Good quarter with the shares breaking out of resistance with the shares closing at $44.15 at the moment on very heavy volume:
At first sight, this was somewhat surprising as the earnings only came within expectations and there actually was a decline in margins, but the conference call soon showed a better outlook.
Short-time we expect a little pullback, but the company is delivering and increasing it's three year outlook slightly.
We'll give you some highlights from the Q3CC:
- The company has just 1% share of the addressable market ($100 trillion), that is, 10% of e-commerce, which is 10% of retail.
- In the third quarter, we generated revenue of $2.67 billion, up 21% on a currency neutral basis and 18% on a spot basis.
- On a currency neutral-basis, total payment volume increased 28% to $87 billion. U.S. payment volume grew 25% and international volume grew 30%.
- The Merchant Services business grew 34% to $73 billion, primarily driven by core Braintree and Venmo. The company ended the quarter with 192 million active accounts, adding 4.4 million active customer accounts in the quarter, and increasing active accounts by 11% from the third quarter last year.
- Margins fell a bit (150bp) due to currency hedging, seasonality (ramping up for Q4), investments in growth, Xoom (their money transfer business) and provisions for bad credit ($271M. Credit is 2% of their overall business).
- 19% growth in free cash flow year-over-year. Our free cash flow for the third quarter was $618 million, representing $0.23 of free cash flow for every dollar of revenue.
- During the quarter, we returned approximately $50 million to shareholders by buying back an additional 1.3 million shares.
- Year-to-date, we have returned approximately $945 million to shareholders by repurchasing 26 million shares at an average price of $36.37. We ended the quarter with cash, cash equivalents and investments of $6.4 billion
- Paypal is amassing an ecosystem of partners and are in talks with many more.
- Cross selling abilities through Zoom and Venmo
- Rise in active acounts
- Rise in engagement per account from 24 to 30 times a year (in the past two years)
- Mobile payment volume rose 56% to nearly $26B
- There are significant opportunities with merchants. At present, they have 15M merchants signed up for the PayPal platform, but with the shift towards mobile they can power the merchant apps, as well as their mobile web and instore payments
While expectations where only met in the quarter, what explains the 10% share rise best is that the quarter allayed some fears that the deals with Visa and Mastercard would eat into their margins.
Why is that? Well, it's that these deals would shift PayPal from debit transactions (through the ACH network, its most profitable transactions) and steer them to credit card-based transactions with lower margins. But as the company raised it's three year revenue growth outlook from 15% to 16%-17%, it also said that its margins would be stable to growing.
It's not a total done deal on that. Transaction margin declined from 62.3% in Q3 2015 to 58.7% in the past quarter. They blame this on "the mix shift in our business toward Braintree and increased provisions in our credit business, partially offset by Xoom.
On the other hand, excluding the acquisition of Xoom, other operating expenses increased only 9% or approximately half the rate of revenue growth. And even if the deals with Visa and Mastercard eat somewhat into margins, that could very well be more than offset by increasing the volume of business.
Other worries are also somewhat allayed, While there is undoubtedly a financial revolution going on, with many new fintech start-ups, for now PayPal seems to be holding its own.