PayPal Continues Its Trek to Payments Domination

Going into PayPal's (PYPL -1.38%) second-quarter financial release, there was plenty for investors to digest. The company has made a flurry of acquisitions, adding four companies, since its last earnings release that have significantly expanded the reach of its growing financial empire.

Given its streak of uninterrupted growth over the past several years, investors had high hopes that PayPal could deliver another expectation-beating quarter -- and the company did just that. 

Image source: PayPal.

PayPal second-quarter earnings: The raw numbers

Data source: PayPal's Second-Quarter Financial Release. Chart by author.

For the just completed second quarter, PayPal reported revenue of $3.86 billion, up 23% year over year, or 22% on a constant currency basis. These results exceeded the high end of PayPal's forecast for revenue in a range of $3.78 billion to $3.83 billion, and topped analysts' consensus estimates for revenue of $3.81 billion. 

Expanding operating margins allowed the company to drop more to the bottom line, with adjusted net income of $703 million -- an increase of 27% compared to the prior-year quarter. Adjusted earnings per share of $0.58 increased 26% year over year. This topped analysts' expectations of $0.56 and PayPal's own guidance for adjusted earnings per share.

Other metrics shined

The sterling results of other operating metrics shine a light on the success of PayPal's strategy. Active customers increased by 7.7 million, with net new actives growing by 18% year over year, now totaling 224 million.

The growth in PayPal's payment business continues to soar, processing 2.3 billion transactions, up 28% compared to the prior-year quarter. The company's record of increasing customer engagement remains intact as well with 35.7 payment transactions per account over the trailing-12-months, up 9% compared to the year-ago period.

Both metrics resulted in increases in the company's total payment volume (TPV) to $139 billion, which is up 29% year over year -- or 27% on a currency neutral basis.

Merchants continued to flock to PayPal as the company added an additional 600,000 during the quarter, bringing the total base of merchants to 19.5 million.

It's personal

Person-to-person (P2P) payment volume grew to $33 billion, soaring 50% year over year, and now represents 24% of PayPal's TPV. Venmo, PayPal's social payments platform, accounted for nearly half of that, processing more than $14 billion in TPV, and rocketing 78% over the same period last year.

PayPal recently released a "Pay With Venmo" button, which allows customers to use the app to pay for retail purchases, and launched a Venmo card. The company said that 17% of Venmo users have used the app to pay a merchant.

Looking ahead

The strength of PayPal's results so far this year have encouraged the company to increase its full-year 2018 guidance for the second time in as many quarters. This chart shows the changes in guidance at the midpoint over the past two quarters: 

Data source: PayPal Financial Releases. Chart by author.

For the third quarter, PayPal expects revenue in a range of $3.62 billion to $3.67 billion, which would represent year-over-year growth of 12% to 13%. The company expects GAAP earnings per share in a range of $0.31 and $0.34, which would be 5% growth at the midpoint. Adjusted earnings per share is expected to be between $0.53 and $0.55, or 17% growth at the midpoint.

PayPal continues to grow its business in every way that matters: expanding its merchant base, increasing its active customers, and increasing the amount each customer is spending on its platform. This is leading to greater payments volume and higher revenue.

The company's expansion strategy has served investors well so far and I see that continuing far into the future.