Fly Intel: What to watch in PayPal earnings report

PayPal (PYPL) is scheduled to report results of its fourth fiscal quarter after market close on January 30, with a conference call scheduled for 5:00 pm EDT. What to watch for: 1. OUTLOOK: During the company's last earnings call, PayPal said it sees fourth quarter earnings per share of 65c-67c and revenue of $4.195B-$4.275B, with consensus at 65c and $4.21B, respectively. The company also said it expects fourth quarter revenue to grow 13%-15% at current spot rates and 13%-15% on an FX-neutral basis. For fiscal year 2018, PayPal expects earnings per share between $2.38-$2.40 and revenue of $15.42B-$15.5B. FY18 revenue guidance included an expected decline related to the sale of U.S. consumer credit receivables to Synchrony (SYF) of approximately 3.5 percentage points. For fiscal year 2019, PayPal sees earnings per share growth of about 20%, including 8c-10c acquisition dilution, and revenue growth of about 17%, which includes about 1.5 pts of growth relating to acquisitions announced in 2018 and about 3.5 pts of decline related to the sale of the U.S. consumer credit receivables to Synchrony. 2. FRAUD CONCERNS: PayPal's Venmo experienced a wave of payments fraud earlier this year that drove losses higher than the company expected and prompted it to shut down some user features to control the damage, the Wall Street Journal reported on November 25. In the first three months of 2018, the digital money-transfer service recorded an operating loss of about $40M, nearly 40% larger than the loss for which the company had budgeted, the publication said, citing internal documents. Commenting on the news, Nomura Instinet analyst Bill Carcache said he believes fears of fraud loss at PayPal's Venmo are overblown. In response to increasing fraud, Venmo temporarily suspended instant transfers, which were quickly reintroduced after updates, and generated $1B of volume in September, he noted. Voicing a similar opinion, Stephens analyst Brett Huff added that the fraud issue looks to be under control given that The Wall Street Journal's article indicates fraud rates have been coming down. Even if it were assumed that the continued high levels of fraud outlined in the article of 0.35% continued, he thinks the negative financial impact that would occur would be fairly muted. 3. MERCHANT ACCEPTANCE LEAD: Morgan Stanley analyst James Faucette said last week that PayPal widened its merchant acceptance lead in the fourth quarter as it added a net of 8 of the U.S.'s top 500 internet retailers while the next largest accepted digital wallet, Amazon Pay (AMZN), lost 4 net merchants this quarter. PayPal now has acceptance at 82% of the top 500 U.S. Internet retailers, up from 81% last quarter, while Amazon's acceptance rate slipped to 12% from 13%. MasterCard's (MA) MasterPass gained 1 net new merchant, Visa Checkout (V) gained no net new merchants and Bitcoin (BTC; BITCOIN) acceptance remained unchanged at 4 of the top 500, Faucette added. The analyst added that PayPal's acceptance lead and consumers' shift toward online purchases should support total payments volume growth at or above the rate of e-commerce. 4. REVENUE MAY DECLINE FASTER THAN EXPECTED: In a research note last month, Loop Capital analyst Joseph Vafi reiterated a Hold rating on PayPal and warned that its revenues may post faster than expected declines in 2020. The analyst cited an increase in instances of eBay's (EBAY) beta version of its Managed Payments platform announced earlier this year, saying that eBay sellers stand to benefit from "slightly lower transaction expenses on the new platform versus PayPal."

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