PayPal Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. PayPal operates a global digital payments platform for consumers and merchants; it reports as one operating segment. Financial figures are unaudited.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenue | $6.846B | $6.182B | $20.135B | $18.453B |
| Operating income | $1.118B | $1.043B | $2.593B | $3.212B |
| Operating margin | 16% | 17% | 13% | 17% |
| Net income | $1.330B | $1.087B | $1.498B | $3.368B |
| Diluted EPS | $1.15 | $0.92 | $1.29 | $2.84 |
| Operating cash flow | $1.948B | $1.513B | $4.656B | $4.577B |
- Q3 revenue rose 11%, primarily with TPV growth. TPV was $337B, up 9%; payment transactions were 5.6B, up 15%. Active accounts reached 432M, up 4%, and transactions per active account rose 13% to 50.1.
- Q3 operating expenses increased 11% to $5.728B. Transaction expense rose 17% and transaction and credit losses rose 37%; their rates were 0.89% and 0.11% of TPV, respectively.
- Q3 net income benefited from $460M of other income, including $495M in net gains on strategic investments. For the first nine months, other expense was $337M, including $163M in net strategic-investment losses.
- Nine-month transaction and credit losses rose to $1.184B from $710M. The increase included a $114M loss related to an ongoing merchant insolvency proceeding and higher credit losses; consumer installment-loan expansion also contributed to higher consumer charge-offs.
- Nine-month cash from investing activities was negative $3.286B and financing activities negative $2.422B. Cash, cash equivalents and restricted cash totaled $16.724B at period-end, down from $18.029B at the start of the year.
- Cash, cash equivalents and investments available for corporate liquidity, as defined by the company, were $13.795B, excluding customer funds, restricted cash and strategic investments. PayPal cautions that some cash supports regulatory and customer requirements and is not available for general corporate use.
- Fixed-rate note principal outstanding was $10.4B, versus $9.0B at year-end 2021. PayPal issued $3.0B of notes in May and repurchased or redeemed $1.6B of earlier notes. It repurchased $3.2B of shares in the first nine months.
Material changes and management commentary
- Revenue growth was supported by unbranded card processing, including Braintree, and Venmo. The company cited weaker eBay marketplace activity and lower foreign-exchange fee revenue as offsets, particularly over the nine-month period.
- Transaction expenses grew faster than TPV, partly because of a higher proportion of unbranded card-processing volume, which generally carries higher expense rates. The nine-month operating margin contracted to 13% from 17%.
- The nine-month effective tax rate was 34%, versus 1% in 2021, primarily reflecting tax expense from an intra-group intellectual-property transfer and fewer discrete stock-compensation tax benefits.
- Management said existing liquidity, operating cash generation, expected capital-market access and potential third-party funding should be sufficient for cash needs over the next 12 months and beyond. No specific revenue, earnings or margin guidance is provided in the filing text.
- A 2022 workforce reduction generated $114M of restructuring charges in the first nine months; management estimated about $10M of additional charges for the rest of 2022. Actions were expected to be substantially complete by Q4 2022. Estimated annualized employee-cost reductions are approximately $290M, including about $110M in stock-based compensation; some savings are expected to be reinvested.
- PayPal suspended transactional services in Russia in March 2022; revenue related to Russia and Ukraine was described as not material. The company said the conflict’s ultimate financial impact could not be reasonably estimated.
Risks, contingencies and unusual items
- Macroeconomic uncertainty, inflation, higher interest rates and weaker consumer or merchant finances could pressure spending, loan performance and credit losses. Consumer receivables rose 59% year over year; consumer net charge-off rate increased to 4.8% from 2.6%. Merchant receivables rose 47%, while the merchant net charge-off rate improved to 3.6% from 6.8%.
- Regulatory and legal matters include OFAC and AUSTRAC matters, CFPB inquiries, an SEC investigation involving branded debit-card programs, and an FTC inquiry. The company said it could not estimate certain potential impacts; recorded legal accruals were not material as of September 30.
- Putative securities litigation concerns PayPal Credit and debit-card disclosures. A separate securities action filed in October 2022 concerns net new active-account results and guidance and allegedly illegitimate accounts. The filing says possible monetary exposure cannot be estimated clearly; the underlying allegations are not findings of liability.
- Customer crypto assets were backed by a matching $690M safeguarding asset and liability at September 30. PayPal relies on one third-party custodian, creating concentration risk; the company disclosed legal, regulatory, operational and custody risks.
- PayPal identified dependence on third parties, including payment processors, banks, lenders, cloud providers and the crypto custodian. It reported discussions with its primary U.S. payment processor about a transition as the arrangement winds down.
- Available-for-sale debt securities had $701M of gross unrealized losses, attributed primarily to interest-rate changes; the company said it did not intend, and did not expect to be required, to sell them before recovery. Strategic-investment valuation changes may cause material earnings volatility.
- PayPal stated that disclosure controls were effective as of September 30, 2022, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether revenue growth can translate into improved operating margins as transaction costs and credit losses rise.
- How much Q3 earnings depended on volatile strategic-investment gains, and how those investments perform in subsequent periods.
- Consumer and merchant credit quality, loss allowances, charge-offs and funding needs under weaker economic conditions.
- Corporate liquidity available after accounting for customer and regulatory requirements, and the effects of debt issuance, maturities and share repurchases.
- Developments and potential outcomes in regulatory inquiries, securities litigation, the processor transition and crypto-custody arrangements.
- Progress and realized savings from the workforce reduction, including whether expected savings are offset by reinvestment or other costs.