PayPal Holdings, Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with FY 2021. This is an annual report, not a standalone fourth-quarter report.
Business context
PayPal operates a global digital payments platform connecting merchants and consumers, with PayPal, Venmo, Braintree, Xoom and other services. At year-end, it reported 435 million active accounts across more than 200 markets. It processed $1.36 trillion of total payment volume (TPV) in 2022. Revenue is generated mainly from transaction fees and, to a lesser extent, credit, partnership and other value-added services.
Financial and operating metrics
| Metric | FY 2022 | FY 2021 | Change |
|---|---|---|---|
| Net revenue | $27.518 billion | $25.371 billion | +8% |
| Operating income | $3.837 billion | $4.262 billion | -10% |
| Operating margin | 14% | 17% | -3 percentage points |
| Net income | $2.419 billion | $4.169 billion | -42% |
| Diluted EPS | $2.09 | $3.52 | -41% |
| Operating cash flow | $5.813 billion | $5.797 billion | Approximately flat |
| TPV | $1.36 trillion | $1.25 trillion | +9% |
| Payment transactions | 22.3 billion | 19.3 billion | +16% |
| Transactions per active account | 51.4 | 45.4 | +13% |
Transaction revenue was $25.206 billion, up 8%; other value-added-services revenue was $2.312 billion, up 17%. Approximately 43% of revenue came from outside the U.S., compared with 46% in 2021.
Operating expenses rose 12% to $23.681 billion, faster than revenue. Transaction expense increased 18% to $12.173 billion, and transaction and credit losses rose 48% to $1.572 billion. The transaction expense rate increased to 0.90% of TPV from 0.83%; the transaction and credit loss rate rose to 0.12% from 0.09%.
At December 31, 2022, cash, cash equivalents and investments totaled $13.723 billion, excluding customer-related assets and strategic investments. Long-term debt was $10.417 billion; the company also had $5.0 billion available under its principal revolving credit facility. Not all cash is available for general corporate purposes because of customer and regulatory requirements. Total assets were $78.717 billion and total liabilities were $58.443 billion.
Loans and interest receivable, net, were $7.431 billion, compared with $4.846 billion a year earlier. Consumer receivables rose 53% to $5.9 billion; merchant receivables rose 48% to $2.1 billion. Net cash used in investing activities was $3.421 billion, and net cash used in financing activities was $1.110 billion. The company repurchased $4.2 billion of stock and paid no cash dividend.
Material changes versus FY 2021
- Revenue growth was driven mainly by TPV growth, Braintree/unbranded card processing and Venmo. Growth in transactions and TPV did not translate proportionately into revenue, in part because of lower foreign-exchange fee revenue, declining eBay marketplace activity and mix shifts.
- Operating margin contracted as expenses—especially transaction expense and transaction and credit losses—grew faster than revenue.
- Net income fell due to lower operating income, $308 million of additional net other expense (including strategic investment losses), and a $1.0 billion increase in income tax expense. The effective tax rate was 28%, versus a tax benefit and negative effective rate in 2021.
- Credit losses were $402 million, compared with a $93 million benefit in 2021, reflecting portfolio growth and a modest deterioration in credit quality. Consumer loans expanded with installment products.
- Other value-added-services revenue benefited from higher interest earned on certain customer-balance assets and growth in credit-related revenue; it also faced a comparison with $157 million of Paycheck Protection Program servicing revenue in 2021.
- PayPal recorded $207 million of restructuring and other charges, including $121 million of workforce-restructuring charges and $81 million of property impairments. The 2022 workforce actions were substantially completed by year-end.
Outlook, commentary and risks
The filing provides no specific FY 2023 revenue, earnings or margin guidance. Management said existing cash, investments, operating cash generation and expected capital-market access should meet cash needs over the next 12 months and beyond, while noting that some cash is restricted or otherwise unavailable for general corporate use. In January 2023, management initiated a further workforce reduction expected to affect approximately 7% of employees and incur about $100 million in restructuring charges, with actions expected to be substantially completed in Q1 2023.
- Macroeconomic and credit exposure: Inflation, higher interest rates, recession risks and weaker consumer or merchant finances could reduce payment activity and increase loan losses and delinquencies. Management’s credit-loss estimates depend on forecasts and judgment; the auditor identified the loan-loss allowance as a critical audit matter.
- Competition and payment economics: Intense competition, changes in customer funding mix, card-network fees and the growth of higher-cost unbranded processing could pressure pricing and margins.
- Technology, fraud and third parties: Cyberattacks, outages, fraud, protection-program losses and reliance on processors, banks, cloud providers and a crypto custodian could disrupt services or create losses. The filing also describes a transition involving the primary U.S. payment processor.
- Regulation and legal matters: The business faces extensive, evolving payments, lending, privacy, consumer-protection and AML requirements. AUSTRAC continues to investigate Australian reporting matters; CFPB inquiries involving Venmo transfers and collections remain active; and the SEC is investigating aspects of branded debit-card programs. A securities class action concerning account metrics and related disclosures was pending. PayPal said accrued legal and regulatory liabilities were not material, while noting outcomes and non-monetary remedies remain uncertain.
- Other unusual matters: PayPal suspended transactional services in Russia in March 2022 and cannot reasonably estimate the situation’s total financial impact; Russia- and Ukraine-related revenue was not material. In January 2023, OFAC closed its review of previously disclosed sanctions transactions with a cautionary letter and no monetary penalties.
Most important facts for investors to verify
- Whether revenue growth can outpace transaction costs and sustain or recover operating margins.
- Trends in transaction and credit losses, delinquency and charge-off rates as consumer and merchant credit portfolios expand.
- How much of reported cash and investments is available for corporate use after customer-fund and regulatory requirements.
- Progress and cost savings from the 2022 and January 2023 workforce reductions, including the extent of reinvestment.
- Developments in the processor transition and material regulatory or litigation proceedings, including AUSTRAC, CFPB, SEC and securities-class-action matters.
- Whether TPV and account engagement growth translate into higher monetization, given declines in eBay-related activity, cross-border TPV mix and foreign-exchange revenue.