PayPal Holdings, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2020. PayPal operates a global digital payments platform, including PayPal, Venmo, Xoom, Braintree, PayPal Credit and Honey. The company reported as one operating segment.
Financial results and liquidity
Amounts below are U.S. dollars; financial statement figures are in millions unless noted.
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Net revenue | $5,261 | $4,305 | +22% |
| Operating income | $951 | $705 | +35% |
| Operating margin | 18% | 16% | +2 percentage points |
| Net income | $1,530 | $823 | +86% |
| Diluted EPS | $1.29 | $0.69 | +86% |
| Operating cash flow | $2,383 | $1,174 | +103% |
- Six-month results: Revenue was $9,879 (+17% year over year), operating income $1,349 (+10%), net income $1,614 (+8%), and diluted EPS $1.36 (+9%). Operating margin was 14%, versus 15% in the first half of 2019.
- Revenue and activity: Q2 transaction revenue increased 28% to $4,945; other value-added services revenue fell 26% to $316. Total payment volume rose 29% to $221.7 billion, transactions increased 26% to 3.742 billion, and active accounts rose 21% to 346 million. Honey contributed approximately 10.2 million active accounts at acquisition.
- Expenses and credit: Q2 operating expenses rose 20% to $4,310. Transaction and credit losses were $440 (+38%); the six-month total was $1,031 (+56%), including a sharp increase in credit-loss provisions tied to economic forecasts and COVID-19 relief measures. The transaction and credit loss rate was 0.20% of TPV in Q2, compared with 0.18% a year earlier.
- Cash flow: Six-month operating cash flow was $3,887, investing cash flow was negative $10,073, and financing cash flow was positive $8,519. Cash, cash equivalents and restricted cash totaled $18,004 at June 30; this includes customer-related balances and is not equivalent to unrestricted corporate cash.
- Liquidity and debt: Cash, cash equivalents and investments available for corporate liquidity, as defined by management, were $13,523, excluding customer funds, restricted cash and strategic investments. Long-term debt had $9.0 billion principal outstanding ($8.934 billion carrying value); the $5.0 billion revolving facility was undrawn, and approximately $130 million of other uncommitted facilities was substantially available. Funds payable and amounts due to customers were $31,031.
- Balance sheet: Total assets were $63,166 and total equity $17,684. Loans and interest receivable, net, were $3,135, with reported related allowances of $878 versus $258 at year-end 2019.
Material changes and unusual items
- Net income growth substantially exceeded operating income growth, in part because Q2 other income included $888 million of gains on strategic investments. Six-month gains on strategic investments were $764 million. These fair-value gains are subject to market volatility and are not operating revenue.
- PayPal completed its Honey acquisition in January for approximately $4.0 billion of total consideration, including cash and assumed equity awards. The preliminary purchase allocation included $2.957 billion of goodwill. The company also acquired a 70% interest in GoPay in December 2019.
- PayPal issued $4.0 billion of fixed-rate notes in May and repaid a $3.0 billion revolver draw; it ended June with $9.0 billion principal of notes outstanding.
- Six-month share repurchases totaled approximately $1.0 billion. The company announced a $530 million commitment to support racial equality.
- Management approved a global workforce reduction and operating-structure redesign, expected to be substantially complete by year-end 2020. Six-month restructuring charges were $55 million; Q2 also included $21 million of asset impairment charges.
Outlook, commentary and risks
- No quantitative earnings or revenue guidance is provided in the filing text. Management said the duration and severity of COVID-19 impacts were uncertain and expected continued adverse effects on transaction revenue growth in affected areas, including travel and events, for the remainder of 2020.
- Management said the shift toward e-commerce and digital payments had benefited the business, including through increased active accounts and payment volume, while reduced spending, merchant distress, unemployment and customer payment relief could increase losses. A return to pre-pandemic consumer behavior could also weigh on results.
- Credit quality warrants attention: merchant receivables past the original expected or contractual repayment period increased, and management expected merchant net charge-off rates to rise as payment holidays expired. Lending standards were tightened, including lower maximum loan sizes and more manual underwriting.
- Strategic investment valuations could materially affect reported earnings. Foreign exchange, interest rates, cybersecurity, payment fraud, evolving payments regulation and Brexit were also identified as risks.
- Regulatory and legal matters include an AUSTRAC review of Australian reporting practices, OFAC inquiries regarding potentially prohibited transactions, and other proceedings. The filing says probable accruals were not material; the potential AUSTRAC impact could not be estimated. No material off-balance-sheet arrangements were reported.
- Management believed available liquidity, operating cash generation, capital-market access and potential third-party funding would be sufficient for foreseeable needs. This outlook remains subject to pandemic, credit-market and regulatory uncertainties.
Investor verification priorities
- Assess how much reported earnings growth came from strategic investment gains and how those gains may reverse or fluctuate.
- Track loan-loss allowances, delinquencies and charge-offs as payment holidays end and economic forecasts change.
- Reconcile operating cash generation with customer-fund movements, investment purchases, acquisition spending and corporate liquidity availability.
- Review the impact of the $9.0 billion debt balance, interest costs, repurchases and the Honey acquisition on capital allocation and returns.
- Monitor COVID-19-related transaction trends, merchant exposure, and regulatory developments, particularly the AUSTRAC review and Brexit-related changes.