[ad_1]
Dive Brief:
- Digital payments pioneer PayPal’s growth is being driven by the expansion of its unbranded transaction processing business, including its Braintree unit, the company’s first-quarter earnings report showed.
- While PayPal’s branded legacy checkout business grew 6.5%, compared to the year-earlier quarter, its unbranded merchant businesses surged 30%, according to the Monday earnings presentation. Overall, revenue jumped 9% to $7.04 billion, largely due to the increase in business at its Braintree unit.
- “We put a lot of investment in that and it’s taking off,” PayPal CEO Dan Schulman said of the unbranded businesses during the company’s earnings call with analysts.
Dive Insight:
San Jose, California-based PayPal considers the Braintree business to be part of its “unbranded” segment, given it is not consumer-facing. Its branded segment is the legacy business that includes the PayPal button that consumers use to make purchases online and in-store.
PayPal acquired Chicago-based Braintree in 2013, when PayPal was still majority-owned by online e-commerce parent Ebay. While Braintree is expanding, with help from its open architecture, the legacy business has struggled to add net new accounts.
In the most recent quarter, the company’s overall number of transactions processed rose 13% to 5.8 billion, with a similar rate of growth for transactions per account. “13% growth in TPA was predominantly driven by transaction growth from Braintree, with contribution from core PayPal,” the company said in the presentation.
Nonetheless, Schulman expects Braintree growth to slow. “We do expect Braintree to moderate its growth, having some big deals last year, but honestly, we’re working on some big deals this year too,” he said during the call.
Some investors are concerned about the disproportionate growth of the unbranded business because it tends to be lower-margin than PayPal’s legacy services.
The company’s first-quarter operating expenses climbed 4.7% to $6.04 billion, according to a Monday press release accompanying the earnings report.
“Braintree/ other items have impacted total revenue growth vs. TPV growth, while also raising (year-over-year) transaction expense growth,” Oppenheimer & Co. analyst Dominick Gabriele said in a note to the firm’s investment clients on Monday. “We get the strategic value of Braintree, but investors will ask; how long can you cut expenses to offset profitability declines which impact valuation?”
PayPal’s operating margin for the first quarter increased to 14.2%, up from 11.2% in the year-earlier quarter, according to the presentation.
The company’s other unbranded segment, called PayPal complete payments, which caters to small and mid-sized merchants, is in the early stages of gaining traction. “Meaningful PPCP profitability help is likely quarters/years away,” Gabriele said in the note. “Thus, revenue growth likely slower than (total payments volume).”
Since activist investor Elliott Investment Management took an ownership stake in PayPal last year, the company has undertaken an effort to reduce costs. “We are just at the beginning of a multi-year efficiency journey,” Schulman said on the call.
When it missed growth goals for the branded business two years ago, PayPal pivoted to seeking more engagement from existing accounts. As of the end of the first quarter, the company had 433 million active accounts, including 35 million merchant accounts. That was up 1% over the year-earlier quarter, and down slightly from 435 million accounts at the end of last year.
The decline from late last year reflected “churn of minimally engaged accounts and the strategic decision to focus on driving higher activity levels with existing active accounts,” the company said in its first-quarter presentation.
Schulman provided an update during the call on the search for his successor, following his announcement last year that he would retire at the end of 2023. The update didn’t reveal anything new. With a board committee and search firm on the effort, the company reiterated that it expects to announce the new CEO before yearend.
[ad_2]