a monthly basis by fiscal year of 2018. It is targeting to cut the Funding Costs going forward. In the first quarter of FY18, major part of the receivables is in expensive legacy funding facilities, but full transition was forecasted to occur in November 2017. As a result, the funding costs have been indicated to be reducing from 9.6% per annum in Q1 FY18 to over 6% going forward. Moreover, the group stabilized operating cost base and expects this to remain broadly flat in the second quarter of FY18 with only modest growth forecasted for the rest of FY18.
 

Quarterly operating margin (Source: Company reports)
 
Improving Transaction Rate: ZML delivered a record quarterly revenue of $6.9 million during the first quarter of FY18, which is a rise of 22% as compared to the fourth quarter of FY17. Transactions on the platform enhanced 23% during the quarter from Q4 FY17, and surged 673% as compared to the same period last year. Merchants rose 34% during the quarter while enhanced 338% year on year (yoy) against Q1FY17. Receivables surged 16% to $176.4 million in Q1FY18, against the fourth quarter of FY17. Bad debts reached 1.98%. The group enhanced the Transaction volume by 10% to $95.1 million against Q4FY17. The group reported a positive start to Q2 FY18, with volume processed October-to-date indicating a quarterly run-rate of $115 million. The customer engagement metrics is delivering an ongoing improvement as the Zip merchant base rises in scale and the products utility resonates with customers. The group’s repeat transaction rate grew from 46% at the beginning of the year to 70% by Sep ’17. The average Zip customer has also transacted more than 3x on the platform.
 

Growing transaction rate (Source: Company reports)
 
Westpac’s investment in Zip: Westpac invested over $40 million in the group at $0.81 per share. The group used a part of these funds to repay costly mezzanine capital in Zip’s funding structures, enhance the equity held by Zip in its receivables portfolio as well as expedited the path to break-even. This investment boosted the group’s financial position enabling it to leverage solid potential market opportunity. On the other side, cash outflows from operations reached $2.7 million in the first quarter of FY18 from $3.9 million in Q4 FY17. But Operating Expenses (staff, administration and corporate costs) rose to $6.0 million from $5.6m in earlier quarter due to rise in average permanent headcount from 103 to 116. However, the group expects the Operating Expenses for the second quarter of FY18 to be broadly stable at $6.1 million.
 
Targeting new market-Health Services: The group is targeting to penetrate in the health services industry and currently is in the early stages. ZML achieved initial $1 million-dollar month of transaction volumes while delivered a 138% growth in transactions, on a quarter on quarter basis. The number of registered clinics surged 66% while the group signed more than 700 clinics. The Zip brand is gaining penetration in this sizeable market segment with more than $29 billion spent annually.
 
Ongoing growth in Pocketbook: The group’s Pocketbook business built over 385,000 users, while ZML has been enhancing its proprietary categorization engine, which drives much of the higher-level features and insights. The categorization engine was trained across Pocketbook’s 650 million transaction set, while the group was able to achieve an uplift of more than 20% through the application of machine learning techniques. These features would drive Pocketbook’s position as a major financial management tool in Australia, strengthening Zip’s credit decision engine through world-leading categorization technology.
 
Rising receivables: Receivables surged 16% to $176.4 million as at 30 September 2017, against the earlier quarter. The customer repayment profile continues to increase, with 14% of opening receivables balance, showing a healthy repayment behavior by Zip’s customer base. The strong credit performance continues to validate the group’s investment in 100% owned proprietary credit and fraud decision technology. The group continues to add new Data Scientists, Data Engineers and Fraud Analysts and is enhancing the risk management capabilities through machine learning and improved business processes over the quarter. The proprietary credit and fraud decision technology and platform, especially with regards to the zipPay product, is finding great support based on performance and the inclusion of further data sources and analytic techniques.
 

Rising receivables (Source: Company reports)
 
Invested in Data Science: The group invested in data science to understand the consumer’s needs and the behaviors which would enable it to make better decisions. Investment in data science, alternative data, decision technology (Decisiontech) and credit technology (Credittech) is the core business model. The group digests major data in real time via API, offering users a competitive edge against the traditional credit card issuers and consumer finance players. Zip model uses multivariate machine-learning modelling while understands transaction, social, and behavioral insights. ZML has developed and rapidly deployed its first artificial-intelligent (AI) models, which enhanced the ability to support real time credit and behavioral decisions, as well as ongoing customer service and support. This led to 85% of the customer applications being processed in real time, 24 hours a day, without the need for human intervention.
 
Stock performance: The group continued to expand its presence in the $300 billion retail target industry while enhancing the monthly transaction volume. ZML’s ongoing addition of merchants, indicates the penetration in the target markets. The group is focusing on managing costs while investing to achieve growth. The shares of ZML have delivered returns of 4.6% in the last four weeks (as of November 20, 2017) and there exists more room for momentum given the efforts and strategic partnerships. Although some competition exists from peers such as Afterpay, however, length of promotional interest-free periods and some flexibility to change payment schedule seem to provide ZML an advantage while the stock trades at comparatively low levels. We give a “Buy” recommendation on the stock at the current price of $0.67, ahead of its Annual General Meeting on November 30, 2017.


ZML Daily Chart (Source: Thomson Reuters)

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