PayPal Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless stated otherwise. PayPal operates a global digital payments platform and reports as one segment. Amounts are in U.S. dollars.
Financial results and key metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net revenue | $6.483 billion | $6.033 billion | +7% |
| Operating expenses | $5.772 billion | $4.991 billion | +16% |
| Operating income | $711 million | $1.042 billion | -32% |
| Operating margin | 11% | 17% | Down 6 percentage points |
| Net income | $509 million | $1.097 billion | -54% |
| Diluted EPS | $0.43 | $0.92 | -53% |
| Operating cash flow | $1.242 billion | $1.758 billion | -29% |
| TPV | $323 billion | $285 billion | +13% |
- Active accounts were 429 million, up 9%; payment transactions were 5.2 billion, up 18%; and transactions per active account rose to 47.0 from 42.2.
- Transaction revenue rose 7% to $5.998 billion; other value-added-services revenue rose 18% to $485 million.
- Transaction expense increased 24% to $2.817 billion, and its rate of TPV rose to 0.87% from 0.80%. Transaction and credit losses increased 35% to $369 million, or 0.11% of TPV versus 0.10%.
- Cash, cash equivalents and investments available outside customer funds were $11.894 billion at March 31, 2022, down from $12.981 billion at year-end. Cash and cash equivalents on the balance sheet were $4.861 billion.
- Long-term debt was $8.222 billion on the balance sheet; $9.0 billion of fixed-rate notes were outstanding at principal value. PayPal also had about $5.5 billion of revolving credit facilities available, including the Paidy facility.
Material changes and management commentary
- Revenue growth was driven by TPV, Braintree and Venmo, but transaction revenue grew more slowly than TPV and transactions. PayPal cited lower eBay marketplace activity, lower foreign-exchange fees and a higher share of lower-rate Braintree volume. Management expected eBay-related revenue declines to continue weighing on growth, particularly in the first half of 2022.
- Expense growth outpaced revenue growth, primarily because of transaction costs and an unfavorable product, merchant and funding mix. Management attributed the lower operating income and margin mainly to these costs.
- Net income also reflected a $345 million year-over-year increase in income tax expense: the prior-year period benefited from discrete stock-compensation tax benefits. The effective tax rate was 19%, versus a 26% benefit rate in Q1 2021.
- Management initiated a global workforce reduction to streamline operations. It recorded $20 million of restructuring charges in Q1, estimated another $100 million for the remainder of 2022, and expected the actions to be substantially completed by Q4 2022. Estimated annualized employee-related cost reductions were about $260 million, including approximately $90 million of stock-based compensation; some savings were expected to be reinvested.
- Cash from operating activities was lower than a year earlier. Investing activities used $751 million and financing activities used $695 million, including $1.5 billion of share repurchases. The quarter-end cash, cash equivalents and restricted cash total was $17.843 billion, including substantial customer-related balances.
Outlook, risks and unusual items
- Management stated that existing cash, investments, operating cash generation and expected access to capital should be sufficient for cash requirements over the next 12 months and beyond. The filing provides no specific revenue, earnings or TPV guidance.
- PayPal suspended transactional services in Russia in March 2022. Russia- and Ukraine-related revenue was described as not material for the periods reported, but management could not reasonably estimate the conflict’s total potential financial impact.
- Macroeconomic uncertainty—including inflation, the Russia-Ukraine conflict, supply constraints and post-pandemic consumer behavior—could weaken spending, increase merchant failures or credit losses, and affect results. Foreign currency movements reduced Q1 operating income by a net $19 million after hedging.
- Consumer loans and interest receivable grew 83% year over year to $4.1 billion. The consumer net charge-off rate was 3.9%, versus 3.0%. Merchant receivables grew 31% to $1.5 billion, while their reported net charge-off rate declined to 3.2% from 19.4%, which management attributed partly to prior-year charge-offs and tighter underwriting.
- Unrealized losses on available-for-sale debt securities were $380 million at quarter-end, primarily attributed to market interest-rate changes; PayPal said it did not intend, and did not expect it would be required, to sell the securities before recovery of amortized cost.
- Regulatory and litigation matters include inquiries involving OFAC, AUSTRAC, CFPB, the SEC and FTC, as well as securities and derivative shareholder actions. PayPal said accrued legal and regulatory amounts were not material, but it could not estimate potential losses for certain matters, including non-monetary remedies.
- Other notable items: Q1 included $14 million of net gains on strategic investments, compared with $120 million of net losses in Q1 2021; investment fair-value changes may make future earnings volatile. PayPal was evaluating the impact of SEC guidance on safeguarding customer crypto-assets (SAB 121).
Key facts for investors to verify
- Whether transaction expense and loss rates stabilize, and whether revenue growth improves as eBay-related effects and mix shifts evolve.
- Trends in transaction volume, engagement, customer acquisition and lower-rate Braintree activity; reported account metrics can include multiple accounts per user.
- Credit portfolio growth, underwriting standards, delinquencies, charge-offs and allowance assumptions, especially under weaker economic conditions.
- Execution and realized savings from the restructuring, alongside the planned reinvestment and additional charges.
- Cash available for corporate use versus customer and regulatory requirements, debt maturities and facility usage, and the effects of Russia-related sanctions and outstanding regulatory matters.