Earnings

PayPal’s Profit Jumps, eBay Move Induces Investor Separation Anxiety

PayPal’s Q4 2017 earnings report, in many ways, was a continuation of the same 2017 theme: earnings, profits, revenue and TPV are all up — and to a greater degree than predicted by analysts.

But for all that was familiar, there was one very big, very different and very surprising change that overshadowed PayPal’s strong performance.

PayPal and eBay are breaking up — for real, this time.

Or, to put it more accurately — the two firms announced yesterday (Jan. 31) that eBay would be stepping into the official role of managing the payments flow between buyers and sellers that PayPal has held for more than a decade and a half. And that eBay has selected Amsterdam-based Adyen as its primary payments processor.

“We believe that we can offer a more seamless experience while giving buyers and sellers more choice for payment and payout options,” eBay CEO Devin Wenig said on a conference call with analysts after the announcement was made.

PayPal CEO Dan Schulman told investors on PayPal’s quarterly earnings call that the move was not only “manageable,” but long expected.

“Both our 2018 and our medium-term guidance already includes the anticipated economic impact of the eBay transition, which is quite manageable over a multi-year period. As such, we see no need to change our medium-term guidance. Given our long history with eBay buyers and sellers, both Devin Wenig and I believe a manageable transition and sustained relationship is in the best interest of our mutual customers.”

eBay, even two years after its split from PayPal, remains the largest individual contributor to PayPal’s revenue and total payments volume — though that share is declining on both counts. Analysts report that eBay accounted for 22 percent of PayPal’s 2016 revenue, down from 26 percent in 2015 and 29 percent in 2014.

Similarly, eBay’s share of PayPal’s TPV is on the — last year, eBay transactions represented 13 percent of the total, compared to 16 percent for the fourth quarter of 2016 and 19 percent two years ago.

“Let’s just assume that exactly the same thing happens over the next 2.5 years. And that we have no acquisitions,” Schulman noted in his comments in response to a question from Goldman Sachs. “eBay becomes approximately four percent at the end of the operating agreement [in 2020]. That’s assuming again the same reduction patterns from first 2.5 years to the second 2.5 years. And they give less than 10 percent of our revenues.”

PayPal CFO John Rainey also noted that servicing the eBay marketplace was not without cost — and those costs were very high.

“Volume is important to us, but so is profitability,” Rainey said on the investor call. “Where this was ending up is something that we weren’t interested in from a profitability perspective.”

Schulman and Rainey both noted that eBay volume is slower-growing than non-eBay volume. Agreements with Disney, Dillards and QVC, they point out, are three examples of PayPal’s growth off eBay.

Schulman also noted that while this transition was announced today, it will happen over a period of years. In the meantime, PayPal and eBay signed a term sheet that will make it possible for eBay users to buy and sell goods via their PayPal digital wallets until 2023.

“I’m really pleased that we’re expanding that partnership through July 2023. As I think most people on the call know, there is a five-year operating agreement that governs our separation, and we’re halfway through that, we’ve got another 2.5 years left till the end of July 2020. And with this announcement, here there are no changes to any of the terms,” Schulman noted.

Analysts and investors did not seem as upbeat.

“eBay’s decision to reduce PayPal’s prominence represents a major setback for PayPal,” Gil Luria, an analyst at D.A. Davidson & Co, told Bloomberg. “Although the share of revenue from eBay has diminished over the years, the share of profit is far more substantial due to the terms of the spinoff. Furthermore, the possible deal to add Adyen more prominently helps propel Adyen to a much more meaningful competitive position.”

The news also came as a bit of a surprise to investors, most of whom had expected the two would negotiate and sign an extension to their current operating agreement. Such a surprise, in fact, that it seemed to distract them from noting the rest of PayPal’s performance, which was strong by most measures.

PayPal announced that profit rose 59 percent despite booking a big charge related to the U.S. tax overhaul. All in all, PayPal reported quarterly profits of $620 million, or 50 cents a share. That compares to a profit of $390 million, or 32 cents a share, at the same time last year.

PayPal incurred a tax expense of $180 million because of the “impact of the recently enacted Tax Cuts and Jobs Act of 2017,” which brought its effective tax rate to 28.2 percent. In the fourth quarter of 2016, PayPal’s effective tax rate was 16.8 percent.

Total payment volume came in at $131.45 billion, an increase of 32 percent from the same period a year ago.

Venmo, PayPal’s mobile person-to-person payments service, also notched a strong quarter with $10.4 billion in volume during Q4 2017 — an 86 percent increase over the same period a year ago.

The firm’s active customer base grew to 227 million.

All that seemingly took a back seat to investor concerns over the longer-term effect of the eBay split on PayPal’s growth, estimates of which came in slightly below analyst expectations. Shares of PayPal fell as much as 11.5 percent in after-hours trading.

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