PayPal Holdings' (NASDAQ:PYPL) first-quarter earnings report, released on April 25, provided ample evidence of the sustainability of its recent revenue and earnings trends. Let's look at the raw numbers and pertinent details from the filing and examine how the past quarter highlights PayPal's unique strengths.

PayPal: The raw numbers

Metric Q1 2018 Q1 2017 Year-Over-Year Change
Revenue $3.69 billion $2.98 billion 23.8%
Net income from continuing operations $511 million $384 million 33.1%
Diluted earnings per share $0.42 $0.32 31.3%

Data source: PayPal Holdings Inc. 

What happened this quarter?

  • Total payments volume (TPV), which measures all transactions processed over PayPal's platform, rose 32% over the prior year comparable quarter, to $132 billion.

  • The company added 8.1 million new accounts, with net new active accounts increasing 35% year over year.

  • Person to Person (P2P) payments continued to account for a growing share of overall TPV. Total P2P volume expanded by 50% to approximately $30 billion during the quarter. TPV for the popular social payments app Venmo increased 80% to $12 billion.

  • The effort to monetize Venmo continues: Over 2 million U.S. merchants now accept it as a payment option. A new feature which enables instant settlement of money transfers between friends for a $0.25 fee saw rapid growth during the quarter.

  • Volume transacted over mobile devices surged 52% in the last three months. Mobile TPV of $49 billion accounted for 37% of PayPal's overall TPV. 
  • PayPal's transaction margin (its margin on transactions after considering transaction expenses and losses on transactions and loans), after rising to 65% in the fourth quarter of 2017, fell to 57% in the first quarter, a percentage that's more in line with its trend for the last several quarters.

  • Management noted that on a currency-neutral basis, merchant TPV grew at a rate of five times the rate of merchant volume growth on eBay's "Marketplace" platform. This statistic should allay some of investors' fears over the eventual end of its relationship as merchant of record for eBay.

  • The $6.8 billion sale of PayPal's credit receivables portfolio to credit partner Synchrony Financial (NYSE:SYF) is expected to conclude early in the third quarter.

Network Expansion

Female customer buying vinyl LPs at small record shop.

Image source: Getty Images.

It's been widely noted that PayPal has thrived over the last two years by forming partnerships with potential competitors, from tech giants to bank card issuers. That deal making continued during the last quarter, as the organization inked agreements with two of Spain's leading banks, CaixaBank and Bankia. Caixa Bank's business customers can now offer PayPal as a payment option on their websites. And Bankia's retail customers can link Bankia cards to a PayPal wallet, thus funding online purchases on PayPal merchant websites. 

Also during the quarter, JP Morgan Chase made purchases via PayPal merchant sites one of the few ways Chase Freedom credit card cardholders can receive 5% cash back on purchases. Similarly, attractive perks are in the offing for customers of British bank Barclays following yet another deal PayPal concluded last quarter. For example, Barclays' U.S. cardholders will soon be able to redeem credit card rewards points for purchases at PayPal merchants.

I cite the examples above not simply to provide an update on new agreements the transactions giant has sealed since the last reporting period, but to illustrate how these financial institutions are increasingly realize that PayPal has high utility for their customers, and enhances their own offerings.

This perception of added value is also helping PayPal expand its merchant base. During the Q1 earnings conference call, CEO Dan Schulman noted that sale conversions on mobile devices are typically low, which is an issue for merchants as customers increasingly shop online. Schulman relayed that PayPal's instant payment "One Touch" feature has lifted its mobile conversion rate to nearly 90% -- more than twice the industry average.

Of course, to maximize the yield on its growing network of card issuers and merchants, PayPal must also reel in new users, and widen the universe of potential customers. One of the ways the company is expanding its total addressable market is through the pursuit of a customer population largely ignored by banks and credit card companies: the "underbanked." These consumers lack access to traditional banking services and revolving credit products.

In April, PayPal announced a partnership with M-Pesa, a Kenyan payment service that enables the underbanked to make payments and transfer funds via their mobile phones. The tie-up allows M-Pesa account holders to purchase goods globally online from PayPal merchants. It also helps Kenyan businesses tap into the international market for goods and services, as micro-businesses and freelancers with M-Pesa accounts will now be able to sell to foreign purchasers.

Recently, PayPal also issued its PayPal Cash Mastercard, designed for U.S. consumers outside the traditional banking system. The prepaid card can be loaded at over 20,000 retail locations in the U.S., and it's distinctive for its lack of monthly fees and minimum balance requirements. Users can receive funds via direct deposit into their PayPal Cash account, and even deposit checks using image capture, a feature typically available only to traditional bank account holders.

PayPal advanced to its present market position by making it extremely easy for customers to shop online and move funds between payment sources. It's using the same approach -- presenting tangible benefits that are difficult to pass up -- to turn competitors into partners, secure greater merchant participation, and widen its customer base. 

Moving forward

PayPal Cashback Mastercard surrounded by travel items: music ear buds, camera, mobile phone, passport, etc.

Image source: PayPal Holdings, Inc.

In the earnings release, management provided its typical broad guidance for annual revenue and earnings per share (EPS). After adjusting for the sale of its credit receivables portfolio to Synchrony, which will cut about 3.5 percent off the top line, PayPal expects full-year revenue to advance by 16% to 18%. This translates to a revenue range of between $15.2 and $15.4 billion. The company projects that diluted EPS will fall within a band of $1.73 to $1.76, versus $1.47 of diluted EPS in 2017. At the midpoint, that would be  roughly 19% earnings growth -- in line with its recent high double-digit percentage growth results.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.