PayPal CEO Defends Long-Term Strategy After Sales Miss

Ebay Exceeds Expectations While Paypal Flops
  • Investors disappointed by company's fees from transactions
  • Take rate falls to 3.24 percent from 3.39 percent year earlier

PayPal Holdings Inc. Chief Executive Officer Dan Schulman defended his strategy of inking deals with big merchants and smartphone applications and offering free peer-to-peer payments as investors sent shares down on concerns the efforts are hurting profit.

PayPal, in its first quarter as a stand-alone company separate from EBay Inc., said it added 4 million accounts to reach 173 million users. Its total payments volume gained 20 percent to $69.7 billion from a year earlier.

But investors reacted to the company’s declining take rate, a measure of how much money PayPal keeps from each payment made on its platform. That metric fell to 3.24 percent in the third quarter from 3.39 percent a year earlier, the company reported Wednesday in a statement. The shares dropped 1.7 percent to $35.91 at the close Thursday in New York, leaving the stock down 2.2 percent since the spinoff was completed July 6.

The goal of the split with EBay was to make sure that each company could focus on their main businesses. EBay last week reported quarterly profit and sales that topped analysts’ estimates and raised its outlook, sending shares up the most in 10 years.

Greater Competiton

PayPal’s strategy is to attract more customers and merchants and offer them expanded services as competition in the payments industry intensifies with startups Square Inc. and Stripe Inc. as well has Apple Inc. and Google Inc. who are trying to create digital wallets. Even JPMorgan Chase & Co., entered the digital payments race Monday.

PayPal is processing more payments in stores like Macy’s and on popular smartphone applications like Uber and Airbnb. But PayPal keeps less money from each transaction because the clients that bring bigger volume to the payments company also have the leverage to negotiate lower rates. The downside of that strategy was on display when Square disclosed its money-losing relationship with Starbucks Corp.

“Take rates are expected to go down over time as the mix of large retailers and person-to-person payments increases,” said Gil Luria, an analyst at Wedbush Securities in Los Angeles. “However, the decline in the quarter was larger than anticipated, which could cause some investor concern.”

Schulman said PayPal’s strategy is to keep increasing its presence in the flow of money from shoppers to merchants as well as from family and friends to one another. In addition to processing payments, PayPal has a peer-to-peer digital payments platform Venmo that lets users split restaurant bills, monthly rent and other costs through their smartphones after linking it to a bank account, debit card or credit card.

Loss Leader

Most Venmo transactions are free, and the app has “millions” of users, mostly people younger than age 30 who aren’t PayPal users, Schulman said Wednesday in an interview. The San Jose, California-based company sees Venmo as a loss leader to generate more customers for PayPal’s transactions business. Schulman said PayPal aims to let Venmo accounts be used to make purchases from PayPal merchants in the current quarter and expand the program in 2016 if successful.

“If we’re successful in our strategy, our take rate comes down,” Schulman said. “That’s how the payments business works.”

PayPal reported third-quarter profit, excluding items, of 31 cents a share on revenue of $2.26 billion, compared with analysts’ average projections of 29 cents and $2.28 billion, according to data compiled by Bloomberg. Sales were $1.98 billion a year earlier. The company’s operating margin was 14.6 percent in the quarter compared with 13.8 percent a year earlier.

For the full year, PayPal maintained its 2015 earnings forecast of $1.23 a share to $1.27 a share, excluding certain items. Analysts projected $1.25.

Merchant Lending

The challenge for Schulman is to differentiate PayPal as competition intensifies. Among the additional services the company offers is a merchant cash advance program called PayPal Working Capital, which gives preapproved loans to businesses that process payments through PayPal. PayPal also is getting into the international money-transfer business by purchasing Xoom Corp. for $890 million in a deal announced in July.

The company surpassed $1 billion in merchant cash advances to 60,000 businesses in the U.S., U.K. and Australia through PayPal Capital, Schulman said Tuesday in a speech in Las Vegas. The pace of advances has increased to $3 million a day from $1 million a day a year earlier, PayPal said. Square, by comparison, has issued more than $300 million.

“We are much more than a button on a website,” Schulman said.

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