Afterpay revenue rises but unpaid debt charge-offs continue

Australian-founded buy-now pay-later (BNPL) company Afterpay, now in the hands of US payments multinational Block (ASX: SQ2) since early last year, saw its revenue improve in the March quarter to reach US$223.7 million ($334 million) while unpaid debts past 180 days due were tracking higher than the average over the course 2022.

The revenue was substantially higher than the $129.8 million registered by the parent company in the March quarter of last year, but that period only included two months as the acquisition was finalised on 31 January 2022.

The broader Block group has been busy integrating Afterpay into its Square and Cash App Pay interfaces, the latter launched in September 2021 so that customers could pay by simply scanning a QR code or tapping a button on their mobile device at checkout.

On an average monthly basis, Afterpay's revenues were up 15 per cent year-on-year in the March quarter.

The company's allowance for credit losses stood at US$141.5 million ($211 million) at the end of the period, up 29 per cent on a year prior although this was a marginal improvement on the start of 2023, partly due to a US$52.4 million ($78.1 million) charge off on consumer receivables that were 180 days past due with "no reasonable expectation of recovery".

This compares to US$168.7 million ($251.6 million) in charge-offs for the 11 months to the end of 2023 - a period in which Afterpay made a provision of US$203.7 million ($303 million) for credit losses.

In the latest March quarter, Afterpay made US$43.1 million ($64.3 million) for such provisions, which is down by almost a third on the average monthly rate in 2022. 

As the group had flagged in its annual report released in February, Block reiterated in its quarterly report several risks relating to Afterpay, whose ongoing integration could "disrupt our business and adversely affect our future results of operations".

Block reports the integration of Afterpay has been "complex and time consuming" with difficulties including the loss of key employees, and challenges with managing a larger and more complex company with differences in business backgrounds, corporate cultures and management philosophies.

The group reports Afterpay historically generated net losses prior to the acquisition, and this state of affairs may continue if Block is unable to generate adequate revenue growth and manage its expenses.

Block also notes existing competitors and new entrants in the BNPL space have engaged in aggressive consumer acquisition campaigns, and may develop superior technology offerings or consolidate with other entities and achieve benefits of scale.

"Such competitive pressures may materially erode our existing market share in the BNPL space and may hinder our expansion into new markets. In addition, mergers and acquisitions by, and collaborations between, the companies we compete against may lead to even larger competitors with more resources," the group stated.

In March, Block was the subject of a scathing short seller report from Hindenberg Research, including criticism of Afterpay's late fees and claims the company "lures customers into extending beyond their means".

"Afterpay does not need to perform credit checks or income verification, typically required for traditional loans, due to technicalities such as charging “fees” rather than interest and limiting the length of its loans to 8 weeks," the report stated.

"Block suggests that because Afterpay only charges fees if a payment is late that it does not “push customers into long-term debt at high interest rates.” It also refers to its late fees as being “low and capped”.

"The reality is that Afterpay’s late fees can reach an APR [annual percentage rate] equivalent as high as 289 per cent, worse than the most punitive debt products."

Block's response was that the report was "factually inaccurate and misleading".

“Hindenburg is known for these types of attacks, which are designed solely to allow short sellers to profit from a declined stock price,” Block stated at the time.

“We have reviewed the full report in the context of our own data and believe it’s designed to deceive and confuse investors.

“We are a highly regulated public company with regular disclosures, and are confident in our products, reporting, compliance programs, and controls. We will not be distracted by typical short seller tactics.”

Shares in SQ2 are up 1.26 per cent to $91.29 per share at 11.22am AEST.