PayPal Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparison is with the corresponding 2019 periods. Amounts are in U.S. dollars. PayPal operates a global digital-payments platform spanning merchant and consumer payments, PayPal, Venmo, Xoom, credit products, and Honey.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Net revenue | $5.459B | $4.378B | +25% |
| Operating income | $977M | $697M | +40% |
| Operating margin | 18% | 16% | +2 percentage points |
| Net income | $1.021B | $462M | +121% |
| Diluted EPS | $0.86 | $0.39 | +121% |
| Operating cash flow | $720M | $1.096B | -34% |
- For the first nine months, revenue was $15.338B (+20%), operating income $2.326B (+21%), operating margin 15% (unchanged), net income $2.635B (+35%), diluted EPS $2.22 (+35%), and operating cash flow $4.607B (+40%).
- Q3 total payment volume (TPV) was $246.7B (+38%); payment transactions rose 30% to 4.013B and active accounts rose 22% to 361M. Honey contributed 10.2M active accounts at acquisition.
- Transaction revenue grew 28% in Q3, while revenue from other value-added services fell 9%. Revenue growth lagged TPV and transaction growth partly because of more lower-fee P2P activity and a greater share of volume from large merchants and platform partners.
- Transaction and credit losses were $344M in Q3, nearly flat year over year; for nine months they rose 38% to $1.375B. The Q3 transaction-and-credit-loss rate was 0.14% of TPV, versus 0.19% a year earlier.
- At September 30, cash and cash equivalents were $6.112B, short-term investments $8.046B, and long-term investments $3.439B. Management reported $15.296B in cash, cash equivalents, and investments for liquidity purposes, excluding customer funds, restricted cash, and strategic investments. Customer funds and amounts due to customers were $30.530B and $32.530B, respectively.
- Long-term debt had a $8.937B carrying amount ($9.0B principal). PayPal issued $4.0B of fixed-rate notes in May; its $5.0B revolving facility had no balance outstanding, and substantially all of $130M in regional credit facilities was available.
Material changes and notable items
- Q3 net income benefited from a $380M year-over-year improvement in other income, primarily the swing in strategic-investment results: $209M in gains in Q3 2020 versus $228M in losses in Q3 2019. Nine-month strategic-investment gains were $973M versus $170M. These market-sensitive gains substantially boosted reported earnings.
- Honey was acquired in January for approximately $4.0B total consideration, including $3.6B cash and approximately $400M in assumed equity awards. The acquisition added $2.962B of goodwill; its reported operating impact was not material to consolidated results, according to the filing.
- Loans and interest receivable, net, were $2.597B versus $3.972B at year-end 2019; the associated allowance was $819M versus $258M. Adoption of the expected-credit-loss standard reduced opening retained earnings by $168M.
- Merchant receivables declined amid reduced originations and tighter underwriting. Merchant receivables over 90 days past expected repayment were 9.8%, versus 3.8% in 2019; the net charge-off rate rose to 12.2% from 8.5%. Consumer receivables grew, with 98.2% current; payment holidays affect these measures.
- Nine-month investing cash outflow was $13.266B, including $3.609B for acquisitions; financing cash inflow was $10.012B, supported by customer-fund movements and borrowing. PayPal repurchased approximately $1.4B of shares during the nine months.
Outlook, risks, and contingencies
- The filing gives no formal quantitative earnings or revenue guidance. Management said COVID-19 had accelerated the shift to e-commerce and digital payments and benefited PayPal through increased accounts and payment volume, while travel and events remained adversely affected. It expected adverse impacts on transaction-revenue growth in affected verticals to continue for the remainder of 2020; duration and overall effects remained uncertain.
- COVID-19 payment holidays and merchant loan modifications may reduce future interest and fee income and affect credit losses. Management cited uncertain unemployment, merchant performance, and recovery assumptions; a 1-percentage-point increase in the loan principal-and-interest coverage ratio would increase allowances by approximately $34M.
- Other risks include fraud and cybersecurity, competition, foreign-exchange and strategic-investment volatility, evolving payments and data-protection regulation, and Brexit-related licensing uncertainty. PayPal reported ongoing OFAC and AUSTRAC matters; it could not estimate the potential impact of the AUSTRAC matter. It also disclosed an appeal in the TIO-related securities case. Accruals for legal and regulatory proceedings were not material for the nine months, but adverse outcomes or non-monetary remedies could still affect the business.
- Management said existing liquidity, expected operating cash generation, and expected capital-market access should fund foreseeable needs. However, not all cash is available for general corporate purposes because of customer obligations and regulatory requirements. No material off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- How much of earnings growth reflects recurring payments operations versus strategic-investment gains, and how those investments perform subsequently.
- Whether elevated loan allowances adequately reflect COVID-related credit risk, payment holidays, merchant delinquencies, and future charge-offs.
- Whether TPV and account growth translate into sustained revenue and margins despite lower-fee transaction mix and higher operating costs.
- Cash available for corporate use after separating customer funds, restricted balances, and regulatory liquidity requirements; also review debt maturities and buyback pace.
- Developments in COVID-19 effects, regulatory investigations and litigation, Brexit-related operating requirements, and Synchrony credit-program economics.