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PayPal $PYPL Earnings Preview Q2 2022
Below is the detailed $PYPL earnings preview we released in our substack earlier today. Make sure that you follow us on Commonstock and subscribe to our newsletter to receive similar posts straight to your email. 👇

PayPal reported rather solid Q2’22 results on 2nd of August 2022 and it is trading >9% higher since announcement. The below is a preview of its earnings.

Financial Highlights

  • Revenue for Q2’22 of $6.81B beating estimates by c. $21.6M and in line with guidance (up 9%, 10% FX- neural basis “FXN” compared to Q2’21).
  • Non-GAAP operating margin of 19.1% (Vs 27% in Q2’21) slightly better than the outlook for the quarter.
  • GAAP EPS for Q2’22 of –$0.29 missing estimates by $0.75 and guidance by $0.74 (down 129% compared to Q2’21). The miss is mainly explained by a negative impact of c. $0.37 tax charge and net loss of c. $0.45 on strategic investments.
  • Non-GAAP EPS for Q2’22 of $0.93 beating estimates by $0.06 and guidance by $0.07 (down 19% compared to Q2’21).

The accelerating growth in revenues (7% in April, 10% in May and 12% in June) is a positive sign under the current environment and relative to the decline in sales and marketing expenses by 7%.
The downward pressure on operating margins is a concern for us, however, Management announced a cost savings program that will save c.$900M in FY’22 and c.$1.3B in FY’23 which is expected to deliver margin expansion on a run rate basis.
Dan Schulman, President and CEO, “We're driving meaningful productivity and cost improvement in OpEx and our transaction expenses, and we expect to see these actions result in increased operating margins as we exit the year, setting us up for a strong 2023.”

Key metrics

  • Total Payment Volume (“TPV”) reached $339.8 billion for Q2’22, up by 9% (13% FXN) whereas Venmo TPV reached $61.4 billion, up by 6%.

Source: Q2’22 PayPal Investor Update

  • Venmo: Despite the increase of 6% in terms of TPV, revenue grew by +50% and thus it is in line with the +50% revenue growth guidance for FY’22. Venmo is also firing in commerce with commerce volumes increasing by +250%!
Signed new deals or launched Pay with Venmo with leading merchants (such as booking.com) whereas Pay with Venmo on Amazon is not yet launched.
Dan Schulman also announced a complete refresh of the app.
  • U.S. continues to be the revenue driver (up by 18% and 16% in TPV) as International revenue declined by 1% (1% growth if FX adjusted and 8% if eBay adjusted).
  • Processed 5.5 billion payment transactions during Q2’22, up 16%, despite 43% decline in eBay transactions. Excluding eBay, transactions grew by 20%.
  • BNPL with accelerating growth with Daniel Schulman, President and CEO mentioning “Our Buy Now, Pay Later products continue to distinguish themselves from our competitors. In the second quarter, we processed $4.9 billion in volume, up 226% year-over-year with over 22 million consumers using our Buy Now, Pay Later services.” For the record, in prior quarter over 18 million consumers were using BNPL.
  • Honey further contributes to conversion but also helps customers to save under the current environment. Daniel Schulman “In fact, the PayPal Honey browser extension increased selection and conversion at checkout by 18%”.

Engagement and Active Accounts

  • PayPal ended the quarter with 429 million active accounts, up 6%, including 35 million merchant accounts. Added 0.4 million net new active accounts in Q2’22, primarily driven by Venmo.
  • Payment transactions per active account (“TPA”) to $48.7 increased by 12%, mainly by transaction growth in Braintree, which shows improvement in engagement.
  • Dan Schulman guided for further growth in TPA as the year unfolds mainly due to the fact that 50% of their base is in digital wallet and have 2x Average Revenue per Account (“ARPA”).

Engagement is critical and Management seems to be executing well.
The negative aspect that we picked up (need more visibility on this) was the “decrease?” in Active Accounts excl. Venmo as per prior quarter the Venmo active accounts were more than 85M whereas this quarter are nearly 90M.
Source: Q2’22 PayPal Investor Update

Take rates

A stabilization in take rates and transaction rates is observed as they remained flat Y/Y and Q/Q, however transaction expense rates increased by 0.09% (mainly Braintree driven) which drags the profitability (transaction margin from 56.8% to 48.7%).

The decrease in margin is mainly mix driven (growth in Braintree volume) and although Braintree’s growth is impacting margins, Gabrielle Rabinovitch explained over the call that SMB space and Europe side of Braintree have attractive profitability characteristics.

Additionally, Gabrielle Rabinovitch guided for improvement in transaction expenses “Starting in the back half of this year, we expect to begin seeing benefits to our transaction expense from leveraging our scale across the network ecosystem.”
“Maybe I would just add, in terms of the $900 million of identified savings this year and the $1.3 billion next year, nearly 50% of that really comes from transaction-related expenses.”

Source: Q2’22 PayPal Investor Update

Balance sheet position – A healthy cash machine

  • Cash & cash equivalents, and investments amount to $15.6B, whereas debt totaled approximately $10.6B.
  • Free cash flow of $1.29B for Q2’22, up 22% and 19% of revenue. Slightly lower than the historic average margin of c.21% but an improvement to compared to Q2’21 (17%) and Q1’22 (16%).
  • Returned $1.5B to shareholders in Q1’22 at an average price of $133.93 and $750M in the second quarter at an average price of $98.71. Per Management, buybacks are expected to reach c. $4B for the year.

Other Developments

  • Announcing Blake Jorgensen as the new CFO joining from EA.
  • CPO retiring but on search for his replacement.
  • Authorised $15B share repurchases bringing the total outstanding to $18B.
  • Confirmed Elliott Investment Management L.P stake.
Dan Schulman, “We continue to engage with Jesse and his team at Elliott, and they have communicated that their investment is a vote of confidence in our strategy, in our management team and our ability to generate long-term value for shareholders.”
  • Announced the testing of new mobile software development kit (enables native in-line checkout) and enhancements in checkout user experience that will make payment experiences faster and more convenient.
  • Announced expansion of relationship with Shopify (powering Shopify Payments in France) and large full-stack processing deals including among other Shein, Zappos, BetMGM and Carrefour.
  • Assessing opportunities for additional credit externalisation.

New CFO, Share repurchases, product innovations, Elliott’s stake and new deals. Love that Shein deal!! => 3rd most downloaded shopping app Worldwide for H1 2022 behind Meesho and Shopee and 1st in US.

Outlook

Note: *c. $0.25 trillion are expected from Venmo (increase of 9% y/y).

Pretty fair guidance both for next quarter and for FY’22 with double digit growth (c.10% spot) for Revenue and lower decline in FY’22 Non-GAAP EPS than prior quarter guidance. Management expects FX headwind for the rest of the year whereas Q3 includes a 150bp headwind from PPP lending program revenue.

Despite the ongoing macro challenges, Gabrielle Rabinovitch – Interim CFO, SVP, Corporate Finance & IR expressed her confidence for PayPal’s future “As we look ahead, we're confident in our long-term strategy and our growth outlook. We believe we are operating in an environment in which strong and enduring platforms like ours get stronger. That has never been more apparent than it is today.”

In addition to the above, Dan Schulman also estimates that PayPal is expected “to grow significantly faster than the rate of e-commerce going forward, both on branded by the way and unbranded as well.”

Concluding remarks

A solid quarter with Venmo and Braintree on fire, management committing to productivity efficiencies through the cost optimization program, strategy focus on Checkout, Digital Wallets (Venmo and PayPal) and Braintree, Elliot’s stake which could unlock value and without any significant changes to outlook.

Disclaimer: Not a financial advice
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