PayPal's Active Accounts Accelerate Sharply

While PayPal Holdings' (NASDAQ:PYPL) management has a plethora of talking points to recap the third quarter of 2018, including major new partnerships and a completed e-commerce acquisition, PayPal's most significant story is a leap in new accounts. Below, we'll discuss the spike in this key metric, as well as other vital details from the last three months, after a brief review of headline numbers:

PayPal: The raw numbers

Data source: PayPal Holdings Inc.

What happened this quarter?

• Total payments volume (TPV), the total dollar amount of transactions conducted over PayPal's platform, jumped 24% against last year's comparable quarter, to $143 billion. 

• The sale of the company's consumer receivables to Synchrony Financial, which was completed at the very beginning of the quarter (on July 2), shaved off roughly 7 percentage points of potential revenue growth during the quarter. In exchange, however, PayPal received $6.9 billion at closing, which it will use for growth investments and share repurchases.

• PayPal added 9.1 million active accounts over the last three months. This eclipsed last year's 8.2 million additions in the third quarter, and it represents PayPal's highest quarterly new-account total ever. Geographic distribution of new customers continues to be well diversified: Over 50% of active accounts are outside the U.S.

• The influx pushed total active accounts up 15% to 254 million. Continuing to tack on new users, and increasing the frequency of customer interactions, are building blocks of PayPal's network expansion. The current quarter's account additions build a case for continued double-digit revenue growth over the next several quarters. 

• As for frequency, PayPal's transactions per active account on a trailing 12-month basis rose roughly 10%, to 36.5.  

• Mobile payment volume, a targeted growth area, increased by 45% year over year to $57 billion, and comprised 40% of overall TPV.

• PayPal's social app Venmo continued to flourish, generating $17 billion of TPV during the quarter, which equates to a growth rate of 78% compared with the same period last year.

• Transaction take rate (i.e., the "take" PayPal earns on each transaction completed over its platform) declined by 14 basis points against the third quarter of 2017, to 2.34%. The company attributed this dip to the higher percentage of person-to-person payments facilitated by Venmo. 

• But a slightly lower take rate was absorbed by transaction volume growth, as PayPal's operating margin improved by roughly 20 basis points to 13.3% versus the previous year.

• Near the end of the quarter, on Sept. 20, PayPal completed its $2.2 billion acquisition of iZettle, an e-commerce platform for small businesses in Europe and Latin America. As I described last quarter, iZettle is one of the larger deals in a flurry of acquisitions PayPal has undertaken during 2018.

• The company announced a new partnership with American Express alongside earnings. American Express customers will now be able to use their loyalty points to make purchases from millions of PayPal merchants. The partnership also allows for the payment of American Express bills via customers' PayPal or Venmo balances. 

• During the quarter, PayPal also clinched an agreement with Walmart that will extend its efforts to reach the unbanked -- i.e., consumers who don't use traditional banking channels. Under the arrangement, PayPal customers can load cash onto their PayPal accounts at Walmart retail locations and use the PayPal Cash Mastercard to withdraw cash at Walmart, among other benefits.

• The American Express and Walmart agreements are the latest in a string of deals PayPal has inked in recent years to integrate with -- rather than compete against -- banks, retailers, and peer transaction companies. The following image from PayPal's third-quarter investor slide presentation shows the 37 significant partnerships PayPal has entered into since 2016:

Image source: PayPal Holdings Inc.

What management had to say

PayPal's millennial-friendly payments app Venmo is certainly the most vibrant attractor of new accounts to PayPal's platform. During the company's earnings conference call on Oct. 18, CEO Dan Schulman provided an update on efforts to monetize Venmo, which is worth reading in its entirety:

For the third quarter in a row, Venmo posted yet again another record for net new [active accounts]. This is driving accelerating network effects as volume grew 78% to $16.7 billion with an annualized run rate now approaching $70 billion. And while it is still early, our monetization efforts appear to be reaching a tipping point -- 24% of Venmo users have now participated in a monetizable action. This is up from 17% one quarter ago and 13% in May of this year. Pay with Venmo monthly active users increased approximately 185% month over month in September versus August.

And across the Uber and Uber Eats apps, we saw more than 300% month-over-month volume growth in September versus August. Our Venmo card is also off to a strong start with approximately 320% month-over-month growth in monthly active users from August to September. Notably, the two top purchase categories since launch for our card are supermarkets and restaurants. These daily-use cases demonstrate how we are rapidly gaining omnichannel ubiquity and becoming a part of our Venmo customers' everyday spend. Finally, last month we processed over $1 billion in instant transfer volume on the Venmo platform alone.

Image source: Getty Images.

Looking forward

On the strength of third-quarter results, PayPal's management increased full-year revenue and earnings estimates. For the fourth quarter, PayPal expects revenue growth of 13% to 15%, and consequently, it anticipates 2018 revenue growth of 18% to 19%. The floor of PayPal's full-year revenue range has been tweaked up roughly 1 percentage point from last quarter's estimate, to $15.42 billion, while the top of the range remains unchanged at $15.50 billion.

Diluted earnings per share (EPS) are now projected to land between $1.65 and $1.69, a material revision from the previous estimate of $1.44 to $1.51. At the midpoint of these two ranges, PayPal has increased its 2018 EPS expectation by 13% since the second quarter. New account additions and higher activity per account are having a tangible impact on PayPal's bottom line.