PayPal Holdings (NASDAQ:PYPL) reported its third quarter earnings on Oct. 28, giving investors its first quarterly update since the company was spun off from eBay over the summer. As a whole, PayPal delivered fairly solid results, though investors may not be happy with the company's slowing take rate percentage.


Source: PayPal

How PayPal performed
Revenue was up 15% year-over-year in the third quarter to $2.3 billion. That helped push earnings per share up to $0.25 (an improvement over the $0.19 it reported in the year-ago quarter) on profit of $301 million. Meanwhile, free cash flow was up 20% year over year to $519 million.

PayPal has consistently added around three million to five million new active customer accounts every three months, and the third quarter managed to match this trend. The company increased active user accounts to 173 million, an improvement of 10% year over year.  

Source: PayPal 

Part of the customer account growth came from PayPal's acquisition of the peer-to-peer lending company, Venmo, and expansion into Latin America.

But customer growth isn't just improving -- those customers are also making more transactions and spending more with PayPal. Transactions per account hit 27, up from 26 in the second quarter. This marks three straight periods of increasing transactions per account.  

Source: PayPal

Total payment volumes (TPV), which measures how much PayPal's users spend on its payment platforms, increased 20% year over year to $70 billion. The company noted that $2.1 billion of those transactions came from the Venmo service. In the U.S., TPVs improved by 28% and international TPVs grew by 25%. PayPal  also noted that international growth was slightly hurt by "weaker China exports and lower European demand". International net revenue makes up nearly half of the top line, so anything that holds back the company's international payment volume should be something for investors to keep an eye on going forward. 

Source: PayPal

Much of PayPal's current and future business will depend on mobile transactions, and in that area, the company continues to perform well. PayPal processed 345 million mobile payments in the third quarter, an increase of 38% year over year. Mobile transactions represented 24% of all TPV in the third quarter, up from 20% a year ago.

One area to watch
In a press release, PayPal's president and CEO, Dan Schulman, focused on the company's overall improvement of transactions per active account and the $2.1 billion in transactions through Venmo. "These metrics demonstrate the trust that our customers place in PayPal, and they are increasingly finding more utility and value in their PayPal accounts," he said.

But in the third quarter, PayPal's take rate (the measurement of how much PayPal keeps from each transaction) fell to 3.24%, down from 3.39% in the year-ago quarter. Part of the decline comes from PayPal bringing on bigger merchants (think Macy's) as partners. While those companies help boost active customer numbers, they can also negotiate for lower rates per transaction, which can bring down PayPals' overall take rate.

Additionally, while the company's peer-to-peer Venmo service has added customers and transactions, the platform doesn't currently charge per transaction. PayPal is looking to Venmo to boost customer numbers and, as a result, it pushes down the take rate. "If we're successful in our strategy, our take rate comes down," Schulman said. "That's how the payments business works."

Obviously, PayPal doesn't want its take rates to keep coming down, so investors will need to watch how well the company can balance bringing in new merchants and customers while increasing the percentage it earns from each transaction. 

Looking ahead
PayPal maintained its full-year 2015 guidance, saying that non-GAAP earnings per share should fall between $1.23 and $1.27. Revenue is expected to grow between 15% to 18% year over year, on a constant currency basis. The company is also on target to bring its free cash flow for the full year between $1.6 billion and $1.8 billion. 

Despite the falling take rate, Schulman believes the company's current leadership position in the payments space will continue:

We are operating in a time when change is sweeping through the financial services industry driven by the rise of mobile technology and the acceleration of money becoming digital. These two massive trends play directly to our strengths and we are leveraging this transformation to extend and accelerate our lead.

Chris Neiger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends eBay and PayPal Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.