PayPal shares soar after earnings as Elliott investment and cost cuts ease concerns


By Emilie Bary

“Ultimately, these developments should address (at least for now) many investor concerns about execution and strategic direction,” an analyst says.

After watching its shares lose about two-thirds of their value over the past year, PayPal Holdings Inc. released a packed earnings report on Tuesday, announcing a new chief financial officer, buyout approval and a reduction program. costs, while confirming that activists at Elliott Management Corp. took a stake in the company.

Additionally, the company beat expectations with its second quarter financial results while providing a mixed update on guidance for the full year.

“We are well on our way to a profound transformation of our business to regain momentum,” chief executive Dan Schulman said during the company’s earnings call.

PayPal (PYPL) shares jumped 11% in after-hours trading on Tuesday, after hitting their best day in two years last week amid reports that Elliott had taken a stake in the company. Elliott confirmed the involvement in Tuesday’s report, just as the activist investor did on Monday afternoon with struggling Pinterest Inc (PINS) as it reported earnings

“As one of PayPal’s largest investors, with an investment of approximately $2 billion, Elliott strongly believes in PayPal’s value proposition,” said Elliott managing partner Jesse Cohn. in a statement included in PayPal’s statement. “PayPal has an unrivaled, industry-leading footprint in its payments business and a right to earn in the short and long term.”

He added that PayPal’s report “highlights a number of steps that have been underway and are being initiated to help realize the opportunity for significant value” in the business.

Schulman said on PayPal’s earnings call that his team and the Elliott team were “completely aligned with our common goal of maximizing shareholder value and we are substantially aligned on priority areas to achieve our goals. “.

The company is tapping former Electronic Arts Inc. (EA) CFO Blake Jorgensen to fill the same role at PayPal. He replaces John Rainey, who stepped down earlier this year to become the chief financial officer of Walmart Inc. (WMT).

Even before Jorgensen joined the company on Wednesday, PayPal executives announced various financial initiatives, including a new $15 billion share buyback and cost-cutting authorization program that they say will generate $900 million. in savings this fiscal year and $1.3 billion in savings next year. Management is targeting an increase in operating margin for 2023.

The management team will undergo a further shake-up in the coming months, as PayPal has announced that Chief Product Officer Mark Britto plans to retire at the end of the year, and a search for his replacement is underway. .

“Ultimately, these developments should address (at least for now) many investor concerns around execution and strategic direction,” Wedbush analyst Moshe Katri said in an e-mail. mail.

The latest metrics are all “positive”, according to Mizuho analyst Dan Dolev, who said “PayPal’s cost base was way too high and needed to return capital to shareholders.”

A key question asked in PayPal’s report was whether the company would again cut its full-year revenue forecast after a series of cuts earlier this year. Executives ended up reducing their forecast and are now modeling growth of around 10% on a one-time basis, compared to a previous outlook of 11% to 13% growth. They also model growth of around 11% on a currency-neutral basis, which is at the low end of the company’s previous range.

“Given the current environment, we think it’s important to be cautious,” acting chief financial officer Gabrielle Rabinovitch said on the call.

Executives also expect about $3.87 to $3.97 in adjusted EPS for the full year. The company’s previous guidance called for adjusted EPS of $3.81 to $3.93.

An analyst said on the call that the scale of PayPal’s cost-cutting targets were greater than he had expected, but Schulman maintained that the company would continue to invest in the business.

“We were doing 100 things,” he said. “We are now doing three or four things extremely well.”

Throughout the call, Schulman offered other signs of the company’s new priorities. While the company rolled out a QR code program two years ago aimed at opening up in-store opportunities, it acknowledged on Tuesday that it was “more impactful” and “less expensive” to try to get greater share online spending by having users pay with cards linked to PayPal.

Additionally, although executives planned to invest in new features such as stock trading this year, they “reallocated [that] number of employees at checkout”, which is PayPal’s core business.

For the most recent quarter, the company reported a net loss of $341 million, or 29 cents per share, while it reported net income of $1.18 billion, or $1.00 per share, in during the quarter of the previous year. The loss for the last quarter reflects the negative impacts of losses on strategic investments and a tax charge related to acquired intellectual property.

On an adjusted basis, PayPal earned 93 cents per share, down from $1.15 per share a year earlier, but above the FactSet consensus, which was 87 cents per share.

PayPal’s revenue fell from $6.24 billion to $6.81 billion, while analysts had modeled $6.78 billion.

The company generated $339.8 billion in total payments volume, or the value of transactions processed through its platform, compared to $311.0 billion in the previous quarter. Analysts expected $342.8 billion in TPV.

PayPal had 429 million active accounts in the second quarter, essentially flat with its first quarter total, but up from 403 million active accounts in the second quarter of 2021. Executives said earlier this year that they would become less focused on absolute user growth as they sought to better monetize PayPal’s higher value users.

For the third quarter, PayPal’s management team expects net revenue growth of 10%, or 12% on a currency-neutral basis. The projection would equate to around $6.80 billion, while analysts tracked by FactSet were looking for $6.78 billion.

PayPal executives also expect adjusted earnings per share of 94 to 96 cents for the third quarter, while analysts had expected 95 cents.

-Emily Bary


(END) Dow Jones Newswire

08-02-22 2019ET

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