PayPal’s 203M Users Drive More Frequency

It was another good earnings day to be PayPal, as the firm managed to beat the Street on earnings and analyst projections and upwardly adjusted earnings expectations for the quarter and the year.

“We continue to deliver on our vision to democratize financial services for our consumers and drive the global transition from cash to digital payments,” Dan Schulman, president of PayPal, said in a statement. “We are deepening our merchant offerings and relationships and expanding our network of strategic partnerships to make PayPal more available in new contexts and new markets.”

Particular areas of strength highlighted in this quarter’s earnings were various partnerships PayPal has made in the last year with Visa, Mastercard and (most recently) Google in expanding PayPal’s reach (into physical stores) and pushing up the number of average transactions among current PayPal users. Mobile also carried forward as an area of increasingly powerful strength, particularly within the PayPal-owned Venmo platform.

So what were the highlights — and what should we all continue to watch?

By the Numbers

By all accounts, PayPal had all of the right arrows pointed in the right direction: up.

PayPal beat analyst estimates with an adjusted $0.44 earnings per share, compared to the $0.41 that was the average prediction. Revenue was also slightly better than expected, coming in at $2.975 billion, when compared to the $2.94 billion that analysts were looking for. For those keeping score at home, that represents 17 percent year-over-year. Net income was $384 million, up 5 percent from last year.

PayPal is also attracting new users — adding six million new PayPal-ers during Q1, bringing their active enrollment from 197 million to 203 million. Transactions per active account increased 12 percent to 32 percent in the trailing 12 months, a metric that PayPal both watches and nurtures carefully.

PayPal had some predictions of its own to offer. Profit during Q2 is forecast to clock in at $0.41 to $0.43/share on revenue of $3.05 billion to $3.1 billion. That is in line with analysts’ projections of $0.42 on revenues of $3.07 billion.

PayPal also raised its annual forecast for adjusted earnings per share of $1.74 to $1.79, on revenue of $12.52 billion to $12.72 billion. Once again, that is on the high side of analyst predictions — the previous projections were for profit maxing out at $1.74 a share, with revenue as much as $12.65 billion.

Investors were clearly quite pleased with what they saw, and shares were up 7.4 percent in after-hours trading.

Network Deals Paying Off

During the Q&A, investors asked the question that they’ve been asking ever since PayPal’s deals with the card networks were done: will revenue take a hit when ACH-based payments are traded off for consumer choice?

It certainly doesn’t appear to be. You might recall that a larger concern raised by PayPal management was the impact that not collaborating might have longer term. What PayPal said at the time was that the certainty of costs in a collaborative relationship would far outweigh the uncertainty of what might happen longer term in a more adversarial one. Clearly, the opportunity of consumer choice has led to more volume, and perhaps even volume that is tied to more margin-favorable debit (and not credit) products.

Even analysts agree.

“The deals with the credit card networks appear to provide less pressure than expected on the non-existence of the feared profit erosion,” noted James Cakmak, analyst at Monness, Crespi, Hardt & Co. “You’re seeing a skilled execution on the mission.”

And speaking of skilled execution…

Mobile Continues to Gain Strength

PayPal continues to crush it on mobile — particularly with Venmo.

Venmo processed a record $6.8 billion in the first quarter, double that volume from the same period last year. What, if anything, Venmo contributes to PayPal’s financials is a bit of a mystery. PayPal only started generating revenue from the service by letting merchants accept Venmo as a payments option mid-year. Merchants pay a small fee for each transaction.

Although he declined to get into specifics, PayPal’s Chief Financial Officer, John Rainey, said during an earnings call on Wednesday that the company expects a “steady” increase in revenue from Venmo.

PayPal also saw significant growth in mobile payments volume. During Q1, payments made through mobile devices were up 51 percent from the same period last year to $32 billion, accounting for nearly a third of the $99 billion in payment volume for the company during the quarter.

One Touch had a strong quarter that further contributed to PayPal’s powerful mobile performance. As of now, over 5 million merchants and 75 percent of the IRR 100 now offer PayPal’s drastically streamlined checkout experience for mobile and desktop eCommerce.

“We expect the number of merchants accepting One Touch to increase noticeably throughout the year,” Schulman noted during his remarks to analysts.

One Touch finished off Q1 with 53 million consumers opted into One Touch — a situation Schulman was eager to tout.

“We couldn’t be more pleased with this transformative product experience and engagement that’s driving our customers. One Touch provides a powerful connection between our merchants and our consumers in a mobile-first world.”