In Depth

PYPL’s First Report Card

The team at PayPal cleared a corporate milestone this week with its first-ever standalone earnings report. PayPal managed to split the difference when it came to analysts’ pre-release earnings estimates, missing on one metric and exceeding another.

Analysts expected net revenue of $2.27 billion, which PayPal missed with net revenue of $2.26 billion. While it missed analysts’ expectations, PayPal’s net revenue was up 15 percent over Q3 2014. PayPal’s reported profit was up 31 percent this quarter to $377 million, or $0.31 per share, which beat estimates of $0.29 per share.

In his remarks to investors, CEO Dan Schulman said he was pleased with PayPal’s first report card and what it says for the firm’s future prospects.

“PayPal had a great start as an independent company, gaining market share, expanding our customer base and deepening our engagement with our customers,” Schulman noted in his call after the earnings figures were released. “We are operating in a time when change is sweeping through the financial services industry, driven by the rise of mobile technology and the acceleration of money becoming digital. These two massive trends play directly to our strengths.”

PayPal is a firm in transition — both into being an independent firm but also into being a more expansive enterprise than it was at its founding as a digital payments player.

“It is our focus that separates us from others,” Schulman noted in his remarks. “We are the only company that is entirely focused on end-to-end digital payments across the globe.”

A focus that is leading PayPal to a different future in its post-eBay life as a fully digital set of payments rails that offers scalable solutions for merchants and consumers all over the world — no matter where commerce is happening.

“PayPal is at a crossroads,” noted Colin Sebastian, a research analyst at R.W. Baird & Company. “Do they continue to focus on eCommerce, a really successful business for them? Or do they have their sights set on much bigger goals, potentially competing with Visa and MasterCard?”

From the tenor of PayPal’s earnings call yesterday (Oct. 28), it seems that the answer might be: “How about something entirely different?”

Numbers Moving The Right Way

In its latest earnings round and during the call with analysts yesterday, PayPal offered up a blizzard of figures — many of which were trending in the direction shareholders like to see.

PayPal saw its active user accounts increase to 173 million, up from 157 million at the same time last year and adding about 4 million new accounts last quarter. Transaction volume was 27 percent with $70 billion in total transactions processed. Transactions per account were also up, from 24 on average to 27.

PayPal also reported topline growth of 19 percent. Its merchant services business, Schulman noted, reported a 34 percent growth, 1.5X the growth rate of eCommerce.

Schulman observed that the firm’s “assets are difficult to replicate given the firm’s sophisticated risk platform, driven by the billions of transactions PayPal processes each year.” He also noted that PayPal’s value proposition “attracts consumers to choose PayPal” and “offers huge conversion lifts” to the merchants who add it as a way for its customers to pay.

The Neutral Platform

Schulman also used the earnings call to highlight PayPal’s continued push to becoming the “neutral” party enabling mobile transactions in a variety of contexts.

PayPal One Touch — its latest payments product that allows PayPal customers to make purchases with a single tap or click — Schulman believes, is a “significant leap forward” in how consumers checkout in-app, on the mobile Web and desktop.

“I believe that One Touch is a key way we create engagement,” Schulman noted.

Schulman further noted that the 7 million consumers who have opted into One Touch globally is a number that is “rising each day” and has a dramatic effect on merchant conversion rates.

Schulman also addressed the in-store payments experience, noting that the 2.0 version being pursued now — powered by its acquisitions of Paydiant and Braintree — is much more about being a “neutral platform” that is collaborative and tied to merchants’ goals for customer loyalty and retention.

Schulman defended that “neutral platform” vision against the probes of analysts who reported that the word among retailers on the floor at Money20/20 was that PayPal’s neutral platform appeared to some merchants as an “unnecessary middleman” in the in-store transaction.

“We are working with one large merchant after another throughout not just the country but across the world, “ Schulman noted. “And talking to them about how they want to do mobile across online, in-app and in-store. Being a neutral third party is a strength in that.”

Schulman further noted that PayPal’s bigger vision isn’t about locking merchants into a mobile plan — even one that would benefit PayPal’s eCommerce business — because it would miss a bigger opportunity.

“We can create a consistency across payments, across loyalty, across different technologies, and that is getting a real hearing with merchants,” Schulman observed. “Not everyone is going to be into that vision, but that’s okay. We don’t think it is going to be a winner-take-all model.”

Which isn’t to say that some players won’t take more, or that Schulman doesn’t want to be a player who gets the most possible.

A Monetization Plan For Venmo

All of PayPal’s recent acquisitions received a warm callout during the latest earnings call, but one in particular, Venmo, added an interesting piece of color.

Venmo, according to the latest earnings reports, continues to see its popularity grow as a P2P payments app, particularly among millennials. In Q3 2014, roughly $700 million was moved via Venmo; that volume has grown by 200 percent to $2.1 billion this year.

And PayPal has now announced how it plans to make money on Venmo. Soon, Venmo will take the same fees on transactions as PayPal does by making Venmo a payment option.

“What this does is it opens up the Venmo user base to our PayPal merchants, and it will be exactly the same take rates,” Schulman said.

Schulman further noted that PayPal has started piloting programs to allow users to pay with Venmo in merchant locations.

Going Forward

While Schulman had much good to say about the future of Venmo — and the power of the other acquisitions in PayPal’s quiver — he did note that the firm’s “internal innovation efforts will always be our primary driver of value.”

“We now have a powerful combination of international innovation efforts and acquisition firepower working in tandem,” Schulman said toward the conclusion of his remarks. “That’s a strong combination to drive and further differentiate our leadership position.”

How sold the market is remains to be seen.

PayPal’s stock took a hit in after-hours trading, down a bit over 3 percent, as the Street clearly didn’t like that PayPal missed its revenue target.

But PayPal’s journey forward, as it attempts to define itself on its own while also redefining the role it wants to play in the digital payments ecosystem, will be much longer than this first report card.

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Latest Insights: 

Our data and analytics team has developed a number of creative methodologies and frameworks that measure and benchmark the innovation that’s reshaping the payments and commerce ecosystem. Check out the February 2019 PYMNTS Financial Invisibles Report

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