PayPal excites investors as partnerships deliver profit

Bloomberg

PayPal Holdings Inc. CEO Dan Schulman is getting investors to embrace his strategy of converting the online payments platform into a digital wallet, even if it requires deal-making that may diminish profit margins.
The company reported first-quarter results that showed Schulman’s strategy is working and raised its annual forecast. Sales and profit topped analysts’ projections as PayPal added 6 million active customer accounts and increased number of transactions per account by 12 percent.
A network effect is taking hold, Schulman said in an interview. As PayPal adds new users, it becomes more attractive to merchants, and as more retailers accept PayPal transactions, it drives greater engagement with consumers. The new account additions in the quarter represented PayPal’s biggest organic gain in three years, he said.
“More people are using PayPal more frequently,” he said. Schulman wants PayPal customers to use their smartphones to pay for goods in physical stores, not just websites. He has been cutting deals with credit card issuers, banks and even Alphabet Inc. to increase the places where PayPal is accepted, which has spurred more people to create accounts and existing customers to use PayPal more often, according to the quarterly earnings report. In exchange for greater access to physical stores from credit card issuers, PayPal agreed to stop pushing customers to make payments from bank accounts that have lower fees.
The first-quarter results and revised outlook show PayPal is managing the transition to a greater variety of transactions without the profit erosion some investors feared, said James Cakmak, analyst at Monness Crespi Hardt & Co. “The deals with the credit card networks appear to provide less pressure than expected,” he said. “You’re seeing a skilled execution on the mission.”
Profit in the current quarter will be 41 cents to 43 cents on revenue of $3.05 billion to $3.1 billion, San Jose, California-based PayPal said in a statement. Analysts projected 42 cents on sales of $3.07 billion.
The company also raised its annual forecast for adjusted earnings per share of $1.74 to $1.79, on revenue of $12.52 billion to $12.72 billion. The previous projections were for profit of as much as $1.74 a share, on revenue of as much as $12.65 billion.
PayPal also announced a $5 billion stock buyback program authorized to begin when the company completes its existing repurchase program. The shares rose as much as 7.4 percent in extended trading after closing at $44.41 in New York. The stock has gained 13 percent this year.
PayPal split from online marketplace EBay Inc. in 2015 to help it evolve from a payment button on websites into a broader service that lets people find and pay merchants and send money to friends through smartphone apps. Schulman has prioritized growth over profitability hoping to fend off competing digital wallets from companies as Apple Inc.

PARTNERSHIP DEALS
The company last year inked agreements with payment networks Visa Inc. and Mastercard Inc. to increase PayPal’s presence in physical stores, where it hopes to lure shoppers with time-saving features such as apps that let them order ahead and skip lines. PayPal wants to attract shoppers and merchants with its one-touch feature, which lets shoppers quickly pay with mobile devices using saved account information.
Earlier this month, PayPal announced a deal with Alphabet’s Google that enables PayPal payments from Google’s digital wallet Android Pay through the tap of a phone at thousands of new retail locations.