PayPal’s fourth-quarter profit beats estimates, but forecast disappoints

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The FINANCIAL –PayPal Holdings, Inc. on January 31 announced fourth quarter and full year results for the period ended December 31, 2017.

“PayPal had a transformative year in 2017. We brought record numbers of new customer accounts to our platform by democratizing financial services for consumers and commerce capabilities for merchants. We also substantially expanded our opportunities for future growth and redefined our competitive position through our successful partnership strategy driven by our open platform architecture,” said Dan Schulman, President and CEO of PayPal.

Schulman continued, “I am very pleased to announce that PayPal and eBay have signed a term sheet to make PayPal available, as a way to pay on eBay, through July 2023. We enter 2018 with strong momentum supporting an increasingly differentiated and expansive value proposition, and a focused commitment to deliver increasing value to our customers and shareholders.”

Significant events in fourth quarter 2017

PayPal and Synchrony Financial announced an agreement expanding their consumer credit relationship. Under the terms of the transaction, Synchrony Financial will acquire PayPal’s U.S. consumer credit receivables portfolio, which totaled approximately $6.4 billion in receivables as of December 31, 2017. Subject to regulatory approval and other customary conditions, this transaction is expected to close in the third quarter of 2018.

The application of held for sale accounting relating to the U.S. consumer credit receivables resulted in the reversal of the related allowance for losses on interest and principal receivables.

The impact from the one-time adjustments related to held for sale accounting on GAAP net revenues was $39 million and on GAAP transaction and loan losses was $283 million, a benefit to GAAP earnings per diluted share (EPS) of $0.25.

PayPal’s GAAP results also include the impact of the recently enacted Tax Cut and Jobs Act of 2017 (the “Tax Act”), which resulted in a preliminary net tax expense of $180 million.

Financial highlights for fourth quarter 2017 include:

GAAP revenue growth of 26% to $3.74 billion, or 26% on a foreign currency neutral (FX-neutral) basis with non-GAAP revenue growth of 24% to $3.71 billion, or 24% on a FX-neutral basis

GAAP operating margin of 22.5% with non-GAAP operating margin of 21.8%

GAAP EPS growth of 57% to $0.50, which includes the impact of held for sale accounting of $0.25, partially offset by the impact from the Tax Act of ($0.15), with non-GAAP EPS growth of 30% to $0.55

Entered into a $3.0 billion unsecured, term loan credit facility

Financial highlights for full year 2017 include:

GAAP revenue growth of 21% to $13.09 billion, or 22% on an FX-neutral basis with non-GAAP revenue growth of 20% to $13.06 billion, or 21% on an FX-neutral basis

GAAP operating margin of 16.2% with non-GAAP operating margin of 21.1%

GAAP EPS growth of 28% to $1.47, which includes the impact of held for sale accounting of $0.26, partially offset by the impact from the Tax Act of ($0.15), with non-GAAP EPS growth of 27% to $1.90

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Returned $1.01 billion to stockholders by repurchasing 19.7 million shares of common stock at an average price of $51

Fourth quarter and full year 2017 impact of held for sale accounting on cash flow

The application of held for sale accounting resulted in a change to the characterization of cash flows related to the U.S. consumer credit portfolio. Cash flows related to repayments of loans originated prior to the application of held for sale accounting continue to be reflected in cash flow from investing activities. Cash flows related to the net changes in loans originated following our application of held for sale accounting are now reflected in cash flow from operating activities. In the fourth quarter, $1.3 billion of net cash outflows recognized in cash flow from operating activities would previously have been recognized in cash flow from investing activities. This change resulted in operating cash flow of ($147) million with free cash flow of ($327) million in the fourth quarter. For full year 2017, inclusive of the impact from held for sale accounting, PayPal is reporting operating cash flow of $2.5 billion with free cash flow of $1.9 billion, according to PayPal.

Operating highlights for fourth quarter 2017 include:

8.7 million active customer accounts added, with net new actives up 61%

2.2 billion payment transactions, up 25%

$131 billion in total payment volume (TPV), up 32%, or 29% on an FX-neutral basis

33.6 payment transactions per active account on a trailing twelve months basis, up 8%

Operating highlights for full year 2017 include:

Active customer accounts of 227 million, up 15% with growth of 29 million net new actives

7.6 billion payment transactions, up 24%

$451 billion in TPV, up 27% both on a spot and FX-neutral basis

33.6 payment transactions per active account on a trailing twelve months basis, up 8%

PayPal’s expanding value proposition

PayPal processed $131 billion in TPV in the fourth quarter, representing growth of 32%, or 29% on an FX-neutral basis. Merchant Services TPV grew 36%, or 33% on an FX-neutral basis, and represented 87% of overall TPV for the quarter. eBay volume grew 10%, or 7% on an FX-neutral basis, and represented approximately 13% of overall TPV for the fourth quarter versus approximately 16% a year ago.

Person-to-Person (P2P) volume grew 50% to approximately $27 billion, and represented approximately 20% of TPV in the fourth quarter. Venmo, the company’s social payments platform, processed $10.4 billion in payment volume in the fourth quarter, an increase of 86% year over year, and for the first time surpassed $10 billion in payment volume processed in a quarter. For the full year, Venmo’s volume increased 97% with approximately $35 billion in payment volume processed.

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Driven by strong mobile engagement on our platform over the holiday shopping season, PayPal processed approximately $48 billion in mobile payment volume in the fourth quarter, representing approximately 53% growth year over year.

Extending PayPal’s global reach and merchant offering

During the fourth quarter, PayPal announced the launch of domestic operations in India. Merchants offering PayPal will be able to process both local and global payments through the platform, gaining access to PayPal’s more than 200 million customers around the world and in India through a single integration.

PayPal also made progress introducing Pay with Venmo to consumers. More than two million U.S. merchants now offer Venmo as a mobile payment option through the PayPal and Braintree platforms.

One Touch, PayPal’s innovative checkout experience, continues its global roll out, ending the fourth quarter with 80 million consumers opted in, up from 40 million a year ago. At the end of 2017, eight million merchants offered One Touch compared with five million a year ago.

Subsequent to the end of the fourth quarter, PayPal and eBay signed a term sheet to continue to feature PayPal at checkout on the eBay Marketplace through July 2023.

2018 Financial Guidance

Full year 2018 revenue and earnings guidance

PayPal expects revenue to grow 15 – 17% at current spot rates and 14 – 16% on an FX-neutral basis, to a range of $15.00 – $15.25 billion. Full year 2018 revenue guidance includes an expected impact related to the sale of U.S. consumer credit receivables to Synchrony Financial of ~3.5 percentage points for full year 2018, assuming the transaction closes on July 1, 2018.

PayPal expects GAAP earnings per diluted share in the range of $1.79 – $1.86 and non-GAAP earnings per diluted share in the range of $2.24 – $2.30.

Estimated non-GAAP amounts above for the twelve months ending December 31, 2018, reflect adjustments of approximately $910 – $950 million, primarily representing estimated stock-based compensation expense and related payroll taxes in the range of $820 – $850 million.

First quarter 2018 revenue and earnings guidance

PayPal expects revenue to grow 20% – 22% at current spot rates and 20% – 21% on an FX-neutral basis, to a range of $3.58 – $3.63 billion.

PayPal expects GAAP earnings per diluted share in the range of $0.41 – $0.43 and non-GAAP earnings per diluted share in the range of $0.52 – $0.54.

Estimated non-GAAP amounts above for the three months ending March 31, 2018, reflect adjustments of approximately $215 – $230 million, primarily representing estimated stock-based compensation expense and related payroll taxes in the range of $190 – $200 million.

 

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