PayPal Holdings, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with the three months ended March 31, 2023. PayPal operates globally as a digital payments and commerce platform and reports as one segment. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net revenue | $7.699 billion | $7.040 billion | +9% |
| Operating expenses | $6.531 billion | $6.041 billion | +8% |
| Operating income | $1.168 billion | $999 million | +17% |
| Operating margin | 15% | 14% | +1 percentage point |
| Net income | $888 million | $795 million | +12% |
| Diluted earnings per share | $0.83 | $0.70 | +18% |
| Cash from operating activities | $1.917 billion | $1.170 billion | +64% |
Transaction revenue rose 11% to $7.034 billion; revenue from other value-added services declined 2% to $665 million. Net revenue growth reflected 14% higher total payment volume (TPV), while transaction revenue growth lagged TPV growth because of foreign-exchange and hedging effects and product mix. Transaction expense rose 19% to $3.917 billion; its rate increased to 0.97% of TPV from 0.93%. Transaction and credit losses fell 27% to $321 million, and their rate declined to 0.08% from 0.12%.
TPV was $404 billion, up 14%, and payment transactions totaled 6.5 billion, up 11%. Transactions per active account increased 13% to 60.0. Active accounts were 427 million, down 1% year over year. Revenue from outside the U.S. represented approximately 42% of the total.
Cash, liquidity and debt
At March 31, 2024, cash and cash equivalents were $9.693 billion, short-term investments were $4.625 billion, and long-term investments were $3.409 billion. Management reported $15.894 billion of cash, cash equivalents and investments, excluding customer funds, restricted cash and strategic investments. It said available resources, operating cash generation and expected access to capital should be sufficient for cash requirements over the next 12 months and beyond; it also cautioned that not all cash is available for general corporate use because of customer and regulatory requirements.
Operating activities generated $1.917 billion; investing activities generated $980 million; and financing activities used $2.362 billion. Cash, cash equivalents and restricted cash increased by $441 million during the quarter. Operating cash flow included $5.2 billion of proceeds from repayments and sales of loans held for sale and $5.3 billion of originations of those loans, so loan-sale activity was a significant factor in the period’s cash flows.
Long-term debt was $9.683 billion on the balance sheet. Term notes had $10.595 billion principal outstanding, including $1.250 billion due in the remainder of 2024. PayPal remained investment grade with the three ratings agencies named in the filing. Under the Paidy facility, approximately $403 million was drawn and $192 million of capacity remained available. The filing reports approximately $5.6 billion of revolving facilities available overall.
Material changes and notable items
- Operating income and margin improved as revenue growth exceeded expense growth; management cited operating efficiencies, partly offset by higher transaction expense.
- Consumer and merchant loan balances declined year over year. Consumer loan net charge-off rate increased to 7.2% from 4.4%; merchant loan net charge-off rate increased to 14.0% from 8.2%. Management attributed the consumer increase partly to deterioration in U.S. interest-bearing installment credit and portfolio mix, and the merchant increase partly to the smaller PPBL portfolio after reduced originations.
- PayPal sold $4.8 billion of eligible consumer installment receivables during the quarter under its agreement with a global investment firm. The agreement covers eligible receivables up to €40 billion, including future originations, subject to conditions.
- Strategic investment losses contributed to other income (expense), net declining to $41 million from $75 million, partly offset by higher interest income.
- PayPal repurchased approximately 25.4 million shares for about $1.5 billion at an average price of $59.18, excluding excise tax. Approximately $9.4 billion remained available under the repurchase authorization at quarter-end.
- Cash, cash equivalents and investments held by foreign subsidiaries were $9.8 billion, or 62% of that reported liquidity measure.
Outlook, risks and contingencies
No specific revenue, earnings or TPV guidance is provided in the supplied filing text. PayPal initiated a global workforce reduction, recording $175 million of restructuring charges in Q1 and expecting a further $70 million to $90 million, substantially recognized by Q2 2024. Management estimated approximately $560 million in annualized employee-related cost reductions, including stock-based compensation, and said a portion would be reinvested in business priorities.
Key risks include changing global payments regulation; cybersecurity and data-protection threats; macroeconomic effects on spending and borrower repayment; foreign-exchange, interest-rate and strategic-investment volatility; and the availability and cost of funding credit products. The filing notes that consumer and merchant credit-loss allowances include qualitative adjustments for economic uncertainty and borrower financial health. Customer crypto assets were $2.846 billion, matched by an equal safeguarding liability; PayPal noted concentration risk from its two third-party custodians.
Legal and regulatory matters include an unresolved German Federal Cartel Office proceeding, an FTC inquiry, CFPB inquiries, a subpoena concerning PayPal USD, a securities class action with a pending motion to dismiss, and a Hawai‘i consumer-protection case scheduled for trial in April 2025. The CFPB closed its inquiry into certain Venmo funds-transfer and collections matters without enforcement action. PayPal stated that accrued legal and regulatory liabilities were not material, but it cannot estimate potential losses from non-monetary remedies in the disclosed matters. AUSTRAC’s review of an external auditor’s report on PayPal Australia’s undertaking remained pending.
Gross unrecognized tax benefits were approximately $2.2 billion; resolution timing is uncertain. The filing reported no off-balance-sheet arrangements with a material current or reasonably likely future effect. Disclosure controls were concluded to be effective as of March 31, 2024.
Important facts for investors to verify
- Whether TPV growth converts into transaction revenue and margin improvement, given the higher transaction expense rate and unfavorable product mix.
- Whether elevated consumer and merchant net charge-off rates stabilize, and how reduced loan originations and receivable sales affect credit revenue and cash flows.
- Whether the projected restructuring savings are realized, how much is reinvested, and whether additional restructuring costs arise.
- Whether liquidity remains adequate after accounting for customer-fund and regulatory restrictions, upcoming debt maturities, and credit-product funding needs.
- Developments in the CFPB, FTC, FCO, SEC, AUSTRAC and court matters, including any resulting costs, business-practice changes or penalties.
- Potential volatility from strategic investments, foreign-exchange movements, interest rates, cybersecurity incidents and crypto-custodian concentration.