PayPal Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. PayPal operates a global digital payments platform and reports as one operating segment. Comparisons are with Q1 2022 unless noted.
Financial results and key metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net revenue | $7.040 billion | $6.483 billion | +9% |
| Operating income | $999 million | $711 million | +41% |
| Operating margin | 14% | 11% | +3 percentage points |
| Net income | $795 million | $509 million | +56% |
| Diluted EPS | $0.70 | $0.43 | +61% |
| Operating cash flow | $1.170 billion | $1.217 billion | -4% |
| Transaction and credit losses | $442 million | $369 million | +20% |
- Transaction revenue was $6.364 billion, up 6%; other value-added-services revenue was $676 million, up 39%. U.S. revenue was $4.147 billion and revenue from other countries was $2.893 billion.
- TPV was $355 billion, up 10%; payment transactions were 5.8 billion, up 13%; active accounts were 433 million, up 1%. Transactions per active account rose to 53.1 from 47.0. Transaction revenue grew more slowly than TPV, reflecting weaker core PayPal and foreign-exchange fee revenue.
- Operating expenses rose 5% to $6.041 billion. Transaction expense rose 17% to $3.283 billion, and its rate of TPV increased to 0.93% from 0.87%. Sales and marketing, technology and development, customer support, and general and administrative costs declined.
- Net income benefited from higher operating income and a $157 million year-over-year improvement in other income (expense), primarily from higher interest income. The effective tax rate increased to 26% from 19%.
- Cash, cash equivalents, and investments were $13.059 billion at March 31, excluding customer funds and strategic investments. Cash, cash equivalents, and restricted cash totaled $17.694 billion, down $1.462 billion during the quarter. Financing cash outflow was $2.662 billion, including $1.432 billion of share repurchases and a $1.020 billion decrease in funds payable and amounts due to customers.
- Total assets were $77.186 billion and total liabilities were $57.328 billion. Long-term debt was $10.481 billion on the balance sheet; outstanding fixed-rate notes had $10.4 billion aggregate principal. PayPal had about $125 million of available capacity under its Paidy facility.
Material changes and management commentary
- Management attributed revenue growth mainly to TPV expansion, particularly unbranded card processing, while noting declines in some core PayPal products and foreign-exchange fees. Higher interest rates supported interest income on customer-related assets and loans.
- Transaction losses declined to $300 million from $322 million, but credit losses increased to $142 million from $47 million. Consumer receivables grew 47% year over year to $6.1 billion; merchant receivables grew 33% to $2.1 billion.
- Merchant credit indicators weakened: 89.8% of merchant receivables were current, versus 92.6% a year earlier; balances more than 90 days past due were 4.5%, versus 2.9%; the net charge-off rate rose to 8.2% from 3.2%. Consumer net charge-off rate increased to 4.4% from 3.9%.
- In response to declining merchant credit performance, PayPal implemented risk mitigation measures that reduced PayPal Business Loan originations during the quarter. Management cited macroeconomic uncertainty and borrower financial health in setting credit-loss allowances.
- Q1 included $117 million of charges for a new global workforce reduction, plus $39 million of lease and facility impairment charges and an $8 million loss on an owned property designated for sale. The workforce actions were intended to improve efficiency; estimated annual employee-cost reductions were approximately $280 million, with some savings expected to be reinvested.
Outlook, liquidity, risks and contingencies
- The filing provides no specific quarterly or annual financial guidance. Management stated it expects existing cash, investments, operating cash generation, capital-market access, and potential third-party funding to meet cash requirements for the next 12 months and beyond.
- Not all cash is available for general corporate use because balances support customer access and regulatory requirements. PayPal had designated $3.8 billion of European customer balances for credit activities, subject to regulatory limits; exceptional circumstances could require corporate liquidity to support European customer balances.
- Risks include worsening macroeconomic conditions, credit deterioration, fraud and customer-protection losses, interest-rate and foreign-exchange movements, strategic-investment volatility, cybersecurity, counterparty financial-institution exposure, and evolving global payments, lending, privacy, and consumer-protection regulation.
- Regulatory matters include CFPB inquiries concerning Venmo transfers and collections, an SEC investigation concerning debit-card interchange and marketing-fee reporting, an FTC inquiry into certain commercial-customer practices, and a German competition proceeding concerning merchant contract terms. PayPal is cooperating with the agencies.
- Australian regulator AUSTRAC accepted an enforceable undertaking in March 2023 concerning historical reporting issues; it includes no monetary penalty but requires an assurance plan and external review. PayPal said noncompliance could lead to penalties or business-practice changes.
- A securities class action concerning historical account growth disclosures was dismissed with prejudice on April 27, 2023; the plaintiffs’ appeal deadline was May 30, 2023. A separate securities action concerning account metrics and illegitimate accounts, plus related derivative actions, remained pending. Recorded legal accruals were not material, but outcomes and non-monetary remedies may be uncertain.
- Management reported effective disclosure controls as of March 31, 2023 and no off-balance-sheet arrangements expected to have a material effect.
Important facts for investors to verify
- Whether payment-volume growth converts into transaction-revenue growth and whether transaction expense rates stabilize, particularly as unbranded processing mix changes.
- Subsequent consumer and merchant delinquency, provision, and charge-off trends, and the impact of tighter underwriting on loan growth and revenue.
- Cash generation and the amount of liquidity genuinely available for corporate purposes after customer-fund and regulatory requirements.
- Execution and realized savings from workforce and facility actions, including restructuring costs and planned reinvestment.
- Developments in regulatory inquiries, the pending securities and derivative litigation, and completion of the AUSTRAC undertaking.