After the bell on Wednesday, the online payments giant reported Q1 revenue of $4.62 billion (up 12% annually) and non-GAAP EPS of $0.66. Revenue missed a $4.74 billion consensus, while EPS, which saw a $237 million ($0.17 per share) hit from credit loss reserves created due to revised macro projections, missed a $0.75 consensus.
Total payment volume (TPV) rose 18% annually to $191 billion, falling short of a consensus of $195.2 billion.
However, PayPal also guided for Q2 revenue to be up about 15% annually on a constant currency (CC) basis, and for non-GAAP EPS to be up 15% to 20%. That’s favorable to a consensus for 11% dollar-based revenue growth (to $4.78 billion) and an 11% decline in EPS (to $0.77). PayPal does note that its EPS guidance assumes no further increase to its credit loss reserves.
Like many other companies, PayPal is withdrawing its full-year guidance, citing a "lack of visibility into the near-term economic effects of COVID-19 and the wider range of potential outcomes."
PayPal, which had rallied to new highs in recent weeks, initially slipped in response to its Q1 report. But it more than recovered its losses as it shared upbeat numbers and commentary on its earnings call, and finished after-hours trading up 8.5% to $139.25.
Here are some notable takeaways from PayPal’s earnings report and call.
1. Business Has Been Very Good in Q2 So Far
After growing 24% annually in January and 28% in February, PayPal’s TPV growth slowed to just 7% in CC. Likewise, revenue growth slowed to just 5% in March in CC, after coming in at 16% in January and 20% in February. Weaker activity among travel/events clients such as Uber (UBER) - Get Report, Airbnb and LiveNation played a role, as did lower cross-border e-commerce activity in Europe and Asia.
But with COVID-19 lockdowns and stimulus payments both providing major boosts to e-commerce and digital content transactions, TPV rose 22% in April in CC, and revenue rose 20%. CEO Dan Schulman also noted that PayPal-branded transactions are up 43% annually over the past month, that revenue involving “PayPal checkout experiences” grew 35% annually in April, and that May 1 was the biggest transaction day in its history.
2. Active Account Growth Has Soared
Even in March, PayPal saw its active accounts (defined as accounts that have transacted with PayPal or a “platform access partner” in the last 12 months) rise by 3.9 million, an improvement from January’s 3 million and February’s 3.1 million. In April, the company added 7.4 million active accounts, up 135% annually and bringing its total base above 332 million. “Core markets” such as the U.S., Western Europe and Australia were said to be driving much of this growth.
PayPal also indicated that account growth has remained strong in May, noting that 295,000 net new actives were added yesterday. Daily active users are said to be up 20% annually.
3. PayPal’s Commentary About Future Demand Was Equal Parts Cautious and Optimistic
“Perhaps the biggest factor impacting our revenue performance for the second quarter is the extent to which behavioral changes associated with social distancing measures continue at the same pace,” said CFO John Rainey on PayPal’s call. He says PayPal’s Q2 guidance, which implies lower annual growth in May/June relative to April, assumes social distancing measures are slowly relaxed, but that there’s still “a more elevated level of e-commerce spend than what we were experiencing going into the crisis” at the end of Q2.
Rainey added PayPal doesn’t expect “any material improvement” in verticals such as travel and events this quarter, and that it doesn’t “expect that there will be a return to pre-crisis levels of economic growth any time soon.”
However, echoing some e-commerce and payments peers, Rainey and Schulman both asserted that COVID-19 has accelerated existing secular trends driving online transaction growth. Schulman also pointed out that PayPal hasn’t yet seen any meaningful change in online activity in countries where lockdowns have eased, such as Germany and Austria, and (given that such activity has often translated into long-term user loyalty) that he’s encouraged by the fact that the percentage of new PayPal accounts conducting 3 or more transactions in their first 10 days is 30% above normal levels.
4. Venmo and Honey Are Doing Well
Venmo’s TPV rose 48% annually in Q1 to $31 billion, after growing 56% in Q4. Schulman admitted that Venmo’s TPV growth slowed in March after being well above 50% in January and February, but also indicated Q2 Venmo activity has been quite strong, with PayPal seeing “a real significant increase” in the use of the Pay with Venmo service as well as upticks for use cases such as sending money to a family member.
E-commerce deal-discovery and discount/rewards service provider Honey, which PayPal recently bought for $4 billion, is also seeing strong growth. Schulman said Honey’s net new active accounts rose nearly 180% in April from pre-COVID levels, and that its April revenue was more than 40% above January and February levels. PayPal has been aggressively promoting Honey’s services, for which there were 10.2 million active accounts as of January, to its user base.
5. PayPal Has Distributed a Lot of PPP Loans
On April 10, PayPal announced that it had begun providing small business loans via the Paycheck Protection Program (PPP). On the Q1 call, Schulman said that PayPal has “distributed well over $1 billion” through PPP loans, with an average loan size of $35,000.
6. A Strong Dollar Is a Headwind
Currency swings had a 1-percentage-point impact on Q1 revenue growth, and a 3-point impact on April revenue growth, which was 17% in dollars and 20% in CC.
For Q2, PayPal is guiding for dollar-based revenue growth to be 2 points below CC-based growth (13% vs. 15%).
7. Stock Buybacks Boosted Q1 EPS
PayPal spent $800 million in Q1 to repurchase 7.5 million shares through a 10b5-1 program. This compares with $305 million worth of buybacks in Q4.
PayPal finished Q1 with $10.1 billion in cash, and $8 billion in debt. Free cash flow, which can be lumpy from quarter to quarter, rose 60% annually to $1.3 billion.