PayPal - Earnings Review Q1'22

Highlights & Commentary 

• Non-GAAP EPS for Q1’22 of $0.88 in line with $0.88 estimates (down by 28% compared to Q1’21). 

• Revenue for Q1’22 of $6.5B Vs $6.4B estimates (up 7.5% compared to Q1’21). 

Key metrics 

• TPV reached $323 billion for Q1’22, up 13% whereas Venmo TPV reached c. $58B, up 12%.  

• We appreciate the double-digit growth given the eBay impact especially for International TPV (which only grew by 1%, 5% if FX adjusted) and given the macroeconomic challenges that Gabrielle Rabinovitch, SVP, Corporate Finance & IR and Interim CFO, mentioned in the earnings call.

  We did see sort of China revenue down more than it was in Q4., U.K. revenue down again more than it was in Q4, and so we'll continue to watch it closely, but that definitely does have a macro layer to it. 

• Venmo: Despite the increase of 12% in terms of TPV, revenue grew by 60% and thus it is in line with the +50% revenue growth guidance for FY’22. 

  

• Processed 5.2 billion payment transactions during Q1’22, up 18%, despite 54% decline in eBay transactions. Excluding eBay, transactions grew by 24%. This metric along with the continuous improvement in payment transactions per active accounts (shown below in yellow line) demonstrate better user engagement. This is mainly Braintree transaction growth driven, i.e., 61% growth in volume. 

• BNPL is also gaining momentum with Daniel Schulman, President and CEO mentioning:

  We continue to be pleased with our Buy Now, Pay Later franchise, which is seeing persistent market share gains. We did $3.6 billion in volume in Q1, up 256%, with over 18 million consumer accounts choosing this funding option since launch. 

• PayPal ended the quarter with 429 million active accounts, up 9%, including 35 million merchant accounts. Added 2.4 million net new active accounts in Q1’22, primarily driven by Venmo. The merchant accounts as at Q4’2021 stood at 34 million and growth in this metric strengthens the network effect of the Company. 

  

• Take rate is down (Y/Y) by 0.10% and this is unfavorable considering the increase in transaction expense by 0.07% (volume mix driven). The main reason of the decrease in take rate is eBay (6 bps), FX and increase in Braintree volume, which are partly offset from increases in Venmo volume. As per Gabrielle Rabinovitch:

  Probably somewhere in the neighborhood of high single digit decline in take rate on the year is where I think we’re thinking we’ll shake out. 

  

Operating margins  

• Following the above decline in transaction margin (from 57.8% to 50.9%) there was a considerable impact in operating margins with non-GAAP operating margins declining from 27.7% in Q1’21 to 20.7% in Q1’22 => Transaction expenses grew by 25% and thus faster than revenues which grew by 7.5%. The biggest contributor of this is the funding mix with Braintree having higher funding cost (card-based) as well as the credit release of $84 million in Q1’21. Adjusting for the credit release the increase would have been 21%, which is still a considerable growth compared to revenues.  

• No clear direction was given in whether the margins could improve in following years, but rather a more open-ended response; that is the sales mix has elements that are growing faster and have lower margins and others with higher margins may not be growing to the same extent. The focus seems to be growing the business and margins will be managed accordingly. For 2022 a non-GAAP margin of c.20% is expected. 

• It remains to be seen how Venmo expansion will assist in growing margins and as Dan Schulman mentioned “Pay with Venmo is beginning to pick up. Clearly at the end of the year we’ve got the launch with Amazon, which has the potential to be meaningful [over time]. First time we’re doing something with them.” Additionally, the recent increase in Instant Transfer fees (to market levels as indicated by management) could be beneficial. 

• The strategic reduction of the existing global workforce intended to streamline and optimize global operations and enhance operating efficiency (initiated in Q1’22) could have another 0.5% to 1% operating margin impact (FY’23). A portion of this will be reinvested to drive further growth. 

Balance sheet position 

• Cash & cash equivalents, and investments amount to $15.1B as at 31/03/2021 down from $16.3B as of December 31, 2021, whereas debt totaled approximately $9.2B. 

• Returned $1.5B to shareholders in Q1’22 at an average price of $133.93. 

• Free cash flow of $1.05B for Q1’22, down 32% and only 16% of revenue. Historically, the ratio stood around 21%. Considering the mid-point of projected revenues and the minimum FCF of $5B, the ratio is expected to improve to c.18% for FY’22. 

Redesigned Digital wallet 

• Downloaded by more than 50% of PayPal’s user base and those who use it transact 20% more at checkout, 70% of BNPL engage through the wallet, ARPA is 2x a checkout only user and churn rate is 25% less. 

Outlook 

The downward revision of forecasts is a cause of concern. In prior quarter, management also withdrew its 750M target and now reduces its forecasts across. There are two sides of the coin; a) clearing of optimism and aggressiveness in forecasts that was carried forward from the pandemic period or b) fail to execute. Either way, we are not happy to see this, and the company’s performance will be closely monitored. 

Additionally, the medium-term outlook set on Investor’s Day in February 2021 was also withdrawn (assumptions initially used are very different today) and that is another cause for concern. However, the CEO confirmed that the conviction is there;

Make no mistake, we have strong conviction in the growth potential of our business and our ability to sustainably create value for our shareholders. 

Concluding remarks 

A fair quarter with some ups (Braintree, Venmo, BNPL) and downs (take rates, margins, new guidance). Of course, one should not ignore the suspension of transactional services in Russia. As a closing, we leave it with Dan Schulman’s opening remarks in earnings call.  

I want to begin my prepared remarks by acknowledging that our shareholders expect more from us than our track record over the past several quarters has delivered. And I take full accountability for that. Navigating through the pandemic and an uncertain macroeconomic environment with resulting shifts in consumer behavior has made visibility more challenging. But we need to do better

=> And yes, you must do better!