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PayPal's Increasing Scale Lifts Second-Quarter Results

The payment-transactions ship known as PayPal Holdings Inc. (NASDAQ: PYPL) sailed full steam ahead during the second quarter, maintaining its brisk start to the year, and providing management the opportunity to revise earnings guidance upward for the remainder of 2017. Before diving into details, let's review headline numbers directly below:

PayPal: The raw numbers

Metric Q2 2017 Q2 2016 Year-Over-Year Change
Revenue $3.14 billion $2.65 billion 18.5%
Net income from continuing operations $411 million $323 million 27.2%
Diluted earnings per share $0.34 $0.27 25.9%

Data source: PayPal Holdings Inc.

What happened with PayPal this quarter?

  • Total payment volume (TPV), which represents the total dollar volume of transactions PayPal facilitates, and is perhaps the company's most closely watched metric, rose 23% to $106.4 billion versus the prior-year quarter.

  • PayPal added 6.5 million new active accounts, bringing its total active accounts to 203 million, for an increase of 11.7% over the last twelve months. This caps seven consecutive quarters of year-over-year customer additions growth of 11% or more.

  • Mobile payments continue to increase in importance to PayPal's transaction processing haul. During the quarter, mobile TPV came to $36 billion, or more than a third of overall company TPV, an increase of 50% from the prior year.

  • Just after the June 30 quarter-end, on July 18, PayPal announced the closing of its $238 million acquisition of kiosk-banking vendor TIO Networks.

  • The company's social payments app Venmo more than doubled its prior-year quarter's TPV to $8.0 billion. Venmo is gradually being monetized, and at a 7.5% share of overall company TPV (and growing), it's a source of future revenue opportunity. During the company's conference call with analysts, CEO Dan Schulman related that he was pleased with progress in onboarding U.S. vendors to accept Venmo.

  • While revenue accelerated, it outpaced the growth in operating expenses, allowing PayPal to take home more in net income versus previous quarters. In the quarterly slide presentation it releases for investors, PayPal reported that non-transaction expenses only grew by 4.5%, even as total revenue expanded by 18.5%.

  • CEO Schulman also touched on the higher profitability in the company's conference call, pointing out that at least part of the operating leverage was due to the enhancement of PayPal's product line, as well as the success of "choice" (the company's shorthand for its numerous partnerships). Both resulted in fewer calls into customer-service call centers, lowering operating expense.

  • PayPal's drive to partner with financial institutions and tech companies, rather than compete against them, continued unabated during the quarter. Below is a chart of major partnership deals from the company's first-quarter 2017 slide presentation, which I included in my earnings review three months ago:

Image source: PayPal Holdings, Inc.

Now, take a look at the updated version PayPal provided this week. In the second quarter, the company inked no fewer than ten major partnerships or extensions of existing agreements. The timeline which began in February of last year is becoming quite crowded:

Image source: PayPal Holdings, Inc.

  • Looking over these logos, perhaps the most illustrative agreement is one announced yesterday by Chinese tech company Baidu Inc. (NASDAQ: BIDU). Baidu plans to enable its mobile wallet to be accepted at over 17 million PayPal merchants worldwide. This is the type of deal which is helping PayPal scale its reach, and maintain revenue growth and TPV expansion at double-digit rates.
  • PayPal's transaction "take rate," that is, the average percentage of revenue PayPal makes per transaction, declined a bit to 2.58% from the prior-sequential-quarter rate of 2.62%. Management attributed the slight drop to higher person-to-person transactions through the Venmo app, which as yet aren't monetized.

  • PayPal repurchased $89 million of its own shares during the quarter, bringing its year-to-date total to $606 million.

These millennial friends can split the check using PayPal's Venmo app. Image source: Getty Images.

What management had to say

In his prepared remarks during the company's earnings conference call, CEO Schulman attributed PayPal's growth to three factors: its ongoing product enhancement, its investment in digital payments, and collaboration. Said Schulman:

Our performance is driven by the cumulative effect of multiple initiatives. We have fundamentally retooled our technology and infrastructure, leading to significant improvements in availability and developer productivity. We have meaningfully improved our core experiences and expanded our suite of products. Our overall scale is accelerating due to the network effects of our two-sided platform. There is clearly a macro secular shift toward digital payments, and our customer choice results continue to exceed our expectations.

Schulman also relayed a positive and potentially unintended consequence of PayPal's partnering strategy:

Throughout the quarter, we saw our relationships with issuers grow increasingly collaborative and productive. For example, we are pleased to see leading issuers, including Wells Fargo and HSBC, actively marketing PayPal to their customer base, encouraging their clients to link their cards into PayPal accounts.

As networks and card issuers realize greater transaction volume by collaborating with PayPal, they begin to act as free marketing resources for the payments platform -- an enviable position for PayPal to find itself in.

Moving forward

PayPal's solid quarter resulted in an earnings guidance revision from management. The company now expects full-year revenue to grow 18% to 19%, against its previous guidance of 15% to 17%.

In addition, the expectation for full-year diluted earnings per share has been bumped to between $1.32 and $1.36, versus the previous range of $1.28 to $1.33.

Looking ahead to the third quarter, PayPal anticipates that revenue will rise between 18% and 20%. If PayPal continues this fervid pace and hits its third-quarter top-line target, the organization will be well on its way to meeting full-year 2017 goals as well.

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Asit Sharma has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Baidu and PayPal Holdings. The Motley Fool has a disclosure policy.