PayPal Reports 2019 Q3 Earnings

TL;DR: Another solid quarter. Revenue of $4.38B, +19%; non-GAAP EPS up 5% to $0.61 (was negatively impacted $0.15 for strategic investments – e.g. Uber’s and MercadoLibre’s stock prices declined). Good guidance, in-line or above analyst expectations. Shares up ~7% in AH trading.

From the press release:

We had an excellent quarter financially and operationally, reporting 19% revenue growth, more than 200 basis points of operating margin expansion, accelerating TPV growth and nearly 10 million net new active accounts. This quarter we also announced that we will be the first foreign payments platform to be licensed to provide online payment services in China, a very significant development that has the potential to meaningfully expand our addressable market," said Dan Schulman, President and CEO of PayPal.

From https://investor.paypal-corp.com/news-releases/news-release-…

Let’s take a look at the numbers:


Revenues (millions)			Q1		Q2		Q3		Q4	
2014					1874		1983		1971		2193	
2015					2137		2297		2258		2556
2016					2544		2650		2667		2981
2017					2975		3136		3239		3744
2018					3685		3857		3683*		4226
2019					4128		4305		4378		

EPS (non-GAAP)			        Q1		Q2		Q3		Q4
2014					0.27		0.28		0.24		0.28	
2015					0.29		0.32		0.31		0.36	
2016					0.37		0.36		0.35		0.42
2017					0.44		0.46		0.46		0.55
2018					0.57		0.58		0.58		0.69
2019					0.78		0.86		0.61

*Sale of consumer debt to Synchrony Financial in July 2018 

2019 Q3 Earnings

Revenue Growth (billions)
2018 Q3 TTM Revenue = 14.97
2019 Q3 TTM Revenue = 17.04
YOY TTM Revenue Growth = 13.8%, previous quarter 13.3%

EPS Growth (non-GAAP)
2018 Q3 TTM EPS = 2.28
2019 Q3 TTM EPS = 2.94
YOY TTM EPS Growth = 28.9%, previous quarter 34.7%

Non-GAAP P/E (Check Current Price) = 96.64/2.94 =32.9, previously 41.7

Trailing 1YPEG = 32.9/28.9 = 1.14

PayPal Metrics

Here is a look at some of PayPal’s other important metrics growth:

of active accounts: 295M, +16% YOY

Payment transactions: 3.1B, +25% YOY
Payment transactions per active account: 39.8, +9% YOY
Total Payment Volume (TPV): $179B, +25% YOY
Venmo processed $27B TPV, +64% YOY
P2P volume: $51B, +39% YOY, representing 28% of TPV
Free cash flow: $923M, +20% (adjusted for sale of consumer credit portfolio to Synchrony)
Mobile TPV: $77B, +34% YOY, representing 43% of TPV
One Touch: 172M consumers, 13.8M merchants
Transaction margin: 53.4%
Operating margin (non-GAAP): 23.4%
Cash, cash equivalents, and investments: $13.2B
Repurchased 3.26M shares worth about $350M

And here’s a look at the historic growth of those numbers:


# of Active Accounts (millions) 	Q1		Q2		Q3		Q4
2014					148		152		157		162
2015					165		169		173		179
2016					184		188		192		197
2017					203		210		218		227
2018					237		244		254		267
2019					277		286		295

Payment Transactions (millions)	        Q1		Q2		Q3		Q4
2014					918		930		972		1144
2015					1123		1161		1216		1428
2016					1414		1448		1512		1755
2017					1771		1817		1941		2240
2018					2214		2327		2463		2867
2019					2838		2973		3090

Transactions Per Active Account	        Q1		Q2		Q3		Q4
2014					23		23		24		24.5	
2015					25.2		26.1		26.9		27.5
2016					28.4		29.4		30.2		31.1
2017					31.7		32.3		32.8		33.6
2018					34.7		35.7		36.5		36.9
2019					37.9		39.0		39.8

TPV (billions)				Q1		Q2		Q3		Q4
2014					53.676		56.736		58.184		66.039
2015					63.021		67.482		69.738		81.523
2016					81.056		86.208		87.403		99.348
2017					99.327		106.44		114.05		131.45
2018					132.36		139.40		143.00		163.65
2019					161.49		172.36		178.67

Transaction Margin (%)			Q1		Q2		Q3		Q4
2014					65.0		65.7		63.1		63.5	
2015					64.2		63.8		62.3		61.1
2016					60.4		59.8		58.7		57.7
2017					56.7		56.3		54.8		65.1
2018					57.1		56.0		54.9		54.6
2019					54.2		54.8		53.4

Operating Margin (non-GAAP) (%)	        Q1		Q2		Q3		Q4
2014									18.4		20.4
2015					22.1		22.6		19.9		20.8
2016					21.1		19.9		18.4		21.1
2017					21.6		21.0		20.0		22.0
2018					22.5		21.3		21.0		22.0
2019					22.6 		23.2		23.4

I read through the conference call, and here are what I thought were the highlights:

Partnerships are driving growth

One thing that PayPal’s management keeps coming back to is how its partnerships are what’s driving growth. throughout the call, management gave several examples, both domestic and international:

  • Travelers Insurance announced customers can now receive insurance claim payments via PayPal

  • PepsiCo launched its first ever cash back loyalty program powered by Venmo and PayPal

  • Lime, the global scooter rental platform selected PayPal to facilitate payouts to its network of freelancers

  • Epic Games is now using our capabilities for competitive Fortnite players to expedite their prize payout process

  • Launched new consumer installment plans in US and Germany, allowing PayPal customers to pay for purchases with monthly payments.

  • Signed a long-term strategic partnership agreement with Citi Australia to develop consumer credit products Australian account holders

  • Expanded relationship w/Walmart, PayPal Checkout now sole payment solution for its online grocery business in Mexico

  • PayPal one of official partners for the Japanese government’s initiative to promote cashless payments throughout the country

  • Amex card members can split a purchase in the Amex app via PayPal or Venmo

  • Offer account linking on mobile devices with Capital One and PNC Bank in US

  • Launched instant transfer to bank accounts for Venmo customers through partnership w/JPMorgan Chase

  • Launched cashback programs with both Chase and Discover

China deal

Of course, the biggest deal was PayPal’s acquisition of a 70% equity interest in GoPay, a license provider of online payment services with the People’s Bank of China. This is huge for the company. CEO Schulman:

This is a very significant development for us and it has the potential to dramatically expand our total addressable market and our long-term growth prospects. The license enables us to expand upon our relationships with existing partners like China Union Pay and AliExpress and forge new partnerships with China’s financial institutions and technology platforms, allowing us to provide a comprehensive set of differentiated payment solutions to businesses and consumers in China and globally.

Our initial focus will be on providing cross-border payment solutions to China’s merchants and consumers, linking China’s commerce ecosystem to PayPal’s vast two-sided network.

Operating margin expansion

If you notice, operating margin continues to creep up, coming in at 23.4% this quarter. In last year’s third quarter, it was 21%. The year before that 20%. Before that 18.4% and before that…well, you get the point. Combined with strong revenue growth, this can be a powerful driver for investment returns. The question has been whether this type of expansion is sustainable. After emphasizing this margin expansion was sustainable, CFO John Rainey gave an example of what was driving this profitable growth:

So we obviously have a significant number of calls that come in each month in our call center, 5 million on average per month. And we aspire to be able to address each of those issues that our customers have and to be on the phone with or not have them have to wait on the phone, but we’re not perfect. And if you go back to last December, we had 33,000 calls that a customer had to wait over 45 minutes. I looked right before I came in here today and in the month of October we have 526 calls. Now that’s a dramatic improvement, but what’s noteworthy about that is we achieved that without adding a single human being to address that problem. Those were all issues around schedule efficiency, better routing when someone goes into the IVR, things like that. It just enables us to provide a better customer experience, but at the same time lower our cost.

And in the scheme of 5 million calls a month, 33,000 is maybe not a lot, but each of those customers has an experience and that impacts whether they use us again, whether they churn in the future.

Another example CEO Dan Schulman gave was Venmo, which before it was making any money, was just a drain. Now that tide is shifting fast. 35% of Venmo customers now engage in a monetized activity on the platform.

See the entire conference call transcript at https://www.fool.com/premium/coverage/earnings/call-transcri…

Those are the highlights and a quick look at the numbers. Any questions/comments/concerns?

Matt
Long PYPL
BlackLine (BL), MasterCard (MA), Ollie’s (OLLI), PayPal (PYPL), and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/TMFCochrane/info.aspx

49 Likes

Not invested in PayPal but as a SQ holder I like seeing the positive numbers, especially Venmo growth. I don’t see cashless payments as being something that will ever dominated by one or two main players, so I view competitor growth as a good thing (to a certain extent). I still believe we are early in the cashless revolution.

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