PayPal Holdings, Inc. PYPL reported non-GAAP earnings of 58 cents per share in the third quarter of 2018, which surpassed the Zacks Consensus Estimate by 4 cents. The figure was in line with the last reported quarter’s earnings but increased 26.1% on a year-over-year basis.

Net revenues declined 4.7% sequentially but increased 14% year over year to $3.68 billion, beating the Zacks Consensus Estimate of $3.66 billion.

The year-over-year growth in top line can be attributed to expanding customer engagement on PayPal’s platform, which significantly boosted net new active accounts in the third quarter. Further, robust performance of Venmo, One Touch and Choice drove the results.

Moreover, the company’s strategic partnerships remained positive throughout the quarter. However, sale of the U.S. consumer credit receivables portfolio to Synchrony negatively impacted revenues. Without the impact of the same, revenues would have exhibited growth of 21%.

Notably, shares of PayPal surged 7.64% in the after-hour trading session. This can primarily be attributed to better-than-expected results and positive outlook for the fourth quarter and full-year 2018.

Top Line in Detail

By Type: Transaction revenues came in at $3.34 billion (90.8% of net revenues), up 17% from the year-ago quarter. The product diversification strategy of PayPal aided the same across all its operative geographies.

Other value added services generated $340 million of revenues (accounting for 9.2% of net revenues), decreasing 10.8% year over year. This was primarily due to the sale of its U.S. consumer credit receivables portfolio to Synchrony.

By Geography: Revenues from the United States came in at $1.96 billion (53.3% of net revenues), surging 13% on a year-over-year basis. International revenues were $1.72 billion (46.7% of revenues), increasing 15% from the prior-year quarter.

Quarter in Detail

PayPal’s strategic partnerships, expanding product & services portfolio, along with strengthening presence in the global market led to massive increase in total payment volume (TPV).

Moreover, strong Venmo monetization efforts of the company remained positive throughout the quarter. It recorded 17% growth in the number of Venmo users who have actively participated in monetization activity in the quarter compared with the last reported quarter.

Further, PayPal’s monthly active user base, supported by Pay with Venmo efforts, expanded significantly in September, growing 185% from August. Additionally, the company’s partnership with Uber boosted the adoption rate of Venmo across Uber and Uber Eats platform. Also, Venmo cart contributed significantly to the growth of monthly active users of the company.

Additionally, the company’s solid initiatives toward enhancement of Choice resulted in its growing adoption worldwide.

Further, PayPal completed the buyout of iZettle. This will expand omnichannel business in the global market.

Additionally, the company announced the partnership with Itaú Unibanco Holding SA. This will allow PayPal to gain traction among the bank’s customers by offering them services.

PayPal Holdings, Inc. Price, Consensus and EPS Surprise

 

PayPal Holdings, Inc. Price, Consensus and EPS Surprise | PayPal Holdings, Inc. Quote

Key Metrics to Consider

Supported by these endeavors, the company recorded 15.4% year-over-year growth in total active accounts, by the addition of 9.1 million net new active accounts during the reported quarter. The total number of active accounts was 254 million in the quarter, beating the Zacks Consensus Estimate of 251 million.

Additionally, the total number of payment transactions came in at 2.46 billion, up 27% on a year-over-year basis. The figure topped the Zacks Consensus Estimate of 2.43 billion.

Further, the company’s payment transactions per active user were 36.5 million, which increased 9.6% from the year-ago quarter. The figure lagged the Zacks Consensus Estimate of 36.6 million.

TPV came in at $143 billion in the third quarter, exhibiting 24.1% and 25% year-over-year growth on spot rate and currency neutral basis, respectively. However, the figure missed the Zacks Consensus Estimate of $145.03 billion. Nevertheless, strong performance of Venmo accounted for $17 billion of TPV during the reported quarter. The figure surged 78% on a year-over-year basis.

Further, PayPal processed $57 billion in mobile payment volume, up 45% year over year, accounting for 40% of TPV.

Moreover, the company benefited from the increasing use of internet and mobile. The company recorded 112 million customers and 10.4 million merchants using One Touch in the third quarter.

Also, payment volume on P2P platform was $36 billion, up 50% from the year-ago quarter, accounting for 25% of TPV.

Additionally, merchant services volume was $127 billion, up 28% year over year. eBay volume increased 3% from the year-ago quarter, accounting for 11% of TPV.

Operating Details

Non-GAAP operating margin came in at 21.4%, which expanded 150 basis points (bps) on a year-over-year basis and 10 bps sequentially. Further, non-GAAP net income was $694 million, up 23.9% on a year-over-year basis but declined 1.3% sequentially.

Adjusted operating expenses were $3.19 billion in the third quarter, climbing 13.1% from the prior-year quarter but declining 2.7% on a sequential basis.

Balance Sheet & Cash Flow

As of Sep 30, 2018, cash equivalents and investments came in at $10.5 billion, up from $6.3 billion on Jun 30, 2018.

PayPal generated free cash flow of $4.45 billion during the third quarter compared with the negative figure of $170 million in the last reported quarter.

Guidance

For fourth-quarter 2018, PayPal expects revenues between $4.19 billion and $4.27 billion, growing in the range of 13-15% on both current spot rate and FX-neutral basis. The Zacks Consensus Estimate is pegged at $4.22 billion.

Non-GAAP earnings are anticipated in the range of 65-67 cents per diluted share. The Zacks Consensus Estimate is pegged at 65 cents per share.

The company also projects stock-based compensation expense and related payroll taxes between $210 million and $230 million.

For 2018, PayPal expects revenues between $15.42 billion and $15.50 billion, growing at 18-19% at current spot rates and 17-18% on an FX-neutral basis. The Zacks Consensus Estimate is projected at $15.43 billion.

Further, non-GAAP earnings are expected in the range of $2.38-$2.40 per share. The Zacks Consensus Estimate is currently pegged at $2.35 per share.

Zacks Rank & Stock to Consider

PayPal currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Twitter TWTR, Upland Software UPLD and Twilio TWLO, each flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Twitter, Upland Software and Twilio is currently pegged at 22.05%, 20% and 9%, respectively.

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