Business context and reporting period
PayPal Holdings, Inc.’s Form 10-K covers the fiscal year ended December 31, 2015, with comparisons to 2014 and 2013. PayPal became independent of eBay on July 17, 2015; 2015 and earlier results include periods when the business was part of eBay, and historical allocations may not reflect costs as a standalone company. The fourth quarter of 2015 was its first full quarter as an independent public company.
PayPal operates a global digital-payments platform, including PayPal, PayPal Credit, Braintree, Venmo, and Xoom. At year-end it reported 179 million active accounts across more than 200 markets. Full-year total payment volume (TPV) was $281.8 billion.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net revenue | $9.248 billion | $8.025 billion | +15% |
| Operating income | $1.461 billion | $1.268 billion | +15% |
| Net income | $1.228 billion | $419 million | +193% |
| Diluted EPS | $1.00 | $0.34 | +192% |
| Operating cash flow | $2.546 billion | $2.220 billion | +15% |
| Free cash flow* | $1.824 billion | $1.728 billion | +6% |
| TPV | $281.8 billion | $234.6 billion | +20% |
*Non-GAAP measure, defined as operating cash flow less purchases of property and equipment.
GAAP operating margin was approximately 15.8% in both years; non-GAAP operating margin was 21% in both years. Net income growth was strongly affected by taxes: 2014 included approximately $650 million of tax expense related to previously undistributed foreign earnings. The effective tax rate was 17% in 2015 versus 67% in 2014.
In fourth-quarter 2015, revenue was $2.556 billion and net income was $367 million, compared with $2.193 billion and $286 million, respectively, in fourth-quarter 2014.
Liquidity, balance sheet, and other metrics
- Cash, cash equivalents, and available-for-sale investments totaled $5.732 billion at year-end, excluding $12.3 billion of assets backing customer balances. Balance-sheet cash and cash equivalents alone were $1.393 billion.
- PayPal reported $28.881 billion in total assets, $15.122 billion in total liabilities, and $13.759 billion in equity. Loans and interest receivable, net, were $4.184 billion.
- A $2.0 billion five-year revolving credit facility was available, with no borrowings or letters of credit outstanding at year-end. The filing does not report a material outstanding borrowing balance under this facility.
- Customer funds are matched by eligible liquid assets under applicable requirements; they should not be treated as corporate liquidity. PayPal reported $12.261 billion both in funds receivable and customer accounts and in funds payable and amounts due to customers.
- Operating cash flow rose, while investing activities used $6.389 billion, primarily for investments, acquisitions, credit receivables, and capital expenditures. Financing activities provided $3.079 billion, principally reflecting eBay’s cash contribution, partly offset by repayment of eBay borrowings.
Material changes versus prior periods
- Account growth and increased customer engagement drove 20% TPV growth and 24% growth in payment transactions to 4.928 billion. Transactions per active account increased to 27.5 from 24.5.
- Revenue grew more slowly than TPV, in part because a larger share of volume came from large merchants paying lower rates and cross-border TPV declined to 22% from 24%. Foreign currency movements reduced 2015 revenue by approximately $345 million, including a favorable $182 million hedge impact.
- Transaction and loan losses increased 25% to $809 million; the loss rate rose to 0.29% of TPV from 0.28%. Consumer loans receivable were $4.0 billion, while PayPal Working Capital advances and fees receivable grew to $421 million from $103 million.
- PayPal acquired Xoom in November 2015 for approximately $1.1 billion and Paydiant in April for approximately $230 million, among other acquisitions. Acquisition-related investing cash outflow was $1.225 billion.
- eBay-related marketplace revenue represented 26% of net revenue, down from 29% in 2014. Following separation, PayPal no longer received eBay reimbursements for certain customer-protection losses.
Outlook, commentary, risks, and unusual items
- The filing provides no specific numerical revenue, earnings, or cash-flow guidance. Management said existing cash and investments, expected operating cash flow, and anticipated access to capital were expected to fund operations, planned capital expenditures, and credit products for the foreseeable future.
- Management’s strategy emphasizes global growth, increased customer use, innovation across mobile and physical commerce, and trust and security. The company reported $947 million of product development expense in 2015.
- Major risks include intense competition, cyberattacks and service interruptions, fraud and customer-protection costs, foreign-exchange exposure, changing payment-card fees and rules, credit losses, and extensive evolving regulation. International markets generated approximately half of revenue.
- PayPal entered a CFPB consent order in May 2015 concerning PayPal Credit practices, including $15 million of consumer redress and a $10 million civil penalty, plus required business-practice changes. It also settled with OFAC in March 2015 concerning possible historical sanctions violations and disclosed subsequent subpoenas and continuing cooperation; potential outcomes were not clear from the filing.
- Legal and regulatory accruals were not material at year-end, but management cautioned that proceedings are uncertain and adverse outcomes could be material. The company also faced tax audits and reported $267 million of gross unrecognized tax benefits.
- In January 2016, the board authorized up to $2 billion in share repurchases; there were no 2015 repurchases. PayPal said it did not anticipate paying cash dividends in the foreseeable future.
Important facts for investors to verify
- Assess standalone profitability and costs after separation, since earlier periods include eBay allocations and benefits that may not recur.
- Track revenue yield and transaction expense against TPV, especially the effects of large-merchant mix, cross-border volume, funding mix, and currency movements.
- Monitor consumer-credit and merchant-advance portfolio growth, delinquencies, charge-offs, funding needs, and the availability of third-party lending partners.
- Review developments in the CFPB and OFAC matters, other legal and tax contingencies, and the potential cost of regulatory compliance.
- Confirm how much of reported cash and investments is available for corporate use, separately from customer funds, and whether the proposed repurchase program is executed.