Earnings Update on Paypal

I’m still working on a long post on Starbucks and I can’t wait to dig in a bit more on Paypal. Both reported earnings last week. Some notes from the Paypal earnings report are noted below.

What appeals to me about Paypal (PYPL) is the consistency of earnings and the loads of cash flow that the business creates. They take a small cut from a consistent and growing financial network with the ability to expand into other financial services. It’s the same business model that Visa and Mastercard have. Last week’s earnings were also the end of their fiscal year. Top lines grew at 17% for both the quarter and the year. Operating cash flow was $923 million for the quarter, $3.2 billion for the year. Free cash flow was $771 million for the quarter and $2.5 billion for the year. Printing cash.

In the fourth quarter, payment transactions grew by 23% and total payment volume was up 22%. The platform is growing, though revenues aren’t growing as fast as volumes, the volume growth is impressive.

A couple of things that I note. There are a couple of earnings per share numbers per reporting period, GAAP and non-GAAP. The non-GAAP numbers back out stock-based compensation expenses. This is a little annoying as compensation is considered an expense most places. I understand that in the tech industry, options are commonplace. However, the numbers at Paypal are pretty significant. For the year, earnings per share were $1.15, but Paypal likes to note that non-GAAP eps was $1.50. 35 cents per share is a pretty significant number in my mind.

The other point that I think is important about this business is that because it produces quite a bit of cash flow, how it is allocated is very important. Part of this allocation is built in to expenses in the form of R&D. Part of it is used for acquisitions, and part is for share buybacks. The allocation of this cash flow will be important in generating future growth.

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