PayPal Holdings' (NASDAQ:PYPL) fourth-quarter 2018 earnings, released Wednesday after the close of trading, reflected major trends that characterized the organization's business in 2018. After selling its credit receivables portfolio to Synchrony Financial in July, PayPal no longer enjoys significant revenue from consumer credit lending. Revenue from former parent eBay sagged in the fourth quarter, as eBay volume continues to exhibit less influence on PayPal's income statement.
Conversely, the surging fortunes of social payments app Venmo, continued brisk growth in PayPal's Braintree subsidiary, and new users from recent acquisitions all represent vibrant sources of future growth. These revenue drivers rebuffed headwinds as PayPal posted double-digit top-line growth in the fourth quarter.
Let's review headline numbers useful for navigating the report, as well as the details that provide valuable context for earnings over the last three months. Note that in the discussion that follows, all comparative numbers are presented against the prior-year quarter (the fourth quarter of 2017).
PayPal: The raw numbers
|Metric||Q4 2018||Q4 2017||Year-Over-Year Change (Decline)|
|Revenue||$4.22 billion||$3.74 billion||12.8%|
|Net income from continuing operations||$584 million||$620 million||(5.8%)|
|Diluted earnings per share||$0.49||$0.50||(2%)|
What happened this quarter?
PayPal's total quarterly revenue crossed $4 billion for the first time. Total payments volume (TPV), a measure of the total dollar amount transacted over PayPal's platform, climbed 23% to $164 billion.
Net new active accounts increased by 13.8 million to 267 million, against 8.7 million added in the fourth quarter of 2017. PayPal gained 2.9 million new active accounts in the fourth quarter from its acquisitions of iZettle and Hyperwallet, demonstrating that its plan to supplement organic growth with acquisitions is meaningfully adding to TPV.
Customer frequency remained robust. The company charted 36.9 transactions per active account in the trailing 12-month period ending in December, a 9% increase over the prior period.
Mobile payment volume expanded 40% to $67 billion, accounting for 41% of TPV during the quarter. Person-to-person volume increased 46% to $39 billion.
- PayPal's revenue is increasingly globalized: Cross-border trade comprised 18% of TPV, and the company noted that 49% of active accounts are now located outside the U.S.
Revenue from eBay Marketplaces was flat against the prior quarter, a result that fell below management's expectations. Total eBay payments volume represented 10% of TPV over the last three months, against 13% in the fourth quarter of 2017.
- eBay transactions are less meaningful to PayPal's revenue due to the growth of services like Venmo. During the fourth quarter, Venmo expanded by nearly 80%, processing $19 billion of TPV. For the second consecutive quarter, Venmo TPV surpassed eBay TPV. The company provided the following image charting Venmo's expansion in its quarterly investor presentation:
PayPal's transaction take rate, which measures the company's earnings from facilitated transactions, reached 2.35% in the fourth quarter, versus 2.45% in the fourth quarter of 2017. Transaction take rate increased sequentially against the third-quarter rate of 2.34%, the first sequential increase since PayPal separated from eBay -- signaling that this important metric may finally be stabilizing.
Completion of the sale of consumer receivables to Synchrony in July shaved roughly seven percentage points of growth off PayPal's top line in the fourth quarter. Management believes that exiting this noncore business and utilizing the $7 billion in proceeds for acquisitions will more than replace the forgone revenue.
- The organization announced a strategic partnership with electronic billing service provider Paymentus. PayPal will enable debit, credit, and Automated Clearing House payment processing for Paymentus throughout the privately held company's merchant and consumer footprint, which spans the U.S., Canada, and Mexico.
What management had to say
During PayPal's earnings conference call, CEO Dan Schulman discussed Venmo's increasing importance to the company's bottom line as it evolves from a social peer-to-peer app to a broader e-commerce platform. Schulman also extolled momentum in the company's merchant-centric payments subsidiary Braintree:
The total number of Venmo users who have made a monetizable transaction is now 29%, reflecting a steady month-over-month increase. The Venmo card continues to gain significant traction [and] Instant Transfer revenues continue to increase. And as a result, our Venmo initiatives have produced a revenue run rate going into 2019 that now exceeds $200 million, with revenues being equally split between Instant Cash Out and other monetizable services.
Braintree continued to grow impressively, demonstrating its market leadership since our acquisition five years ago. Last month, we announced the Braintree platform had processed over 500 billion in authorized payment volume since 2014, with more than 6 billion transactions last year alone. We added KFC Australia, Krispy Kreme, Deutsche Telekom, Deutsche Post, Live Nation, Ticketmaster, Acer computers, and TripAdvisor experiences to its platform, joining a powerful list of leading mobile apps using Braintree, such as Uber, Wish, Boxed, Facebook, and Airbnb. PayPal's opportunities to expand internationally continue to grow ... [with] tech and merchant partnerships continuing to multiply.
PayPal reaffirmed the 2019 growth parameters it mapped in its third-quarter 2018 earnings release. The company anticipates revenue of between $17.85 billion and $18.10 billion, for expansion of 16% to 17%. This reflects 3.5 percentage points of decline from the consumer credit receivables sale. Management expects GAAP diluted earnings per share to land between $1.83 and $1.93 for the full year.
Looking ahead to next quarter, PayPal projects revenue expansion of 11% to 12%, for a top line of $4.08 billion to $4.13 billion. The company expects diluted EPS of $0.42 to $0.45.
On a non-GAAP basis, PayPal expects first-quarter adjusted EPS of $0.66 to $0.68. If it hits the midpoint of this range, PayPal will achieve 18% growth over the adjusted earnings of $0.57 it booked in the first quarter of 2019.