PayPal Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are in U.S. dollars unless stated otherwise. PayPal operates a global digital-payments platform and reports as one segment.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net revenue | $7.287B (+7%) | $6.806B | $14.327B (+8%) | $13.289B |
| Operating income | $1.133B | $764M | $2.132B | $1.475B |
| Operating margin | 16% | 11% | 15% | 11% |
| Net income (loss) | $1.029B | $(341)M | $1.824B | $168M |
| Diluted EPS | $0.92 | $(0.29) | $1.62 | $0.14 |
| Operating cash flow | $(200)M | $1.250B | $970M | $2.467B |
- Q2 TPV was $377B, up 11%; payment transactions were 6.1B, up 10%. First-half TPV was $731B, up 10%, and transactions were 11.9B, up 12%. Active accounts were 431M versus 429M a year earlier.
- Q2 transaction revenue rose 5% to $6.556B; other value-added-services revenue rose 37% to $731M. Higher interest earned on customer-balance assets and loan revenue contributed to the latter increase.
- Transaction expense rose 16% in Q2 to $3.541B, faster than TPV, and the transaction expense rate increased to 0.94% from 0.90%, partly due to product mix and greater unbranded card-processing volume. The transaction-and-credit-loss rate declined to 0.11% from 0.13%.
- Net income improvement included a substantial swing in other income: Q2 other income was $170M versus expense of $715M in Q2 2022, primarily reflecting strategic-investment gains versus losses. First-half strategic-investment gains were $181M versus losses of $658M a year earlier. These items make earnings comparisons less indicative of operating trends.
- Cash and cash equivalents were $5.504B at June 30; short- and long-term investments were $8.941B. Management reported cash, cash equivalents and investments of $12.076B, excluding customer funds, restricted cash and strategic investments. Customer funds and related accounts totaled $33.643B and are not equivalent to unrestricted corporate liquidity.
- Long-term debt carrying value was $10.549B; fixed-rate notes had $10.622B aggregate principal. A new $5B revolving facility was undrawn, and a ¥90B Paidy facility was also undrawn at quarter-end. Total assets were $74.579B and total equity was $19.661B.
Changes, outlook and notable items
- Operating income and margins improved as revenue growth exceeded expense growth, supported by cost efficiencies and lower sales and marketing, technology and development, and certain administrative costs. Transaction expense growth partly offset those gains.
- Operating cash flow fell to $970M for the first half from $2.467B. The filing cites $1.5B of originations of loans held for sale, higher cash taxes paid ($906M versus $444M), and movements in other assets and liabilities among the factors. Financing cash outflow was $6.054B, including $2.961B of treasury-stock purchases and a $2.578B decrease in funds payable and customer amounts.
- PayPal repurchased about 41M shares for $3.0B in the first half at an average $72.42 per share, excluding excise tax; $12.9B remained authorized for future repurchases.
- In June, PayPal agreed to sell eligible U.K. and European BNPL receivables, including a forward-flow commitment for future eligible originations over 24 months, for up to €40B. Closing was expected in the second half of 2023 and remained subject to conditions. PayPal expected to retain servicing rights and earn servicing fees. The held-for-sale balance was $1.9B at quarter-end.
- Consumer credit indicators weakened year over year: 95.5% of consumer receivables were current versus 96.5%; the net charge-off rate was 5.0% versus 4.2%. Merchant credit quality weakened more sharply: 86.5% current versus 93.2%, more than 90 days past due at 7.1% versus 2.6%, and net charge-off rate at 13.3% versus 3.4%. Management attributed merchant deterioration partly to expanded risk parameters in 2022 and said it reduced PayPal Business Loan originations in the first half of 2023.
- A workforce reduction initiated in Q1 incurred $117M of first-half restructuring charges. Management estimated approximately $280M in annualized employee-cost reductions, including $85M in stock-based compensation, with some savings expected to be reinvested. The first half also included $34M of losses to measure held-for-sale loans at lower of cost or fair value.
- Management stated existing liquidity, expected operating cash generation and access to capital were expected to meet cash needs over the next 12 months and beyond. No quantitative earnings or revenue guidance was provided in the supplied filing text.
Risks and contingencies
- Macroeconomic uncertainty, inflation, higher interest rates, weaker consumer spending, borrower distress, foreign-exchange movements and potential recession could affect transaction activity, credit losses and results.
- PayPal faces extensive and evolving payments, lending, consumer-protection, AML, privacy, cybersecurity, competition and cryptocurrency regulation. The filing warns that enforcement could bring fines, operating restrictions, costly changes or reputational harm.
- Regulatory matters include CFPB demands concerning Venmo transfers and collections, an FTC inquiry into certain commercial-customer practices, and a German Federal Cartel Office proceeding concerning merchant contract terms. The Australia AUSTRAC matter resulted in an enforceable undertaking without a monetary penalty; required external review remained ongoing. The SEC debit-card-program matter was closed without action.
- A securities class action concerning reported account growth and allegedly illegitimate accounts, and related derivative actions, remained unresolved or stayed as described in the filing. A Hawaii consumer-protection lawsuit continued after a motion to dismiss was denied in July 2023. Management said probable and estimable legal accruals were not material, but outcomes and potential non-monetary remedies may be uncertain.
- The BNPL receivables sale may be delayed or fail to close if conditions are unmet. PayPal also disclosed potential reliance on external credit funding, payment-network and banking partners, and third-party crypto custodians. Customer crypto assets and the corresponding safeguarding liability were each $1.016B; PayPal disclosed concentration and custodian-failure risks.
Key facts for investors to verify
- How much operating-margin improvement is sustainable after accounting for higher transaction costs, product mix and any reinvestment of workforce savings?
- Whether the European BNPL receivables transaction closes as expected, and its effect on credit exposure, liquidity, revenue and servicing economics.
- Whether consumer and especially merchant delinquencies and charge-offs stabilize, and how credit-loss provisions evolve.
- How much of reported earnings growth reflects recurring operations versus strategic-investment gains, and how strategic-investment valuations change.
- Whether operating cash flow recovers after the first-half decline, and how repurchases, customer-fund requirements and credit-product funding affect available corporate liquidity.
- Developments in the pending regulatory inquiries and litigation, the AUSTRAC assurance process, and U.K. regulatory authorization requirements.