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What to Watch When PayPal Holdings Reports Earnings

By John Ballard - Oct 16, 2017 at 8:31PM

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PayPal is enjoying strong momentum and there's no reason to expect it to have waned.

PayPal Holdings (PYPL -2.24%) is scheduled to report its third-quarter earnings results on Thursday, Oct. 19, after market close. If the company's recent performance and guidance are any indication, this should be another strong quarter for the digital payment provider.

Guidance and key metrics to watch

Management is calling for revenue growth of 18% to 20% for the third quarter, consistent with last year's third-quarter growth of 18%. As for the bottom line, management is calling for non-GAAP earnings per share to be in the $0.42-$0.44 range, which represents year-over-year growth of 20%.

PayPal corporate logo

IMAGE SOURCE: PAYPAL HOLDINGS

As for key operating metrics, investors will want to focus on growth in active customer accounts and transactions per customer account. PayPal ended the second quarter with 210 million active customer accounts, and management expects to finish 2017 with over 220 million accounts, which represents growth of about 10% over 2016.

In the second quarter, transactions per customer account reached 32.3. This figure is calculated as the average number of times customers use their PayPal account on a rolling-12-month basis. It's a key measure of engagement across PayPal's digital payment services (excluding Venmo), so it's important this number gradually grows over time.

Growth in customer accounts and transactions per account are the main ingredients that grow total payment volume (TPV), which has consistently risen by around 25%, and that trend should continue given PayPal's strong momentum. PayPal generates revenue by taking a few percent from each transaction amount, so this is another important metric to watch. On a trailing-12-month basis, PayPal generated $392 billion in TPV.

Merchant account growth

Investors should also keep an eye on merchant account growth. PayPal has a growing base of 17 million merchants who offer PayPal as a payment option, and these merchants will be key to monetizing PayPal's Venmo app -- a popular peer-to-peer payment service that's very popular among millennials.

Venmo processed $8 billion in TPV in the second quarter, which is an annual run rate of about $30 billion. More merchants are starting to offer in-app payments with Venmo, including lululemon athletic and Forever 21, to name two of the latest stores to sign up. PayPal management, however, is not yet allowing the ability to make mobile payments with Venmo in-store.

Currently, PayPal doesn't make any money on Venmo payments, unless Venmo users fund their account with a credit card, in which case PayPal charges a 3% fee. The challenge for management is that Venmo is popular largely because it doesn't charge fees on bank account and debit card funding. But PayPal is setting the stage to begin monetizing Venmo as it rolls out Pay With Venmo to its merchant base. Management expects to have millions of U.S. merchants accepting Venmo payments by the end of 2017.

Expect recent momentum to continue

Investors shouldn't expect any surprises, as PayPal is one of the most consistent companies you'll find. An impressive roster of partnerships with major credit cards, banks, and tech giants is providing PayPal users more ways to use the payment platform, and this trend should continue to win over new customers and keep them using the service more often.

The PayPal brand is spreading everywhere, and it's expected to keep its momentum going for the foreseeable future. Tune in to the latest quarterly report for management's take on how things are going. 

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