Discover more from Stock Market Nerd
PayPal (PYPL) & Airbnb (ABNB) Earnings Reviews
Exploring the results of these two giants.
1. PayPal (PYPL) – Earnings Review
PayPal beat revenue estimates by 0.5% and beat guidance by 0.2%.
Transaction revenue rose by 7% Y/Y and other value added service revenue rose by 25% Y/Y. The 25% growth was powered by more interest income via soaring rates.
Foreign exchange neutral (FXN) revenue growth was a bit over 9% Y/Y.
Branded volume rose 6% Y/Y FXN vs. 5% Q/Q & 6.5% 2 quarters ago.
Unbranded volume rose 32% FXN vs. 28% Q/Q & 30% 2 quarters ago.
International FXN volume growth was 19% Y/Y vs. 14% Y/Y last quarter. U.S. volume growth was around 10% Y/Y.
Beat EBIT estimates by 1.7%.
Beat $1.23 earnings per share (EPS) estimates by $0.07 (same guide). EPS rose 20% Y/Y thanks to non-transaction operating expense cuts. As you can see below, transaction margin fell Q/Q as expected.
Beat $0.87 GAAP EPS estimates by $0.06 (same guide).
PayPal’s Q4 guidance was 1.4% light on revenue. This was mainly related to incremental FX headwinds that its currency hedging program can’t entirely eliminate. Its GAAP EPS guide beat $1.02 estimates by $0.18 and its non-GAAP EPS guide missed $1.40 estimates by $0.04 (raised for the full year).
For the full year, it lowered its revenue growth guidance from 8% to 7.5% and lowered FXN growth guidance from 9.5% to 8.5%. It lowered its EBIT margin expansion guidance from 100 bps Y/Y to 75 bps Y/Y. This is due to branded checkout slowing starting in July and through the end of Q3. Imperatively, that slowing stabilized quarter to date with growth in line with the first half of the year. That’s slightly worse than what we were told to expect on the last call. The guidance was called very prudent.
Conversely, it raised its full year EPS guidance from $4.95 to $4.98 thanks to the strong Q3 result. It lowered its FCF guidance from $5 billion to $4.6 billion.
Finally, for transaction dollars, the Q4 Y/Y decline will improve vs. Q3. This means better than -3% Y/Y transaction dollar growth. The margin will again contract Y/Y in Q4. Q4 is expected to represent a transaction dollar growth bottom with that turning positive (along with a resumption of margin expansion) in 2024. This is vital.
d. Balance Sheet
$11.5 billion in cash & equivalents with another $3.9 billion in investments.
$10.6 billion in debt.
Share count fell 5.2% Y/Y via continued rapid buybacks. It will remain “opportunistic” with buybacks.
It sold Happy Returns to UPS for $465 million in cash proceeds.
The 30% Y/Y decline in FCF is related to its buy now, pay later portfolio sale to KKR. The cash flow hit will be fully offset next quarter following the deal closing. FCF growth would have been 21% Y/Y without the transitory headwind.
e. Call & Release Highlights
Alex Chriss’s Priorities:
This was Alex Chriss’s first quarterly call as CEO of PayPal. Considering this, he spelled out his priorities for the company in detail. He did so while candidly sharing where the old team has done well… and where they’ve struggled. Let’s dig in.
“I speak plainly and transparently. I will not hesitate to call out where we are struggling.” – CEO Alex Chriss
First and foremost, the pace of innovation at PayPal needs to speed up. Considering the slow pace of large merchant onboarding to its latest checkout flow, I fully agree. To him, the firm has all of the assets in place (and then some) to drive profitable growth and strong shareholder returns. To get there, tighter focus on the core and better execution is dearly needed. This is not a matter of needing to seek out exciting new sources for growth. All of those sources are present and obvious. The foundation is strong, the opportunity is massive and the internal performance needs to improve. “It will” according to Chriss.
“We know exactly what needs to be done. We simply must execute.” – CEO Alex Chriss
Cost Base Priorities:
Chriss sees significant opportunity to cut operating expenses further. He thinks the cost base is bloated and redundant to a point of limiting to the firm’s pace of innovation and growth. Several acquisitions that were not properly integrated led to these issues. Cost cuts leading to accelerating growth would be a wonderful thing.
The company’s teams do not share work or communicate well. They operate parallel, redundant infrastructure that must be consolidated. This consolidation, again, will lower costs while also making PayPal better at launching products in a timely fashion.
Chriss is in the process of evaluating the highest return products that PayPal features. He will pull costs away from less appealing opportunities to ensure the firm has the needed financial capacity to invest where needed.
“The cost base remains too high and is slowing us down.” – CEO Alex Chriss
From a consumer perspective, Chriss’s priority is to revamp the digital wallet and checkout experiences. Apparently, the refresh conducted under Schulman did not cut it. It has wonderful products like the 3% cash back debit card, the first regulated stable coin and a rewards program used by 25 million consumers. It needs to package these disparate value creators in a more intuitive and obvious fashion to make the utility utterly clear. Today, it’s not clear. Product silos are abundant and interoperability is rare at PayPal. This new experience will fixate on pulling from PayPal’s quality assets to ensure customers get unique value every single time they choose PayPal.
Another key theme of the call was better leveraging the data advantage PayPal enjoys from its massive scale. This will entail more aggressively utilizing all of its merchant and consumer data to make PayPal a more intelligent. Doing so will allow it to improve product discovery, streamline checkout further, offer more affordable access to products, sharpen package tracking tools, market more effective etc. It will help everywhere. The firm has always had this massive data edge, yet hasn’t quite taken advantage. Chriss is determined to take advantage.
White Label Checkout Priorities:
For smaller businesses, the priority is scaling PayPal Commerce Platform (PPCP) globally and quickly. This is its white label payment service software that complements Braintree. He hinted at more work needed to improve the product that old CEO consistently praised as best in class. Maybe he just didn’t know what being best in class looked like.
PPCP will become an invaluable piece of affordable customer acquisition by using its massive data vault to let small merchants offer frictionless checkout. Again… data helps everywhere. It will then use this traction to expand into other margin expanding services like cash flow management.
The larger merchant focus will unsurprisingly be on Braintree margins. Chriss thinks the 10% share of white label processing Braintree has built is a wonderful starting point. He sees this as giving PayPal the clear right to up-sell value accretive services like payouts and FX management. He also sees the established share as giving Braintree the right to “demand more margin… and price services to value.” This hinted at Chriss being less eager to compete on price than the old team. Adyen shareholders should love hearing that. He doesn’t seem willing to use Braintree as a loss leader to grow branded market share. Only directly profitable growth is attractive to Chriss.
PayPal will overhaul the structure of its quarterly reporting. Finally. Its investor materials are quite difficult to navigate. This is a welcomed change and will make PayPal easier to track and model according to Chriss. In the coming weeks, it will clearly unpack its operating principles and which metrics it’s most focused on. It will share this new format on the Q4 call along with full year 2024 guidance.
The transaction margin contraction was as expected. This continues to be greatly pressured by the shift in business to giant merchants. This quarter it deepened its partnership with Meta to add Braintree as a processor for its ads business. Importantly, Meta also added services like Hyperwallet which is margin accretive. This is part of what needs to happen for Braintree to be more profitable (along with global expansion).
It’s important to review unique headwinds hitting transaction dollar growth at the moment. The company is lapping abnormally high FX hedging gains and merchant service revenue worth about $225 million in transaction dollars. Beyond that, a mix shift to large Braintree merchants is hitting this vital margin line further. It cannot be overstated: Transaction margin expansion MUST resume via traction with smaller merchants, service cross-selling and global expansion. That’s the plan for 2024.
It continues to find EBIT and net income growth in the near term largely thanks to cost cuts. These cuts will continue through 2024, but it needs to find a transaction margin bottom for profit compounding to stay brisk for the long term. That is why I will not add to this name until the trough comes. There’s a reason why I am repeating myself.
The decline in active accounts is intentional. It’s the result of ending cash burning retention promotions in Latin America and Southeast Asia. Importantly, churn exceeded internal leadership expectations for the quarter and year to date.
PayPal Business Loans:
PayPal continues to hold back on originating business credit amid uncertain macro. These receivables now represent 12% of its total credit book vs. 21% Y/Y.
Chriss will add more senior talent in the coming months to “accelerate the growth trajectory.” It announced Jamie Miller as its new CFO who most recently was the CFO of EY.
f. My Take
The quarter was about as I expected. The turnaround was never going to start today. I’ve said that many times. With Chriss only a few weeks into his tenure, I will be giving him a year to see how effectively he can turn the tide. I wholeheartedly agree with his assessment of PayPal. The asset base, brand trust and scale are all world-class. The execution has left much to be desired. He has the background and energy to make this work. Let’s see what he can do. For now, I will reserve judgment and continue sitting on the shares that I already own. No adding. No trimming.
2. Airbnb (ABNB) — Earnings Review
Airbnb beat revenue estimates by 0.9% and beat its guidance by 1.5%.
Nights and experiences booked growth Y/Y accelerated vs. last quarter as expected.
18.1% revenue growth was 14% Y/Y FX neutral.
Its 14.9% 2-year revenue CAGR compares to 17.7% Q/Q & 28.5% 2 quarters ago. Comps got tougher.
It beat EBITDA estimates by 5.4% while comfortably beating 33%+ EBITDA margin guidance. It beat GAAP EBIT estimates by 3.9%.
A $2.8 billion one-time tax benefit propped up EPS this quarter. That perk is excluded from the margin line for more relevant comps. Interest income is also why GAAP net income is better than GAAP EBIT. It’s great to have a pristine balance sheet… Especially in today’s world.
Next quarter revenue guidance was 1.4% below consensus. The company sees take rate rising a bit Y/Y and slowing nights booked growth. Pricing should be stable Y/Y. It reiterated its guidance on full year EBITDA leverage.
d. Balance Sheet
$10.8 billion in cash & equivalents.
$2 billion in debt.
Basic shares are flat Y/Y.
e. Call & Release Highlights
Supply growth continued to briskly grow at 19% Y/Y vs. 19% Y/Y last quarter. While this did end the quarterly streak of Y/Y acceleration, it’s still an impressive number at this scale. Growth was above 10% in every single region. The fastest growth was in Latin America and Asia Pacific and was balanced across professional and individual hosts.
Korea is joining Germany and Brazil as a new standout international market. Nights booked there are now 54% higher than in 2019. Airbnb’s product localization and marketing playbook is proving to work across the globe.
China outbound travel rose 100% Y/Y.
Asia Pacific overall re-surpassed 2019 volumes with 23% Y/Y growth.
Cross-border volume rose 17% Y/Y vs. 16% Y/Y growth last quarter. Cross-border represents 45% of total nights vs. 43% Y/Y.
Through long term stay discounting, price comparison tools & initiatives to get hosts to cut cleaning fees, Airbnb continues to control pricing effectively. Average Daily Rate (ADR) in North America fell Y/Y with growth in other regions materially lagging hotel competition.
Airbnb called out first time bookers as a quarterly highlight. Importantly, these bookers are finding Airbnb organically at a 90% clip. It’s only directly paying for 10% of this traffic thanks to its verb-based ubiquity.
Long distance stays rose 18% Y/Y.
Urban nights booked were 49% of total vs. 48% Y/Y.
In the call, leadership called out some softness in overall demand so far in the fourth quarter. This led to implied nights booked guidance in the high single digits. The team cited macro and geopolitical trends as the reasoning and baked the weakness into its quarterly revenue guidance. That was the source of the small miss.
Expanding Beyond the Core:
With Airbnb’s margins and balance sheet in great shape, it’s ready to expand to other travel services. These could include car rentals, food reservations and more. Importantly, its massive scale means massive data scale to season the AI models it’s working on (and that its partners are working on). By adding new use cases, it will merely enrich its data set to better match searchers with results. This should be a longer term conversion and lifetime value tailwinds as it becomes the digital travel concierge.
f. My Take
Like for PayPal, this quarter was about as expected with the forward guidance a tiny bit soft. Discretionary spending for both companies covered in this article will be pressured if macro headwinds intensify. Airbnb’s commentary about the 4th quarter so far is evidence of that beginning to play out. With its fortress balance sheet and famous brand, it’s well-positioned to weather this storm. The only thing that could potentially stand in its way is highly fluid regulation. The team seems confident that will not happen. Fine quarter all around.