PayPal Holdings, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. PayPal operates a global digital payments platform, including PayPal, Braintree, Venmo, Xoom, PayPal Credit, and iZettle. It reported 305 million active accounts and $711.9 billion in total payment volume (TPV) for 2019.
Financial performance and condition
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net revenue | $17.772 billion | $15.451 billion | +15% |
| Operating income | $2.719 billion | $2.194 billion | +24% |
| Operating margin | 15% | 14% | +1 percentage point |
| Net income | $2.459 billion | $2.057 billion | +20% |
| Diluted earnings per share | $2.07 | $1.71 | +21% |
| Cash from operating activities | $4.561 billion | $5.483 billion | -17% |
- Transaction revenue was $16.099 billion, up 17%; other value-added services revenue was $1.673 billion, down 4%. TPV grew 23%, payment transactions rose 25%, and active accounts increased 14%. Lower-fee P2P mix and reduced cross-border activity meant revenue grew more slowly than TPV.
- Operating expenses rose 14% to $15.053 billion. Transaction expense increased 22%, faster than revenue, while transaction and loan losses rose 8% to $1.380 billion. The transaction loss rate improved to 0.15% of TPV from 0.18%.
- Fourth-quarter revenue was $4.961 billion versus $4.226 billion a year earlier; net income was $507 million versus $584 million.
- Year-end assets were $51.333 billion and total liabilities were $34.404 billion. Cash, cash equivalents, and investments were reported at $11.722 billion, excluding customer funds and strategic investments. Customer funds are subject to regulatory safeguarding requirements and are not all available for corporate use.
- PayPal issued $5.0 billion of fixed-rate notes in 2019; carrying value at year-end was $4.965 billion. It had no year-end borrowings under its new revolving facilities, with $6.0 billion available under those facilities. Operating cash flow fell partly because 2018 included cash effects associated with the sale of the U.S. consumer credit portfolio.
Material changes and notable items
- In July 2018, PayPal sold its U.S. consumer credit receivables portfolio to Synchrony Bank. PayPal no longer owns newly generated U.S. consumer receivables and instead earns revenue share; lower related interest and fee income weighed on 2019 revenue growth.
- Credit balances grew: consumer loans and interest receivable were $1.3 billion, up 88%; merchant loans, advances, and related receivables were $2.8 billion, up 50%. Consumer current balances fell to 93.9% from 94.9%, while the consumer net charge-off rate rose to 4.1% from 3.1%. Merchant receivables within the original repayment period declined to 89.6% from 91.0%.
- PayPal acquired a 70% interest in China’s GoPay in December 2019. It completed the Honey acquisition in January 2020 for approximately $4.0 billion, a subsequent event rather than a 2019 transaction.
- Strategic investments increased to $1.8 billion from $293 million. Unrealized gains on strategic investments contributed to higher other income and may make earnings more volatile.
- PayPal repurchased approximately $1.4 billion of shares in 2019. It does not anticipate paying cash dividends in the foreseeable future.
Outlook, risks, and contingencies
- The filing provides no quantified forward guidance. Management said existing cash and investments, expected operating cash flow, and anticipated capital-market access should fund operations, planned capital expenditures, and credit products for the foreseeable future.
- Key risks include intense payments competition; cyberattacks, data breaches, fraud, and service interruptions; extensive and changing financial, privacy, and consumer-protection regulation; foreign-exchange exposure; dependence on banking, payment, and lending partners; and credit losses. The company also cited uncertainty around Brexit and the future of cross-border trade.
- PayPal’s eBay operating agreement was due to expire in July 2020, with a one-year tail. eBay generated 14% of 2019 revenue, down from 17% in 2018; the companies were also in arbitration over referral-service fees. PayPal warned that changes to eBay’s payment strategy could reduce business.
- PayPal Australia self-reported a potential AML/CTF reporting violation; AUSTRAC required an external review, and the company said it could not estimate the potential impact. PayPal also faces ongoing OFAC inquiries concerning self-reported transactions, and challenged the CFPB prepaid-account rule as applied to PayPal.
- The TIO platform had a security incident involving potential exposure of personal information for approximately 1.6 million customers. A related securities class action was dismissed with prejudice in September 2019, but plaintiffs appealed; further litigation or inquiries remained possible.
- Management reported effective disclosure controls and internal control over financial reporting at year-end. The auditor issued an unqualified opinion and identified income-tax accounting as a critical audit matter.
Investor verification priorities
- Verify the durability and quality of TPV-driven growth, including transaction yields, P2P and cross-border mix, and the pace of expense growth.
- Review credit portfolio performance, especially rising consumer charge-offs and slower merchant repayment indicators, and assess the impact of the expected-credit-loss accounting adoption in 2020.
- Track Synchrony revenue-share economics and the degree to which PayPal can offset any reduction in eBay-related activity after the operating agreement changes.
- Monitor outcomes of the AUSTRAC review, OFAC matters, CFPB litigation, and the TIO appeal, including any financial or operational consequences.
- Assess availability of corporate liquidity separately from customer funds, and consider the $5.0 billion debt issuance, acquisition spending, and share repurchases together.