PayPal Holdings (NASDAQ:PYPL) released its 2018 fourth-quarter earnings last week and, while shares sold off slightly after the report, there seemed to be a lot of bullish takeaways for investors who are willing to be a little patient. In the quarter, revenue grew to $4.23 billion, a 13% increase year-over-year, and non-GAAP earnings per share (EPS) rose to $0.69, a 26% increase year-over-year. It should also be noted that PayPal's revenue was negatively impacted about 7% by the sale of its consumer credit portfolio to Synchrony Financial, and EPS was diluted by up to $0.10 due to the acquisitions PayPal made last year.
|PayPal Metrics||2018 Q4||2017 Q4||Change|
|Revenue||$4.2 billion||$3.7 billion||13%|
|Active customer accounts||267 million||229 million||17%|
|Transactions per active account||36.9||34.0||9%|
The biggest takeaway? A record number of new accounts
While shareholders could focus on a number of things, including Venmo's fast-approaching profitability, the most important number from PayPal's quarter was its accelerating growth in net new active accounts. In Q4, the number of active accounts grew 17% year over year to 267 million -- 246 million consumers and 21 million merchants. More than 13.8 million active accounts were added, a new company record. Excluding acquisitions, almost 11 million accounts were added, giving the company the best organic growth it has ever achieved.
Any way you slice it, PayPal's platform is more popular than ever.
PayPal isn't just adding casual users. These new users are heavily engaged, meaning that they are not having a dilutive effect on user engagement. During the earnings call, Executive Vice-President Bill Ready said, "[O]ne of the great things is that even [as] we have significantly increased the number of net new actives coming onto the platform each quarter, each new cohort, we see stronger than the last in terms of how they engage and how they mature over time."
With new account holders increasingly interacting with PayPal's core platform and Venmo, active accounts averaged 36.9 transactions over the trailing 12 months -- 9% higher than in 2017's final quarter.
What's driving the growth of these new accounts? Let's take a closer look at the channels from which these new account holders are coming.
One of the key things called out by management during the conference call was PayPal's international growth. While they did not cite exact figures, CEO Dan Schulman offered some color, noting that the company was beginning to see "an uptick" in new accounts globally, specifically calling out France, India, and Japan.
For starters, Schulman said the company has seen "strong consumer demand" in India since PayPal launched there in 2017. This year, he promised, the company would continue to invest in friction-less payment experiences expanding its partnerships with Indian financial institutions and merchants.
Another country where PayPal is making progress is in Japan. The company has launched a suite of services there that consumers and merchants in other countries have already come to appreciate, including One Touch, buyer protection, and instant deposits.
Lower customer churn
Most of the time, investors tend to think of net customer growth as being a matter of attracting new users, but there is another side to the formula that receives far less attention: holding on to the customers you already have. On the conference call, Schulman addressed the point that PayPal's churn rate was improving as well:
"Why is the churn rate improving? It's improving because the customer experiences and the breadth of services that consumers are utilizing with us and their engagement is increasing. I give a ton of credit [to the team] for creating those experiences, because I really think we're moving toward best-in-class. Whether that's Checkout, whether that'd be P2P experiences, whether that'd be our mobile app, whether it'd be choice as well, these are all driving increased engagement and helping at the bottom part of the funnel."
Another way PayPal is driving growth is through new partnerships with financial institutions and merchants. What started with a single partnership with Visa shortly after eBay spun PayPal off has evolved into its de facto strategy: Forge partnerships with all merchants, marketplaces, and financial institutions, and transform PayPal into a universal and open digital payment platform.
Schulman stated PayPal now has agreements with eight of the 10 largest banks in the U.S. and 20 "top-tier global financial institutions," and there have now been 40 marketing campaigns from banks directing customers to its PayPal partnership. Many banks are also planning to copy the Discover Financial and Citigroup feature that allows account holders to redeem their reward points through PayPal's platform. As Schulman concluded concerning these partnerships, "it's clearly a win-win for both of us."
Schulman is projecting PayPal to have 300 million active user accounts by the end of 2019, but if 2018's growth rate is anything to go by, that might be a classic case of low-balling guidance. As Schulman pointed out, the strong user growth is increasing PayPal's network effect:
"[T]he virality of Venmo and the network effects on core PayPal are clearly coming into play. You've got 21 million-plus merchants accepting PayPal. Consumers see that, want to be a part of it. You've got 246 million-plus consumers using PayPal. Every merchant now wants to be a part of that. So you've got a good network effect both on core PayPal and on Venmo."
At the risk of stating the obvious, the more active accounts PayPal has, and the more its account holders use them, the more money the company makes. That's why the most important number from PayPal's quarter was the record number of new accounts it added. As long as the payments platform continues to add new accounts, the market-beating returns will continue to follow.