Openpay Group [ASX:OPY] is suspending its US operations indefinitely and materially reducing its US staff as the buy now, pay later (BNPL) stock continues to scale down to drive down costs.
OPY shares rose as high as 29% on Friday, rising from its all-time low of 12 cents.
Despite the boost today, the OPY stock is still down 90% in the past 12 months as investors sour on BNPL and its business model.
Source: Tradingview.com
Openpay ditches growth at all cost
It’s July 2021.
Openpay has just released its June quarterly update.
Active BNPL plans rose 141% to 2 million. Total transaction volume rose 46% to $92 million.
Openpay’s USA BNPL is about to go live, with OPY describing it ‘as the world’s largest developed BNPL market’.
OPY concluded the quarterly presentation with the comment:
‘FY22 will be the year when Openpay will record initial substantial volume growth in the largest global consumer market, the US, where all high-growth competitors have built a presence, creating a fundamental quantum leap in growth and scale.’
Fast forward to July 2022.
OPY has ‘materially withdrawn’ from the UK market and has just announced it will do the same with the US.
Despite describing the US as the ‘world’s largest developed BNPL market’ a year earlier, the size of the market was not enough to offset the costs incurred to operate in it.
What remains of OPY’s presence in the US will be a ‘skeleton team’. BNPL loan origination will be suspended indefinitely.
Why did OPY ditch its US growth plans?
Having already withdrawn from the UK market, Openpay turned its attention to the US.
Should it continue operating there? At what cost? Under what structure? With what funds?
OPY tasked US investment bank Keefe, Bruyette & Woods with answering these questions as corporate advisors.
The bank was also tasked with searching for potential investors, ‘given the scale and capital requirements for that market.’
Given OPY’s significant drop in market value, dilutive capital raises were not a sustainable option for financing.
Keefe, Bruyette & Woods were clearly unable to find potential investors, despite ‘advanced discussions with several interested parties for a transaction to provide direct investment’.
In a frank admission, OPY explained that it felt the best course of action was to suspend its US operations:
‘However, given the current macroeconomic and public market conditions, together with the likely ongoing capital investment required in the US to fund its progress for an extended period, Openpay has decided to pause its existing US operations indefinitely and cease loan originations on the Opy USA platform.
‘As a consequence, Openpay’s US workforce will be materially reduced, with a small skeleton team to continue for a short period to assist in the transition.’
OPY will make no further investments in its existing US operations ‘in the near term’, barring restructuring costs.
What will OPY do now?
If the UK and the US are a no-go, what will OPY focus on now?
Its mature Australia market.
‘Openpay believes that available capital and funding are best allocated to the Australian business given its continued strong growth, market-leading margins and unique market positioning.’
OPY said the singular focus on Australia is warranted given the market ‘continues to perform strongly’ with ‘market-leading margins’.
Openpay said it has a ‘clear runway to profitability targeted for June 2023.’
The last point is ambiguous.
Is OPY targeting profitability by June 2023 or a pathway to profitability in June 2023? And what is the difference?
More detail will be forthcoming in OPY’s trading update for June 2022, slated to be released later this month.
The outlook for OPY and BNPL in trying times
CEO Dion Appel commented on the big operational change:
‘This decision to shift our approach in the US was not taken lightly but will now allow even greater focus on Openpay’s Australian business which continues to perform strongly in terms of growth (TTV, revenue, active plans, customers, merchants, etc) and metrics (gross margin, NTM, loss and arrears rates etc) as highlighted in our May Trading Update.
‘This will also allow further focus on the capitallight OpyPro B2B business as it continues to move into a significant ramp-up phase.
‘We remain incredibly proud of what Openpay and its dedicated team have achieved in the US since December 2021, and the Company will continue to look to leverage and monetise its investment in the US and the UK markets in the future.’
The market’s positive response to the news suggests investors think winding down operations in costly markets is a smart approach at a time when cost of debt is rising and consumer sentiment is waning.
The BNPL sector is especially sensitive to consumer experiences, and as interest rates continue to climb, more customers are put at risk of missing repayments.
Often shareholders are left to pick up the pieces.
Over in the UK, financial regulators have also been pressuring BNPL companies with requests to refund late fees and change their consumer contracts, calling them ‘unfair and unclear.’
The suspension of operations in the UK and the US will likely help OPY’s cash burn and reduce costs.
The question now, of course, is where OPY goes from here.
BNPL stocks were often assessed on their growth outlook.
Valuations skyrocketed in 2021 on the back of strong growth projections in key markets like the US — a market OPY has just abandoned.
So how will the market recalibrate its valuation of BNPL stocks?
It’s an interesting question…time will tell.
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Regards,
Kiryll Prakapenka,
For Money Morning