PayPal 2018 Q1 Conference Call Notes

This strong performance was driven by continued growth of core PayPal and Venmo users and our Customer Choice initiative. Choice continues to produce strong customer activations and a year-over-year reduction in our overall churn rate. We expanded the global roll-out of Choice by launching in China and nine additional countries across Southeast Asia and further expanding into Europe by launching in France, Germany, Italy, and Spain. Following the addition of a record 29 million net new actives in 2017, we’re pleased to see continued strength in our customer acquisition.

We remain confident that net new actives for this year will be in line with the record additions we experienced last year. And as our consumer base expands, the growth of merchants signing up to our platform is also accelerating. Our merchant base now totals 19 million accounts. This powerful network effect along with continued improvements to our technology platform and enhancements in our product experiences continues to drive increasing engagement. PayPal ended the first quarter with 34.7 transactions per active account, up once again by 8%. Our efforts to redefine our ecosystem with landmark partnerships, the introduction of new products and services, and the continued expansion of our global footprint led to strong volume growth.

  • CEO Dan Schulman

The above quote, taken from Schulman’s opening comments on the conference call, almost perfectly captures the quarter. PayPal’s customer choice initiatives, rolled out over the last fifteen months or so, has led to its customer base using their PayPal accounts more. The more PayPal account holders utilize their accounts, the more merchants want to sign up onto PayPal’s platforms. The more merchants on PayPal’s platform, the more customers use their accounts and the more new consumers sign up for accounts. And on and on the virtuous circle goes.

PayPal’s Customer Choice initiative also allows consumers to easily pick which credit or debit card they want to use for each transaction and includes tokenization, which empowers offline and more secure transactions. Every quarter, it seems there’s several more wrinkles or new partnerships added, giving PayPal’s customers more choices than ever before. This quarter, Chase’s popular Freedom credit card added PayPal as one of its bonus reward categories.

But now it’s not just domestic partnerships, it’s international too, as alluded to by the quote above. These are some of the deals with foreign entities announced this quarter:

• In Kenya, 28 million consumers can now seamlessly integrate their M-Pesa accounts with PayPal.
• In Spain, CaixaBank and Bankia both further integrated their online sites with PayPal.
• HSBC Holdings now allows corporate customers in the U.K. to pay distributions to beneficiaries through PayPal, a capability that will be rolled out across Europe in the coming months.
• Barclays announced a strategic partnership that enables its customers to more easily link their accounts to PayPal and soon use their reward points on PayPal’s digital platform.

It should also be noted these deals area win-win. The partners are just as willing to deal with PayPal as the other way around. COO Bill Ready made it a point to highlight this during the conference call:

“[W]hat we’re seeing is tremendous receptivity from our banking partners to really drive their customers into PayPal because it’s a great source of digital transaction growth, which was the primary place where issuers were growing right now. And we’ve seen really good response from the programs that are out there, and they’ve been tremendous both for us as well as for our issuing partners. And so we’re not committing any kind of unnatural acts to get those things to happen. In fact, our venue partners have found it very much to be in their interest to promote their customers to use PayPal. So we see that as something certainly indicative of a partnership…”

Ready later added:

[W]hat we are seeing is tremendous receptivity from our banking partners to really drive their customers into PayPal because of the great source of digital transaction growth, which is the primary place where issuers are growing right now.

These aren’t just words. For instance, Bank of America introduced a streamlined option for its account holders to sign up for a PayPal account on its mobile and online channels this quarter.

Venmo enjoyed another spectacular quarter. Payment volume increased 80% YOY to $12.3B. More new customers signed up for Venmo this quarter than any before.

Pay with Venmo going even better than expected. 2M merchants have dedicated Pay with Venmo buttons, including big names like Eat24, GrubHub, Pottery Barn, Seamless, and Williams-Sonoma.

The PayPal-Venmo combo is dominating mobile payments. Processed $49B in mobile payment volume, up 52% YOY. Mobile payments now makes up 37% of total payment volume. Again, most of this credit was given to One Touch. W/One Touch, PayPal’s mobile sales conversion rate is 89%, double industry average. One Touch now has 92M consumers, 8.6M merchants enrolled. Personally, I find it so easy to use, I literally get annoyed when an online merchant doesn’t offer it. For more on One Touch see https://www.fool.com/investing/2017/02/06/paypals-one-touch-…

On returning money to shareholders or looking for acquisition opportunities. In Q1, company repurchased 23.6M shares, approximately $1.8B worth. On company’s thoughts about using cash for additional buybacks or future M&A opportunities, CFO John Rainey said:

“We still prioritize capital allocations first as investing for growth, and that can be either organically or through M&A activity but we also believe in returning cash to shareholders. It so happens that in the first quarter we had clarity on a couple of important issues. One is tax reform. The other is the transaction that we announced with Synchrony and that allowed us to do more than what we have done in the past but very importantly, a strong balance sheet for us is a strong competitive advantage. It’s an asset that a lot of our peers don’t have and we believe as a management team in putting that cash to use to create shareholder value and you’ll continue to see us allocate capital in that manner whether it’s returning cash to shareholders and going out and looking at the M&A landscape. I would not read anything into the amount of the share buyback as to suggest if there are no opportunities for us to go acquire companies. As you can appreciate those take time to complete a deal.”

PayPal is experimenting with blockchain, still skeptical about cryptocurrencies. Schulman said the company is not yet seeing demand for cryptocurrency trading on its platforms from consumers or businesses, thinks cryptos are too volatile still to make for a good currency, and pointed out the limitations of the blockchain for the number of transactions/second that could be faciliatated using it. He did say though:

[W]e are excited about the long-term potential of Blockchain and what it might be able to do in terms of distributed-trust applications, and when I say that I don’t just mean crypto. I mean things like identity and how to protect identity in different and new ways using things like Blockchain. So as you saw from our patent filing, we have a number of initiatives under way where we are exploring from a long-term perspective how we might utilize Blockchain in innovative ways to create value propositions that may be even better than what we have today. But I would tell you Blockchain is still in the very first innings.

About those margins. Remember when everyone fretted that PayPal’s margins would drop once it started making those partnerships with the banks and credit card companies? Yeah, about that. CFO John Rainey:

“And our ability to grow operating income while expanding operating margin highlights the sustainable scalability of our model… We believe that we can sustainably grow our business with this level of investment in our non-transactional-related expenses, allowing us to continue to deliver operating margin expansion. In the first quarter, operating income grew 29% to $829 million on 24% top-line growth. This resulted in an operating margin of 22.5%, or 90 basis points of operating leverage. It’s worth noting this is the highest operating margin we’ve reported as an independent company.”

Foolish Conclusion. I don’t know if I own a company that puts up such reliably solid numbers while constantly being doubted. When it began making partnerships with credit cards, we heard the company was compromising, that it’s place in the ecosystem wasn’t secure, that margins would drop, etc. Well, four quarters of accelerating revenue growth, 3 quarters of 30% EPS growth/25% transaction growth, and 80%+ stock price appreciation later, the company just recorded its highest operating margin ever and said it believes it can continue to expand that margin.

Last quarter, we heard worries that it would be ending its back-office payment processing relationship with eBay. Management says it doesn’t affect medium or long term guidance and seems excited the termination of the contract allows them to explore opportunities in other large online markets. In the meantime, it extended its contract to 2023 to ensure eBay users would still be able to use PayPal to buy and sell items – which is the more lucrative side to PayPal’s relationship with eBay.

That’s about all I’ve got for now. Questions/concerns/comments?

For the complete conference call transcript, Motley Fool has it at https://www.fool.com/earnings/call-transcripts/2018/04/26/pa…

For a review of the company’s quarterly numbers, see http://discussion.fool.com/paypal-reports-2018-q1-earnings-33048…

Matt
Long PYPL
MasterCard (MA), PayPal (PYPL), Skechers (SKX) and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/TMFCochrane/info.aspx

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I too have PayPal. I received their annual report last week. Looks very positive.

Matt

What about valuation?
Cap 88 b
Rev growth 25%
Pe 50

Hey Rizzz,

Is that based on GAAP earnings? Using adjusted earnings, the company’s current P/E is about 36, as I show here: http://discussion.fool.com/paypal-reports-2018-q1-earnings-33048…

Based on forward guidance, which I expect the company to beat as they have consistently beaten own guidance:

Forward GAAP EPS projections: $1.73 - $1.76
This would give PayPal a forward P/E in the neighborhood of 42.

Forward non-GAAP EPS projections (what I use): $2.31 - $2.34
This would give PayPal a forward P/E in neighborhood of 32.

I am comfortable with that valuation.

Matt
Long PYPL
MasterCard (MA), PayPal (PYPL), Skechers (SKX) and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/TMFCochrane/info.aspx

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