Review of $PYPL CFO's Interview with UBS Today:
a) Branded Checkout Acceleration
Interim CFO Gabrielle Rabinovitch didn’t offer August branded checkout volume data following the company’s acceleration to 8% Y/Y July growth. She did say the quarter and macro backdrop both continue to progress roughly as expected.
b) Unbranded
Last week, Dan Schulman told us that Braintree is winning market share via superior authorization and loss rates with no change to its pricing philosophy. This ran in stark contrast to Adyen’s comments last quarter on increasing pricing pressures impacting its growth in North America. This week, CFO Gabrielle Rabinovitch echoed that same color. She told us that Braintree’s market share gains and success are based on “performance and best in class authorization rates.”
c) Transaction Margin
I feel like I discuss this same idea every time I write about PayPal… but that’s because of how important an idea it truly is. PayPal’s transaction margin needs to bottom for sentiment to turn, for profit to keep briskly compounding in the years ahead and for this investment to work. I won't add to my stake until that happens. Braintree’s rapid growth has weighed on this margin line along with a few other headwinds. Those need to abate.
I’m confident that they will and that PayPal will deliver a needed inflection here. Not in Q3, maybe in Q4 and likely in 2024. Why? Several reasons:
• Braintree’s existing book of business is made up of the lowest possible margin clients in the World: Giant, domestic businesses. Any successful expansion internationally or downstream would be margin accretive over time. It’s already having success in Latin America and as it expands its $BKNG relationship to Europe.
-- Up-selling value add services to giant clients like it did with Uber will help too. PayPal is debuting more value add services for Braintree clients like FX as a service next year (impact to be in 2025).
-- It now finally has a modern full stack product (PayPal Commerce Platform) geared towards smaller businesses.
• Industry e-commerce growth and discretionary spend are showing signs of recovering per PayPal. This will feed branded transaction revenue which is margin accretive.
• Braintree customer wins let PayPal integrate its latest and greatest branded checkout flows into merchant sites. This raises higher margin branded checkout share.
• FX translation and currency hedging gains were abnormally strong in 2022. The company will finish lapping that transaction dollar boost in Q4 & comps will get easier.
• As it finishes onboarding merchants to the newest Braintree integration and PayPal Commerce Platform, it will be able to sunset antiquated versions of these products to cut redundant costs that it's currently incurring. It will also finish somewhat hefty custom Braintree platform integration work for its largest 100 merchants by the end of 2024 to shed those costs as well. There’s a lot of custom onboarding work needed for gigantic clients such as Uber. They all have unique needs and wants.
• Non-recurring merchant cleanup fees added $190 million in one-time revenue for 2022. That comp headwind goes away in Q4.
d) Final Notes
• Expect more EBIT margin expansion in 2024.
• No discernible impact on peer to peer payment volumes from the FedNow Launch. The use cases are different.
• Will keep aggressively buying back shares while it sees the “intrinsic value of the company as much higher than the valuation.”
• Net New Actives continue to grow in core markets and decline overall as expected as it eliminates cash burning incentive plans to retain users in less important markets where it doesn’t have its full product suite.
a) Branded Checkout Acceleration
Interim CFO Gabrielle Rabinovitch didn’t offer August branded checkout volume data following the company’s acceleration to 8% Y/Y July growth. She did say the quarter and macro backdrop both continue to progress roughly as expected.
b) Unbranded
Last week, Dan Schulman told us that Braintree is winning market share via superior authorization and loss rates with no change to its pricing philosophy. This ran in stark contrast to Adyen’s comments last quarter on increasing pricing pressures impacting its growth in North America. This week, CFO Gabrielle Rabinovitch echoed that same color. She told us that Braintree’s market share gains and success are based on “performance and best in class authorization rates.”
c) Transaction Margin
I feel like I discuss this same idea every time I write about PayPal… but that’s because of how important an idea it truly is. PayPal’s transaction margin needs to bottom for sentiment to turn, for profit to keep briskly compounding in the years ahead and for this investment to work. I won't add to my stake until that happens. Braintree’s rapid growth has weighed on this margin line along with a few other headwinds. Those need to abate.
I’m confident that they will and that PayPal will deliver a needed inflection here. Not in Q3, maybe in Q4 and likely in 2024. Why? Several reasons:
• Braintree’s existing book of business is made up of the lowest possible margin clients in the World: Giant, domestic businesses. Any successful expansion internationally or downstream would be margin accretive over time. It’s already having success in Latin America and as it expands its $BKNG relationship to Europe.
-- Up-selling value add services to giant clients like it did with Uber will help too. PayPal is debuting more value add services for Braintree clients like FX as a service next year (impact to be in 2025).
-- It now finally has a modern full stack product (PayPal Commerce Platform) geared towards smaller businesses.
• Industry e-commerce growth and discretionary spend are showing signs of recovering per PayPal. This will feed branded transaction revenue which is margin accretive.
• Braintree customer wins let PayPal integrate its latest and greatest branded checkout flows into merchant sites. This raises higher margin branded checkout share.
• FX translation and currency hedging gains were abnormally strong in 2022. The company will finish lapping that transaction dollar boost in Q4 & comps will get easier.
• As it finishes onboarding merchants to the newest Braintree integration and PayPal Commerce Platform, it will be able to sunset antiquated versions of these products to cut redundant costs that it's currently incurring. It will also finish somewhat hefty custom Braintree platform integration work for its largest 100 merchants by the end of 2024 to shed those costs as well. There’s a lot of custom onboarding work needed for gigantic clients such as Uber. They all have unique needs and wants.
• Non-recurring merchant cleanup fees added $190 million in one-time revenue for 2022. That comp headwind goes away in Q4.
d) Final Notes
• Expect more EBIT margin expansion in 2024.
• No discernible impact on peer to peer payment volumes from the FedNow Launch. The use cases are different.
• Will keep aggressively buying back shares while it sees the “intrinsic value of the company as much higher than the valuation.”
• Net New Actives continue to grow in core markets and decline overall as expected as it eliminates cash burning incentive plans to retain users in less important markets where it doesn’t have its full product suite.
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