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PayPal Earnings: The Transformation Is Paying Off

Even before PayPal Holdings, Inc. (NASDAQ: PYPL) announced its financial results, the payment processor was already having an impressive quarter. The company had recently announced a number of new or extended partnerships with major credit card issuers and processors, as well as its acceptance as a payment option with Apple Inc., in its App Store, Apple Music, and iTunes accounts. 

Investors were eager to see if the continued expansion of these partnerships would translate into additional users and greater financial success, and they were not disappointed. For the just completed quarter, PayPal saw revenue increase to $3.14 billion, up 18% year over year, and an even higher 20% on a foreign currency-neutral basis. GAAP earnings per diluted share increased to $0.34, up 27% over the prior-year quarter. 

PayPal saw improvement in a variety of other metrics as well. The company added 6.5 million new customer accounts, up an astonishing 80% year over year, and the largest quarterly gain in two years. The number of payment transactions grew to 1.8 billion, a 23% year-over-year increase, while the total payment volume (TPV) hit $106 billion, up 23% over the prior-year quarter and the first time TPV has exceeded the $100 billion mark.

PayPal's partnership strategy is reaping big rewards. Image source: PayPal.

Increasing its total addressable market

PayPal has been hard at work broadening its customer base by increasing the number of partnerships with major credit card issuers, which now includes banking behemoths JPMorgan Chase, Citigroup, and Bank of America. In addition to the expanded relationships with the card issuers, PayPal also revealed that in addition to its agreement with Apple and its previous availability on Android Pay, it struck accords with Chinese search leader Baidu, Inc. and tech giant Samsung to include PayPal as a payment option using their respective digital wallets.

PayPal aspires to move beyond its roots as an online payment option and is expanding its reach as a payment platform, integrated across the environment of buyers and sellers, enabling all manner of payments. To that end, the company announced the completion of its acquisition of bill payment processor TIO Networks, extending into another aspect of the payments market. TIO works with a host of "telecom, wireless, cable, and utility bill issuers in North America," giving PayPal customers yet another way to leverage the platform.

Two sides of the same coin

PayPal believes that by providing increasingly relevant services to both consumers and merchants, it is growing its ecosystem much more robustly than by focusing on just one aspect. Dan Schulman, president and CEO of PayPal said, "The accelerating and extensive scale of our two-sided global platform creates a strong foundation for PayPal's growth, enabling consumers and merchants to transact in new contexts and across operating systems, technologies and platforms."

PayPal has been attracting increasing numbers of customers to Venmo, its social-payments platform, which processed $8 billion in transactions, up 103% over the prior-year quarter. While PayPal has yet to monetize Venmo, it has recently begun a test that will allow consumers to not only pay each other but also pay merchants with Venmo, using its existing network of PayPal merchants. This will leverage an as yet untapped opportunity for the company, producing a new and potentially lucrative revenue stream.

PayPal is moving from payment option to payments platform, and investors are reaping the rewards. Image source: PayPal.

One Touch, which allows consumers to bypass the traditional login once they have enabled PayPal on a specific device, seems to be a hit with consumers and merchants as well. PayPal reported that 61 million consumer accounts had opted into One Touch by the end of the quarter, and 5.6 million merchants accepting those payments, with 75% of the Internet Retailer 100 now accepting One Touch.

Going forward

For the second time in as many quarters, PayPal again raised its full-year guidance, expecting revenue of $12.825 billion at the midpoint of its forecast, and GAAP earnings per share in a range of $1.32 and $1.36.

Thus far, PayPal has been successful in expanding from a simple online payment option to a full-service digital payment processor. In its earnings press release, Schulman pointed to the company's transformation "from a checkout option to ... [a] way for consumers to manage and move their money." While that transformation is ongoing, investors are reaping the rewards.

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Danny Vena owns shares of Apple, Baidu, and PayPal Holdings. The Motley Fool owns shares of and recommends Apple, Baidu, and PayPal Holdings. The Motley Fool has a disclosure policy.