3Q23: 3Q outperformance but 4Q continues to be clouded by unfavourable mix
- Firm growth in 3Q23; revenue in line while EPS outperformed street estimates
- Lifts full year profit forecasts above consensus estimates on strong 3Q and changes to tax assumptions
- Operating margin continues to be pressured by a higher mix of lower margin unbranded processing
Firm growth in 3Q23; revenue in line while EPS outperformed street estimates. Net revenues came in $7.4b (+9% yoy), roughly in line with consensus. Bottom-line experienced stronger growth with non-GAAP EPS at $1.30 (+20% yoy), higher than analyst expectations of $1.23 and $0.07 above the midpoint of prior guidance. Operational metrics continued to remain strong with TPV (total payment volume) at $388b (+13% yoy fxn), number of payments transactions up 11% and transactions per active account up 13%. At the segmental level, branded checkout TPV grew 6% fxn while unbranded processing which primarily comprises Braintree volumes accelerated sequentially at +32% fxn. 3Q23 transaction expense increased 4bps to 93bps and transaction margins fell to 45.4% in 3Q23 vs 45.9% in 2Q23 and 51.0% in 3Q22. We continue to keep watch on transaction margins which has been eroding due to a higher mix of unbranded.
Lifts full year profit forecasts above consensus estimates on strong 3Q and changes to tax assumptions. Paypal raised its non-GAAP EPS forecast slightly to $4.98 (+21% yoy) vs analysts forecasts and prior projections of $4.92 and $4.95 respectively. 4Q guidance also sees net revenues growing c.7-8% fxn (foreign exchange neutral) and non-GAAP diluted EPS at $1.36 (+10% yoy). Cost discipline is the saving grace with non-GAAP operating margin for FY23 expected to expand 75bps, albeit down from prior forecasts of 100bps. We believe that the market continues to be concerned about Paypal’s operating margin which continues to be pressured by a higher mix of lower margin unbranded processing. Our investment thesis that Braintree traction is a double-edged sword still holds true with TPV growing at the expense of margins.