PayPal Holdings Q2 2022 Earnings Review
Exploring the Results of This Global Payments Titan
“We are seeing a flight to quality in our markets that we expect to continue driving market share gains like it did for us this quarter.”
Analysts were looking for $6.78 billion in revenue while PayPal guided to $6.8 billion. It posted $6.81 billion in revenue, barely beating expectations.
More Context on Demand:
- This was the last quarter in which the end of the eBay operating agreement impacted growth. The headwind is officially in the rear-view. No more “ex-eBay” qualifications. Hallelujah.
- Foreign Currency (FX) headwinds and the eBay operating agreement shaved 500 basis points (bps) off of PayPal's growth. 1 basis point = 0.01%.
- PayPal added 400,000 net accounts this quarter. This was all thanks to Venmo as PayPal let many low engagement accounts roll-off. 0% YoY account growth shown above is a matter of rounding
- TPV and revenue have expanded at a CAGR of 25% and 16% (22% ex-eBay) over the last 3 years.
- Take rate stability is a great sign. I was not expecting it to remain at or above 2% for the quarter.
Analysts were looking for $0.87 in EPS while PayPal guided to the same. It earned $0.93 per share, beating expectations by 6.5%.
PayPal also guided to an 18% operating margin. Its 19.1% margin beat expectations by 110bps. It's controlling costs.
- eBay and Q2 2021 credit reserve releases shaved $0.22 off of PayPal's earnings this quarter.
- Volume based expenses rose 30% YoY via a shift back to higher cost credit as the stimulus debit shock ends. Braintree growth also contributed to this.
3. Balance Sheet
- $15.6 billion in cash, equivalents and investments vs. $15.1 billion sequentially.
- $10.6 billion in debt vs. $9.2 billion sequentially (new debt raise in May 2022).
Buybacks represented 95% of PayPal’s free cash flow generation so far in 2022. It expects 2022 buybacks to reach $4 billion.
4. 2022 Guidance
- PayPal now expects 10% revenue growth vs. 12% growth as of last quarter and analyst expectations of 11% growth. The miss was via added FX headwinds.
- With no 2022 eBay headwind, growth would be roughly 14% YoY for the year.
- With no 2022 eBay headwind, growth would be roughly 14% YoY for the year.
- PayPal now expects $3.92 in EPS vs. $3.87 as of last quarter. Analysts expected $3.87 as of last quarter as well. Nice raise.
- PayPal continues to expect to add 10 million net new accounts this year.
- PayPal continues to expect over $5 billion in free cash flow.
- PayPal continues to expect over 50% Venmo revenue growth for 2022.
“The shape and dynamics of the quarter reflect the trends we anticipated in our full year guidance.”
The team did not suffer from overly ambitious guidance like it has the last few quarters.
5. Investor Letter & Past Quarter’s Highlights
- PayPal authorized a new $15 billion buyback program. This gives it $17.8 billion in total remaining buyback capacity.
Product releases and expansion from the past quarter:
- Expanded relationship with Shopify to power Shop Payments in France.
- PayPal Working Capital expanded to France and the Netherlands.
- Launched external crypto transfers to and from PayPal digital wallets with no fees.
- PayPal added Tap to Pay across several European markets during the quarter.
- Blake Jorgensen will be the company’s new CFO. Previously, he has served in the same role with Electronic Arts (where he was also the COO), Levi Strauss and Yahoo!
- Chief Product Officer Mark Britto is retiring in December.
- Interim CFO Gabrielle Rabinovitch will stay on with PayPal.
On Cost Savings Initiatives:
PayPal’s belt tightening initiatives are expected to save it $900 million in operating and transaction costs for 2022. The annualized benefit of these changes plus “additional initiatives” will generate an expected $1.3+ billion in 2023 savings. PayPal “expects to invest a portion of these savings into high conviction growth opportunities and drive 2023 operating margin expansion."
“These cost savings are not one-time in nature and will continue to benefit the company on a run rate basis.”
- Around 50% the cost savings came from "re-negotiated" partner contracts which I took as a real sign of PayPal's clout and pricing power within the industry.
- PayPal is exploring other ways to reduce its real estate footprint and is shifting hiring to lower cost geographies to get more out of its dollars. Smart. No reason to only hire in California.
- These initiatives are expected to lead to operating margin expansion starting in Q4 2022 and throughout 2023.
On Elliott Management:
PayPal disclosed Elliott's stake in the company at $2 billion today.
"As one of PayPal's largest investors with around $2 billion, Elliott strongly believes in the value proposition at PayPal. PayPal has an un-matched footprint across payments and a right to win over the long term. Today's announcement highlights a number of steps to realize the value of the company. We look forward to working and supporting Dan and the board as they execute on this opportunity."
“Discussions with Elliott have been both constructive and collaborative and we appreciate the partnership we’ve built. We are substantially aligned on areas of focus to maximize shareholder value… they have communicated that their investment is a vote of confidence in our team and value.”
Activist investors are not always friendly and amicable. They often look for leadership overhauls and even asset sales. This seems to be a more friendly pursue from Elliott thus far. The two are freely sharing information as well.
On Credit Sales:
PayPal leadership seemed to hint at future credit portfolio sales to companies like Synchrony. I wholeheartedly support this. As a reminder, it sold its U.S. consumer receivables book to Synchrony in 2018. PayPal wants to become more asset-light and free up more cash -- this is a way to do that. I would imagine this sale would include BNPL receivables, but I'm speculating.
The eBay operating agreement growth headwind is officially behind us! This was the last quarter in which it created a large headwind. As a result, PayPal's revenue growth accelerated from 7% in the month of April to 14% in the month of July. Now the playing field has been leveled. PayPal is still dealing with the same macro headwinds as the rest of the space, but no longer is dealing with added, unique headaches. The eBay headwind will be less than 1% in Q3 and immaterial in Q4. Onward.
On Checkout and BNPL:
- PayPal grew branded checkout share in Q2 with its smallest and largest merchants. Those share gains continued into Q3.
- For unbranded Braintree, it continued to win large merchants like Zappos and BetMGM during the quarter to add to its impressive roster of clients.
- PayPal's Pay Later suite is now at a $4.9 billion quarterly run rate. That's up 226% YoY and 36% QoQ. There was no mention of struggles with delinquencies or charge-offs. Good news.
- Upstream presentment means showcasing PayPal's checkout button and options on product pages before a user closes out their basket. This raises PayPal's conversion share. 200,000 merchants have now deployed this option vs. 30,000 YoY.
- Honey's automated deal hunting and sourcing engine is raising merchant shopper conversion by 18%. Inflation is actually raising the value of Honey by making shoppers more aggressively seek out deals.
- Venmo is now around 90 million users vs. around 85 million last quarter. User growth here remains rapid.
- Venmo Q2 revenue growth was well over 50%. It's now exceeding $100 million in monthly revenue.
- Venmo Checkout launched with Dick's Sporting Goods, Draft Kings and Booking.com during the quarter.
- Venmo Checkout on Amazon is still in the works.
- Venmo is adding teen profiles with special controls this year and also profiles for charities.
- Venmo Commerce volume grew over 250% YoY in Q2 2022.
6. Notes from Interim CFO Gabrielle Rabinovitch
Braintree's acceleration as clients like Uber and Airbnb recover post pandemic is a margin headwind. Longer term, PayPal sees operating leverage within Braintree into 2023 as its small-medium business segment takes off. Take rate is higher there.
- eBay take rate is now at 2.12% vs. 2.37% QoQ and 3.22% YoY.
- Take rate from all other clients rose 5 basis points YoY.
- The equity investment product launch is being delayed to 2023. Those resources have been re-allocated to checkout as PayPal narrows its focus.
- Cross border volumes remain quite challenged at (12%) YoY growth. This is 13% of PayPal's TPV vs. 17% pre-pandemic. Cross-border is high margin for PayPal -- so this is a margin headwind.
“Today, we believe we are better positioned to deliver sustainable long term growth than we were before the pandemic. Over the years, PayPal has experienced serious business and macro challenges and has emerged stronger every time. We’re confident in our outlook.”
7. My Take
With the unique eBay headwind out of the way, it's time for PayPal's excuses to slow and for its performance to improve. If July's growth was any indication, that is clearly happening. I'm confident that the rest of 2022 will be far kinder to this company than the last couple years have been. If that turns out to be wrong, I'll have to re-evaluate my position. For now, I'm pleased and will remain a bullish shareholder.