Mobile payment leader PayPal Holdings (PYPL 0.33%) is set to report its first-quarter 2018 earnings on April 25, after the market close. The company is coming off an incredible year of growth that saw revenue and non-GAAP earnings per share grow 22% and 27%, respectively (excluding the effect of exchange rate fluctuations).

PayPal is benefiting from two megatrends: the digitization of cash and the adoption of mobile devices around the world. These global trends are completely transforming how people buy things. To monitor how well PayPal is capitalizing on this massive consumer shift, investors will want to watch the growth in customer accounts and the growth in transactions per customer account when the company reports.

A phone displaying PayPal mobile app laying on a desk with a credit card, glasses, shoes, watch, and other luxury items.

Image source: PayPal Holdings. 

The two most important metrics to watch

Since PayPal generates revenue by charging a fee each time someone pays with their account, it's vital for PayPal's growth that the company continually adds new customers, and that those customers use their account as frequently as possible.

Last year, PayPal grew its customer accounts 15.2% to 227 million, and the more that number grows, the more PayPal increases its relevance in a fast-growing, competitive market. That's why banks and card companies have been willing to join PayPal as a partner. PayPal is gaining the perception of being a convenient, safe, and trusted service for millions of people. With the rising threat of cyberattacks, those are important qualities for a payment provider.

Along with customer account growth, PayPal also reports the number of times that customers use their account. This is reported as a rolling 12-month average, and provides investors a very useful metric to monitor how engaged customers are with their account.

In 2017, transactions per customer account increased 8% to 33.6. This means that customers, on average, used their account about once every two weeks. This is a deceleration from 2016's 13% growth rate, but there's a good reason for this.

As management explained on the fourth-quarter conference call, PayPal's strong customer account growth, which accelerated from 10% in 2016 to 15% last year, is causing growth in transactions per account to temporarily slow down. While newer customers are more engaged than older customers, it takes some time for those new customers to reach the engagement levels of customers who have been with PayPal for a year or more.

CEO Dan Schulman said, "I think it's instructive to note that our accelerating net new active [customer account] growth hides the true underlying growth of engagement."

He added: "It's particularly encouraging that our net new active cohorts acquired in 2017 are showing an acceleration in engagement versus similar cohorts from 2016. The net takeaway is we're bringing on record net new actives with higher engagement than ever before, and that obviously bodes well as we look ahead."

Schulman's goal is to see customers use their account not once every two weeks, as they do now, but two times per week. Given the company's recent momentum following partnership announcements with major credit card providers and banks, I don't think it's a question of if PayPal reaches that target, but when.

Guidance and final thoughts

For the first quarter of 2018, management is calling for revenue to be between $3.58 billion and $3.63 billion, representing growth of 21% year over year at the midpoint of guidance. That is expected to translate to non-GAAP earnings per share in the range of $0.52 to $0.54, or growth of 20.5% at the midpoint.

Investors shouldn't expect any surprises. PayPal has been as consistent as they come. Customer account growth and engagement are two fundamental drivers of total payment volume, and therefore revenue. The performance of these metrics will tell investors more about the company's momentum than a headline number like earnings per share.