PayPal Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. PayPal operates one reportable segment, providing global digital payment services through PayPal, Venmo, Braintree, Xoom, Honey and other offerings.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Change | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|---|
| Net revenue | $6,182 | $5,459 | +13% | $18,453 | $15,338 (+20%) |
| Operating expenses | $5,139 | $4,482 | +15% | $15,241 | $13,012 (+17%) |
| Operating income | $1,043 | $977 | +7% | $3,212 | $2,326 (+38%) |
| Operating margin | 17% | 18% | Down 1 point | 17% | 15% |
| Net income | $1,087 | $1,021 | +6% | $3,368 | $2,635 (+28%) |
| Diluted EPS | $0.92 | $0.86 | +7% | $2.84 | $2.22 (+28%) |
| Operating cash flow | $1,513 | $1,314 | +15% | $4,577 | $4,507 (+2%) |
- Q3 transaction revenue was $5,607 (+10%); revenue from other value-added services was $575 (+50%). Nine-month amounts were $17,025 (+20%) and $1,428 (+30%), respectively.
- Q3 payment volume (TPV) was $310 billion (+26%); nine-month TPV was $906 billion (+38%). Active accounts reached 416 million, up 15% year over year. Transactions were 4.9 billion in Q3 (+22%) and 14.0 billion for nine months (+27%). Transactions per active account rose 10% to 44.2.
- Transaction expense grew faster than revenue in Q3, up 27% to $2,564; the transaction expense rate was 0.83% of TPV versus 0.82%. Transaction and credit losses declined 22% to $268; the reported loss rate was 0.09% versus 0.14%.
- Other income, net was $122 in Q3 and $181 for nine months, versus $167 and $880 in the comparable periods. Lower strategic-investment gains drove much of the decline. The nine-month effective tax rate was 1%, compared with 18%, reflecting lower prior-year tax expense on intra-group intellectual-property transfers and discrete tax benefits.
Liquidity, cash flow and debt
- At September 30, cash and cash equivalents were $7.782 billion, short-term investments $5.510 billion, and long-term investments $6.753 billion. Management reported $16.539 billion of cash, cash equivalents and investments, excluding customer funds, restricted cash and strategic investments. These balances are not all available for general corporate use; cash also supports customer access and regulatory requirements.
- For the first nine months, investing activities used $2.356 billion and financing activities used $186 million; cash, cash equivalents and restricted cash increased $1.929 billion to $19.969 billion. Investing cash flows included $695 million of property and equipment purchases, $643 million of net principal loan growth and $469 million for acquisitions, partly offset by investment maturities and sales.
- Debt principal was $9.0 billion in fixed-rate notes; carrying value of long-term debt was $7.949 billion after accounting for the $998 million current portion and issuance costs. The $1.0 billion note due in 2022 is the nearest scheduled maturity. No borrowings were outstanding under the $5.0 billion revolving credit facility; investment-grade ratings were maintained.
- Customer funds receivable and accounts totaled $35.104 billion, compared with $37.804 billion of funds payable and amounts due to customers. These customer-related balances are distinct from corporate liquidity.
Material changes, outlook and management commentary
- Management attributed growth primarily to higher TPV and transaction counts, pandemic-accelerated adoption of digital payments, and recovery in travel and events. Revenue growth lagged TPV growth because of declining eBay marketplace volume, a greater mix of lower-rate large merchants and platform partners, and hedging effects. PayPal expected the eBay-related pressure to continue through the rest of 2021 and, to a lesser extent, into 2022.
- Operating expenses rose with transaction volume, marketing and user incentives, technology investment, and customer support and compliance needs. Lower transaction and credit losses supported margins; the nine-month decline in credit losses included reserve releases as macroeconomic and portfolio conditions improved.
- Value-added-services revenue included $93 million of Q3 and $145 million of nine-month PPP loan servicing fees, including accelerated recognition following forgiveness of some loans. The remaining unearned PPP fee revenue was not material.
- In October 2021, after quarter-end, PayPal completed its approximately $2.7 billion acquisition of Paidy, a Japanese buy-now-pay-later platform. The filing provides no specific numerical revenue, earnings or EPS guidance.
- COVID-19 behavior shifts had benefited digital payment activity, but management warned that a return toward pre-pandemic consumer behavior could adversely affect results. Credit performance remains exposed to macroeconomic uncertainty; consumer receivables expanded while merchant receivables declined following tighter underwriting.
Risks, contingencies and unusual items
- Regulatory matters include an AUSTRAC investigation in Australia concerning international funds-transfer reporting, OFAC requests regarding potentially prohibited transactions, CFPB demands concerning Venmo transfers and collections and PayPal Credit marketing, and an SEC inquiry into debit-card interchange rates and marketing-fee reporting. The company said it could not estimate the potential AUSTRAC impact; adverse outcomes could involve penalties, business changes or other material effects.
- A securities class action filed in August 2021 alleges misleading disclosures related to the CFPB PayPal Credit and SEC debit-card matters. PayPal reported that accrued legal and regulatory amounts were not material, but noted losses or non-monetary remedies could exceed recorded accruals.
- Other material exposures include evolving payments, lending, cryptocurrency, privacy and consumer-protection regulation; cybersecurity; foreign-exchange movements; volatility in strategic investment valuations; and credit and transaction losses. A 10% decline in strategic-investment values would reduce portfolio carrying value by approximately $348 million, according to the filing.
- During the nine months PayPal repurchased approximately $1.9 billion of stock; $6.6 billion remained authorized. Three 2021 acquisitions had aggregate purchase consideration of $524 million. The 2020 workforce restructuring continued to generate charges, and property exits caused $26 million of impairment charges in the nine-month period.
Important facts for investors to verify
- Whether revenue and TPV growth can offset eBay-related volume pressure and the lower monetization of large merchants and platform partners.
- How margins, transaction expenses and credit-loss reserves evolve as consumer and merchant lending portfolios change and macroeconomic conditions fluctuate.
- The size and timing of any financial, operational or reputational impact from the AUSTRAC, OFAC, CFPB and SEC matters and the securities litigation.
- Paidy’s integration costs and contribution, and the use of cash for acquisitions, lending needs, capital investment and share repurchases.
- How much reported cash and investment liquidity is practically available for corporate purposes after customer-fund and regulatory requirements.