PayPal Holdings, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 4, 2021. The filing also reports unaudited fourth-quarter results. PayPal operates a global digital payments platform, including PayPal, Venmo, Braintree, Xoom, iZettle, Hyperwallet and Honey.
Financial and operating performance
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net revenue | $21.454 billion | $17.772 billion | +21% |
| Operating income | $3.289 billion | $2.719 billion | +21% |
| Operating margin | 15% | 15% | Unchanged |
| Net income | $4.202 billion | $2.459 billion | +71% |
| Diluted EPS | $3.54 | $2.07 | +71% |
| Cash from operating activities | $5.854 billion | $4.071 billion | +44% |
| TPV | $936 billion | Not stated here | +31% |
- Transaction revenue rose 24% to $19.918 billion; other value-added services revenue fell 8% to $1.536 billion.
- Payment transactions increased 25%; transactions per active account were 40.9, up from 40.6. PayPal ended 2020 with 377 million active accounts, including 348 million consumer and 29 million merchant accounts. Honey contributed 10.2 million active accounts upon acquisition.
- Operating expenses increased 21% to $18.165 billion. Transaction and credit losses rose 26% to $1.741 billion; transaction and credit loss expense was 0.19% of TPV, unchanged from 2019.
- Fourth-quarter revenue was $6.116 billion versus $4.961 billion a year earlier; net income was $1.567 billion versus $507 million, and diluted EPS was $1.32 versus $0.43.
Liquidity, debt and capital
- Cash, cash equivalents and investments totaled $15.852 billion at year-end, excluding $33.4 billion of funds receivable and customer accounts. Not all corporate cash is available for general use because of regulatory and operating requirements.
- Long-term debt was $9.0 billion principal ($8.939 billion carrying value), up from $5.0 billion principal in 2019. PayPal had no year-end borrowings under its $5.0 billion revolving credit facility.
- Total assets were $70.379 billion and total liabilities were $50.316 billion. Operating cash flow was $5.854 billion; investing cash outflow was $16.218 billion and financing cash inflow was $12.492 billion.
- PayPal repurchased approximately $1.6 billion of shares in 2020, with about $8.4 billion remaining under its repurchase authorization. The company does not anticipate cash dividends in the foreseeable future.
Material changes and unusual items
- Net income growth substantially exceeded operating income growth because other income included $1.914 billion of net gains on strategic investments, compared with $208 million in 2019. Management said the gains were primarily driven by fair-value increases in marketable equity securities; results may therefore be volatile.
- COVID-19 accelerated adoption of e-commerce and digital payments, benefiting account additions and payment volume, while travel and events were pressured. PayPal cautioned that a return to pre-pandemic consumer behavior could adversely affect results.
- Credit losses increased 110% to $607 million, reflecting provisions for deteriorating and uncertain macroeconomic conditions. Merchant receivables fell 51% to $1.4 billion, while consumer receivables rose 64% to $2.2 billion. Merchant net charge-off rate rose to 18.9% from 7.4%; payment holidays and loan modifications affect interpretation of delinquency and repayment metrics.
- PayPal adopted the current expected credit loss accounting standard in 2020, recording a $178 million reduction to opening retained earnings. The year-end allowance for loans and interest receivable was $838 million, versus $258 million a year earlier.
- Honey was acquired in January 2020 for approximately $4.0 billion total consideration ($3.6 billion cash and approximately $400 million in assumed equity awards). Honey and GoPay together added expense and reduced operating margin by an estimated three percentage points, offset by operating efficiencies.
- The company recorded $109 million of workforce restructuring charges and $30 million of asset impairment charges; restructuring actions were expected to finish by the end of first-quarter 2021.
Outlook, risks and contingencies
- The filing provides no numerical 2021 financial guidance. Management said it planned to enhance PayPal and Venmo digital wallets in 2021 to expand functionality and engagement, and stated that available liquidity, operating cash generation and capital-market access were expected to fund foreseeable needs.
- Key risks include the uncertain COVID-19 and macroeconomic outlook; fraud, cyberattacks and service interruptions; intense competition and changes in payment-card costs or funding mix; credit losses; evolving global payments, lending, privacy and AML regulations; and foreign-exchange exposure.
- Brexit-related U.K. authorizations remained pending under a temporary permissions regime. PayPal also disclosed an AUSTRAC investigation in Australia, a January 2021 CFPB information demand concerning Venmo transfers and collections, and continuing OFAC inquiries. It said probable and estimable legal accruals were not material, but outcomes and potential non-monetary remedies could be uncertain.
- Auditors issued unqualified opinions on the financial statements and internal controls. The allowance for loans receivable was identified as a critical audit matter because of the judgment involved in economic forecasts and qualitative credit-loss adjustments.
Important facts for investors to verify
- How much of earnings growth is repeatable apart from the $1.914 billion strategic-investment gains, and how those investments are valued.
- Whether merchant credit delinquencies, charge-offs and allowance levels worsen as payment holidays and modifications unwind.
- Whether the 2020 growth in TPV and active accounts persists as pandemic-related shopping patterns normalize, and how lower-fee P2P and large-merchant mix affects monetization.
- Cash available for corporate purposes after customer-fund and regulatory requirements, alongside debt maturities, interest costs and planned repurchases or acquisitions.
- Developments in the AUSTRAC, CFPB and OFAC matters; U.K. authorization status; and changes to privacy, AML, payments and lending requirements.