PayPal sheds users amid tightening margins in Q2 2023

PayPal sheds users amid tightening margins in Q2 2023

PayPal has reported its Q2 2023 results and, while the company saw revenue growth at the top end of its guidance and improvements in total payment volume (TPV), it has also seen narrowing operating margins and a reduction in active user numbers. This has prompted a negative response from investors, with share prices dropping on the news.

Net revenues increased by 7% on a GAAP or 8% on a non-GAAP basis to $7.3bn in the quarter, while total payment volume increased 11% on both a spot and an FX-neutral basis to $376.5bn. 

The company also highlighted evidence that ecommerce growth had stabilised in the mid-single digits, which CEO Dan Schulman highlighted was “substantially above” PayPal’s estimates at the beginning of 2023.

PayPal grows net revenue, total payment volume
Full-year net revenue and TPV, 2018-2022 and 2023E

PayPal sees increased revenue but weakening margins in Q2 2023, despite improving ecommerce outlook

Improvements in revenue come amid changing market conditions that follow an extended slump in ecommerce, which faced headwinds amid the macroeconomic downturn that came after its strong run of growth during the pandemic. 

For PayPal, this has translated into a 6.5% YoY growth in branded checkout volumes in June, with the company seeing this rise to 8% in July – the highest monthly growth rate it has seen since the pandemic. It expects this return to continue in H2 2022, aided by cooling inflation.

Schulman did highlight that the company was lapping outsized one-off benefits in Q2 and Q3 of 2022, without which PayPal would be reporting revenue growth of 9-10% in this quarter. However, it projects trends to continue in H2, with revenue “roughly the same” or “maybe a bit better than the first half”, according to the CEO.

However, the market was quick to notice the tightening margins, with adjusted operating margins at 21.4% in Q2 2023, compared to 22.7% in the previous quarter. While PayPal did highlight that margins were higher than in Q2 2022, this is the second quarter in a row where they have declined on a non-GAAP basis.

Ecommerce drives PayPal revenue increase, but margins narrow
PayPal quarterly net revenue, operating margin and total payment volume

PayPal transactions up but active user numbers down

PayPal also saw an increase in total transactions, which grew 10% YoY to 6.1 billion for the quarter, while transactions per active account increased by 12%. This was attributed in part to a 5% increase in transaction revenue to $6.6bn, primarily in Braintree and PayPal-branded checkout. 

However, the number of net new active accounts (NNAs) dropped by 2.5 million this quarter. This is the second quarter in a row that NNAs have been down, and appears to be only the second quarter that PayPal has reported a drop in overall user numbers since it went public – it is certainly only the second quarter since the start of 2017, the date PayPal currently publishes quarterly earnings back to.

The company attributed this 0.6% decline compared to Q1 2023 to the “churn of minimally engaged accounts and the strategic decision to focus on driving higher activity levels with existing active accounts”.

Schulman did highlight ongoing efforts in this area, including rolling out “high-margin, value-added services”, as well as increasing international expansion and “making noticeable progress with in-person payments”. Here, the company highlighted an AI chatbot that is currently being tested internally and which will soon be added to the consumer app to provide services including advanced checkout and customised rewards. 

The company also highlighted that the app was key to driving higher customer engagement. At present, app users have a 35% higher average revenue per user than non-app users, as well as having 60% greater TPV and 25% lower churn.

PayPal active accounts decline for second quarter in a row
PayPal quarterly active accounts and payment transactions per account

Cross-border returns to growth but takes lower share of TPV

This quarter once again saw no mention of Xoom, despite reports that PayPal may be looking to sell the remittance brand. 

However, cross-border trade had its most positive quarter at PayPal for some time, with volumes increasing 3% on both a spot and FX-neutral basis to $47bn, compared to declines across 2022 and flat growth in Q1 2023. This makes it the fifth strongest quarter PayPal has ever had for cross-border volumes, with the top four all occurring during the pandemic when ecommerce was at its peak.

This quarter’s growth was largely driven by intra-European corridors, although ongoing post-Brexit softness in EU-UK trade posed a headwind. Notably, the recovery of travel was not a major factor as most of PayPal’s cross-border trade relates to ecommerce. 

Despite improvements in cross-border trade volumes, cross-border’s share of TPV was down on previous quarters, dropping to 12%. This puts it below the previous four quarters, where it sat at 13%, and the lowest it has been across currently available records.

PayPal cross-border value rises but TPV share drops
Quarterly cross-border value and cross-border share of total payment volume

PayPal bets on AI to continue cost efficiencies

PayPal also provided an update on ongoing efforts to drive cost efficiencies, which it has been facing sustained investor pressure to focus on. 

In June, the company announced the sale of its European BNPL receivables loans to KKR, and provided an update on the “exclusive multi-year relationship” during the earnings call. The company expects the transaction to close in H2 2023, upon which it will receive proceeds of around $1.8bn for the purchase of up to €40bn current and future BNPL loans originating from the UK and Europe.

Beyond this, Schulman said that the company was exercising “good discipline in managing operating expenses” and expected to “drive meaningful productivity improvements” in H2 2023 and FY 2024.

He highlighted that AI would be key to this, allowing the company to advance processes and infrastructure while improving product quality, and overall enabling PayPal to “see a future where [it will] do things better, faster and cheaper”.

Schulman also provided an update on his succession plan, following his February 2023 announcement that he planned to step down from his role as CEO at PayPal. He said that the company was now in the final stages of the process with “several outstanding candidates”.

Looking to Q3, PayPal now anticipates 9% revenue growth, with low-teens TPV growth, while for FY 2023 the company is projecting currency-neutral revenue growth of 9-10%.

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