PayPal (PYPL 0.34%) reports its first-quarter earnings after the bell on Wednesday. Despite beating the analysts' consensus estimates for both the top and bottom lines with its fourth-quarter report, PayPal saw its shares fall on news that eBay (EBAY 0.88%) is transitioning its payments processing operations in-house from PayPal. PayPal hopes to avoid unpleasant surprises this time around, with the Street expecting $0.54 in earnings per share on revenue of $3.59 billion.
But investors will want to pay attention to a few more things on PayPal's earnings report beyond its revenue and earnings expectations. Here's what to watch when PayPal reports its first-quarter earnings.
Image source: PayPal.
Customer growth and engagement
Last quarter, PayPal added 8.7 million customer accounts, an increase of 61% from the fourth quarter last year. That's actually a slight slowdown in net new accounts compared to the second and third quarters.
PayPal added 6 million new customers in the first quarter last year, up from 4.5 million in the first quarter of 2016. Look for the accelerating customer growth to continue as PayPal expands its active merchants, particularly on mobile.
Investors should also keep an eye on customer engagement. PayPal has managed to increase transactions per account over the last 12 months, reaching 33.6 transactions per customer last year. That engagement growth is key, especially in light of stronger customer growth. A healthy combination of customer account growth and engagement growth is essential to long-term payment volume growth.
Growth on mobile
One of the biggest growth drivers bringing in more customers and increasing engagement is the strength of PayPal on mobile. PayPal is adding more merchants on mobile, reaching 8 million as of the end of last year, up from 5 million a year prior. Mobile payment volume increased 63% year over year in the fourth quarter.
As more commerce shifts to mobile, investors should look for PayPal to benefit. Shoppers have notoriously lower conversion rates on mobile due to the pain of typing in payment information, which greatly benefits PayPal. Investors just need to be sure management is executing on the opportunity.
Venmo
Paypal's mobile payment app continues to grow extremely quickly, surpassing $10 billion in total payment volume in the fourth quarter. Total payment volume on the platform grew 97% in 2017, and investors should look for Venmo to keep up the pace this year.
Investors should pay close attention to management's commentary about Pay with Venmo, which allows users to pay merchants with Venmo -- just like its flagship product. The company said it had 2 million merchants on the platform as of the end of the year, and its adoption is growing quickly. While there's clear overlap in functionality between PayPal and Pay with Venmo, management has said it will happily cannibalize PayPal with Venmo, as it usually has lower transaction fees.
Growth may wane, however, as competition from Square's (SQ -2.28%) Cash App increases. Square said it ended 2017 with 7 million active users on Cash App and it continues to add unique functionality to the app such as the ability to buy bitcoin or receive direct deposits. To that end, management has said it's seen no impact on growth from the competition in the last six months, but investors should see if that story changes at all.
eBay as a percentage of transaction volume
PayPal and eBay are set to cut ties over the next five years as eBay transitions to processing payments in-house. To be sure, PayPal's branded payment option will remain on eBay, but it won't do the behind-the-scenes work of processing credit card transactions directly on eBay's checkout page.
Nonetheless, investors need to pay attention to what percentage of transaction volume still comes from eBay, in order to estimate the risk to its future revenue. eBay accounted for 13% of transaction volume in the fourth quarter, and transaction volume grew 7% year over year. That growth is much slower than the 33% overall volume growth of non-eBay merchants.
Investors should expect for eBay to account for a smaller and smaller portion of revenue as time goes on and other merchant volume grows. For reference, eBay expects about 7% gross merchandise volume growth this year, so it should continue to lag the rest of PayPal's merchants.
PayPal is benefiting from the secular growth of online sales around the world, which should continue to push earnings and revenue higher. But to be sure the company is executing on its long-term plan, investors will want to pay attention to details around customer growth, mobile payments, and Venmo when Paypal reports this week.
