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PayPal (PYPL) Tops Q3 Earnings Estimates, Raises 2017 View

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PayPal Holdings, Inc. (PYPL - Free Report) reported better-than-expected third-quarter 2017 results, beating the Zacks Consensus Estimate on both counts.

Proforma earnings of 46 cents per share beat the consensus mark by 2 cents, increasing 31.4% year over year but staying flat sequentially.

Net revenue of $3.24 billion beat the Zacks Consensus Estimate by $66 million and was up 21.4% on a year-over-year basis (up 22% on an Fx-neutral basis) and 3.3% sequentially. It came ahead of the company’s own guided range of $3.14–$3.19 billion.

In response to the impressive results and raised full-year guidance for both earnings and revenues, shares jumped 3.6% in afterhours trading. PayPal shares have rallied 70.4% year to date, massively outperforming its industry’s gain of 23.4%.

The results were driven by continuous strong performance in global payments, especially mobile. PayPal added record 8.2 million new customers in the third quarter, taking the total active customer accounts to 218 million.

In the quarter, partnership and mobile centrism continued to be PayPal’s top priorities.

The company partnered with Microsoft (MSFT - Free Report) to allow Skype users in 22 countries to use PayPal to send and receive money through the Skype mobile app. It also partnered with South Korea’s largest credit card issuer Shinhan Card and Banorte in Mexico. It collaborated with Nintendo to allow consumers of 34 countries across North America, Europe and Asia to use PayPal on Nintendo gaming systems.

It extended its partnership with Mastercard (MA - Free Report) in Europe, Latin America, Canada, Africa, the Caribbean and the Middle East. The company’s ongoing partnerships with Visa (V - Free Report) , Google, Facebook, Pinterest, Alibaba, Intuit and eBay are also delivering positive results.

In the quarter, PayPal closed acquisitions of Swift Financial and previously announced acquisition of TIO Networks. Swift Financial will make PayPal’s financing solutions more accessible and affordable to small businesses. TIO will boost PayPal’s global expansion efforts. TIO’s offline payment processing platform will help PayPal tap un-banked and under-banked customers who are unable to access conventional financial services.

PayPal has been working on a broader goal of partaking into daily financial activities of customers through partnerships and acquisitions. It appears that those deals have started to pay off.

Also, the quarter witnessed PayPal’s accelerated push into mobile with One Touch and Venmo continuing to bolster its stake in mobile payments. Venmo users can now pay at more than 2 million PayPal merchants across the United States. One Touch is currently in use by more than 6 million merchants and 70 million consumers.

In the quarter, mobile made significant contribution to PayPal’s volume growth, processing $40 billion of transactions and accounting for 35% of total payments made on its platform.

At the call, management stated that PayPal delivered the strongest result since its spun-off from eBay.

Let’s delve deeper into the numbers.

Revenues in Detail

Transaction revenues of $2.83 billion contributed 87% to total revenue and were up 3% sequentially and 22% on a year-over-year basis. Other value-added services revenues of $406 million contributed the rest and were up 5% sequentially and 15% year over year.

PayPal Holdings, Inc. Revenue (TTM)

Geographically, the United States contributed 54% to total revenue, up 3% sequentially and 21% on a year-over-year basis. International revenues contributed 46% to total revenue and were up 3% sequentially and 22% year over year on an Fx-neutral basis.

In the quarter, total payment volume (TVP) was $114.04 million, growing 29% year over year on an Fx-neutral basis. The company processed 1.9 billion payment transactions, up 26% year over year. Over the trailing 12 months, payment transaction per active account was up 9% to 32.8.

Margins and Net Income

Non-GAAP operating margin of 19.9% was up 157 basis points (bps) year over year.  Non-GAAP net income of $560 million was up 31.8% year over year.

Including special items, GAAP net income was $380 million (31 cents per share) compared with $323 million (27 cents per share) in the year-ago quarter.

Balance Sheet and Cash Flow

PayPal had a strong balance sheet at the end of the third quarter. Cash and short-term investments balance was $4.92 billion compared with $4.09 in the previous quarter. The company generated $1 billion in cash from continuing operations and spent $165 million on capex.

The company has no long-term debt.

Outlook

For the fourth quarter of 2017, PayPal expects revenues to grow in the range of 20–22% on an Fx-neutral basis to $3.57–$3.63 billion. The mid-point of the range is better than the Zacks Consensus Estimate of $3.57 billion.

Non-GAAP earnings are expected to be in the range of 50–52 cents per share. The Zacks Consensus Estimate of 51 cents is in line with the midpoint of the range. GAAP earnings per share are expected in the range of 37–39 cents.

For 2017, PayPal increased its expectations. The company now expects revenues between $12.92 and $12.98 billion compared with its earlier expectations of $12.78 billion to $12.88 billion. This is better than the Zacks Consensus Estimate of 12.86 billion at the mid-point.

Non-GAAP earnings are expected to be in the range of $1.86 - $1.88 per share compared with the earlier expectations of $1.80 - $1.84 per share.  This exceeds the Zacks Consensus Estimate of $1.84 per share at the mid-point.

Currently, PayPal has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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