PayPal Q1 2022 Earnings Review: the case of overpromising and under-delivering
The First Quarter 2022 earnings season is here and PayPal ( PYPL 0.00 ) was the first Fintech company to report its results. Unfortunately, it wasn’t the best opening of the season. The company (again) lowered its guidance for the year and fully removed the mid-term target of 20%+ revenue and earnings growth past 2022. Total Payment Volume growth decelerated, Transaction Margin took a meaningful dive, and the management again used the earnings all to blame the economy instead of presenting an action plan. Let’s break down their Q1 2022 results!
PayPal reported 429 million Active Accounts at the end of Q1 2022, which represents 9.4% growth compared to Q1 2021, and 0.7% growth sequentially. The number of active merchants grew from 34 million at the end of Q4 2021 to 35 million at the end of Q1 2022.
During the Q4 2021 earnings call, PayPal’s management notified investors that they will not be pursuing anymore the mid-term ambition of growing Active Accounts to 750 million. As the result, in Q1 2022 the Active Accounts grew at their slowest rate in the last five years.
During the Q1 2022 earnings call the management slashed the Full Year 2022 guidance from 15-20 million Net New Accounts to 10 million Net New Accounts.
Total Payment Volume
PayPal reported $323 billion in Total Payment Volume in Q1 2022, which represents a 13.1% YoY growth (again the slowest growth rate in the last five years). During the first two quarters of 2022, eBay is still using PayPal services (full separation is expected by July 2022); thus, the company also reports TPV numbers excluding eBay. TPV excluding eBay grew 17% YoY.
During the Q4 2021 earnings call, the management guided for 19-22% YoY growth in Total Payment Volume for the full year of 2022; however, they slashed this guidance as well to 13-15%.
Last time I argued that it will be difficult for the company to sustain 19-22% TPV growth while growing the Active Accounts only by 3-5%. Now they are guiding for 13-15% TPV growth with 2.3% expected growth in Active Accounts, meaning they expect the existing user base to deliver higher TPV volume.
Revenue and Take Rate
The company reported $6.5 billion in revenue for the quarter, which represents a 7.5% growth YoY (yes, lowest in the last 5 years). The company previously guided for $6.4 billion in revenue for the quarter. Please don’t read much into the sequential decline from Q4 2021, as the first quarter of any year is usually the slowest part of the year for merchants.
As you might have noticed, revenue grew at a slower rate than the Total Payment Volume (7.5% vs. 13.1%), which is the result of the lower Take Rate compared to Q1 2021. The chart below shows the Total Take Rate (total Net revenue divided by the TPV) and the Transaction Take Rate (Transaction revenue divided by the TPV). As can be seen from the chart that trend is not promising.
The company guided for net revenue of $6.8 billion in Q2 2022, which would represent a 9% YoY growth, and 11-13% growth in net revenue for the full year (implying $28.2-28.7 in annual net revenue). The management lowered the full-year guidance from 15-17% announced during the Q4 2021 earnings call.
During the earnings call, the management also removed the mid-term guidance of annual 20%+ revenue and earnings growth past 2022. I don’t know whether this is just investors’ expectation management, or the company does not believe anymore that such growth is possible. In either case, this is very concerning in my opinion, as the company is still trading at the growth stock multiples despite the market correction.
Operating Expenses and Income
The company reported $711 billion in GAAP Operating Income, which represents a 32% decline from Q1 2021. As can be seen from the table below, the two most critical components of the cost structure, “Transaction expense” and “Transaction and credit losses”, increase at a much faster pace than the revenues (28.8% YoY and 35.2% YoY respectively).
As the result of the increasing transactional costs, the Transaction Margin, a measure of PayPal’s gross profitability (calculated as Revenue less Transaction expense and Transaction and credit losses divided by Revenue), declined to 50.9%, the lowest level in the last five years with the exception of Q1 2020. Need to wait for the 10Q filing to understand what happened and whether this is a seasonal or structural change.
Don’t want to sound bearish, but I would not be surprised if PayPal pulls the break on its spending in 2022 (all the way to layoffs); however, transactional expenses, which are primarily the interchange and card scheme fees are difficult for PayPal to cut. Those are primarily a result of payment mix (i.e. debit vs credit) and consumer behaviour (i.e. methods used to top up PayPal wallet).
PayPal reported $509 million in GAAP Net Income (a 53.6% decline from Q1 2021), and $1.03 billion in non-GAAP Net Income (29% decline from Q1 2021). PayPal is primarily operating with non-GAAP Net Income and non-GAAP EPS in its quarterly presentations. Non-GAAP adjustments primarily include stock-based compensation, amortization of acquired intangible assets, gains (losses) on strategic investments, and related tax impacts.
As can be seen from the chart below, GAAP Net Income has been declining for the past three quarters and is back to the pre-pandemic level of 2019 despite substantial growth in revenues over this period. The declining Take Rate and Transaction Margin took their toll on the company’s profitability and the stock price, at least for now, reflects that.
The company does not provide Net Income guidance, and instead from guidance for Earnings Per Share. Thus, PayPal’s management guided for $0.44-0.46 GAAP EPS and $0.86 non-GAAP EPS in Q2 2022. In Q2 2021 the company earned $1.00 in GAAP EPS and $1.15 in non-GAAP EPS.
Full-year guidance includes $2.19-$2.34 in GAAP EPS, and $3.81-$3.93 in non-GAAP EPS (compared with $3.52 GAAP EPS and $4.60 non-GAAP EPS in 2021).
Just three months ago, during Q4 2021 earnings call, the company guided for $2.97-3.15 in GAAP EPS, and $4.60 - 4.75 in non-GAAP EPS in 2022.
Things to Watch in 2022
Active Accounts and TPV growth. Despite the lowered guidance, the company is still expecting a 13-15% in Total Payment Volume in 2022. I am still in the opinion, that it might be challenging to achieve without the growth in Active Accounts. This will be especially difficult if rising inflation results in lower spending by consumers.
Declining Take Rate. Last quarter, PayPal made some repricing efforts on the consumer side in order to increase the Take Rate; however, those efforts have not yet resulted in improving Take Rate. Repricing merchants is a slow process that should be carried out with caution to avoid losing the customer altogether. Let’s see how PayPal’s team acts to address the declining Take Rate.
Operating Expenses. As described above, operating expenses grew at a much faster pace than the revenue, so I would expect PayPal to take action on this. Not sure what they can do on the Transaction expense side, as this is mostly the result of the payment method mix, but they are definitely in control of other expenses. Also, any increase in interchange and card scheme fees (also outside of PayPal’s control) will further decrease the Transaction Margin.
Enough is enough? The company does not seem to have a plan for what to do next. They keep pounding on their chest talking about the scale and brand recognition of PayPal, and at the same time keep lowering the guidance. Don’t get me wrong, I want PayPal to continue being a successful company, but it is becoming painful to listen to their earnings call. Should we expect some action from the board and investors?
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Disclosure & Disclaimer: despite rocky performance in 2021 and early 2022, I have open positions in most of the companies covered in this newsletter, as I am extremely bullish on the transformation in the financial services industry. However, none of the above is financial advice, and you should do your research.