PayPal Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. PayPal operates a global digital payments platform and reports as one segment. Amounts are in U.S. dollars; financial statement figures are generally in millions.
Financial performance and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net revenue | $6,806 (+9%) | $6,238 | $13,289 (+8%) | $12,271 |
| Operating income | $764 (-32%) | $1,127 | $1,475 (-32%) | $2,169 |
| Operating margin | 11% | 18% | 11% | 18% |
| Net income (loss) | $(341) | $1,184 | $168 | $2,281 |
| Diluted EPS | $(0.29) | $1.00 | $0.14 | $1.92 |
| Operating cash flow | $1,466 | $1,306 | $2,708 | $3,064 |
- Q2 TPV was $340 billion, up 9%; payment transactions were 5.5 billion, up 16%. Active accounts reached 429 million, up 6%. For the first half, TPV was $663 billion, up 11%.
- Q2 transaction revenue grew 8%; other value-added-services revenue grew 21%. Growth in unbranded card processing and Venmo was partly offset by lower eBay marketplace-related revenue and foreign-exchange fees.
- Expenses outpaced revenue: Q2 transaction expense rose 21% and transaction and credit losses rose 165%. Management cited higher unbranded processing mix and funding costs, a $114 million merchant-insolvency loss, and increased fraud-related losses.
- Q2 other expense was $715 million, including $672 million of net losses on strategic investments. The six-month strategic-investment loss was $658 million. Q2 income tax expense was $390 million, with a 796% effective rate, primarily reflecting tax expense related to an intra-group intellectual-property transfer.
Balance sheet, cash flow, debt and liquidity
- At June 30, 2022, total assets were $77.8 billion, total liabilities $58.0 billion, and equity $19.8 billion. Cash and cash equivalents were $4.6 billion; short-term investments were $4.7 billion.
- PayPal reported $12.95 billion of cash, cash equivalents and investments for corporate liquidity, excluding customer funds, restricted cash and strategic investments. Management said available liquidity, operating cash generation and expected capital-market access should meet requirements for the next 12 months and beyond; some cash supports regulatory and customer obligations and is not available for general corporate use.
- Six-month operating cash flow was $2.7 billion, versus $3.1 billion a year earlier. Investing used $4.7 billion and financing provided $750 million; cash, cash equivalents and restricted cash decreased by $1.3 billion.
- Long-term debt on the balance sheet was $10.2 billion; aggregate principal on fixed-rate notes was $10.4 billion. PayPal issued $3.0 billion of notes in May and repurchased or redeemed $1.6 billion of older notes. It remained investment grade with the cited rating agencies.
- PayPal repurchased approximately $2.3 billion of shares in the first half and authorized a new $15 billion repurchase program in June.
Material changes, outlook and risks
- Compared with Q2 2021, revenue increased, but operating margin fell from 18% to 11% and the company moved from net income to a net loss. Management attributed the earnings decline chiefly to expense growth, strategic-investment losses and higher tax expense.
- Management expected eBay marketplace revenue to continue weighing on revenue growth trends, but to a lesser extent in the second half of 2022. The filing provides no broader quantified financial guidance.
- A workforce-reduction plan incurred $91 million of first-half charges; management estimated a further $15 million of charges for the rest of 2022 and approximately $260 million in annualized employee-cost reductions, with some savings to be reinvested. Completion and related cash payments were expected substantially by Q4 2022.
- Macroeconomic risks include inflation, higher interest rates, weaker consumer spending and borrower credit quality, currency movements, and lingering COVID-19 effects. PayPal suspended transactional services in Russia in March; the ultimate financial impact was not estimable, though Russia- and Ukraine-related revenue was not material in the periods reported.
- Credit exposure grew: consumer receivables were $4.5 billion, up 77% year over year, and merchant receivables were $1.7 billion, up 33%. Consumer net charge-off rate was 4.2%, compared with 3.8% a year earlier; merchant net charge-off rate improved to 3.4% from 8.7%.
- Notable legal and regulatory matters include OFAC sanctions inquiries, an AUSTRAC investigation, CFPB inquiries involving Venmo and PayPal Credit, an SEC investigation concerning debit-card matters, an FTC inquiry, and related securities and derivative lawsuits. Accrued legal and regulatory amounts were not material, but PayPal said adverse outcomes or non-monetary remedies could have material effects and certain losses could not be estimated.
- PayPal adopted crypto-asset safeguarding accounting guidance retrospectively: it recorded a $596 million safeguarding asset and matching liability. It also disclosed concentration risk from using one third-party crypto custodian.
Investor verification priorities
- Review whether transaction expense and credit/protection losses continue to grow faster than revenue and TPV, and whether the 11% operating margin stabilizes or recovers.
- Assess the persistence and valuation sensitivity of strategic-investment gains and losses, which materially affected reported earnings.
- Track consumer and merchant receivable growth, delinquency and charge-off trends, and exposure to worsening economic conditions.
- Confirm the realized cost savings, additional restructuring charges and reinvestment outcomes from the workforce actions.
- Monitor cash available for corporate use versus customer and regulatory liquidity needs, debt maturities, repurchases, and developments in the disclosed legal and regulatory matters.