PayPal's e-commerce sales are picking up again after an extended post-pandemic slowdown, which helped drive a 7% increase in net revenue during the second quarter, to $7.3 billion, over the same period a year earlier.
But investors weren't wowed by the overall results PayPal announced Wednesday afternoon, and the San Jose, California-based firm's stock sank about 10% as of mid-Thursday.
Loans PayPal made to merchants deteriorated sharply during the quarter ended June 30, causing credit losses of $112 million, up 65% over the same period a year earlier. PayPal has since tightened underwriting criteria and limited loan originations, acting chief financial officer Gabrielle Rabinovitch told analysts during the company's earnings call.
PayPal has also developed into a funnel for the international buy now/pay later lending industry, issuing a total of 300 million loans to more than 35 million customers in eight markets over the past three years, the company said.
As part of that strategy, PayPal announced a partnership with Kohlberg Kravis Roberts & Co., in which the New York-based investment firm will purchase up to $43 billion of BNPL loan receivables PayPal originated in France, Germany, Italy, Spain and the U.K. The deal is expected to generate $1.8 billion in proceeds upon closing, PayPal said.
"The largest growth area for us continues to be our buy now/pay later solutions, where our performance continues to be very strong," Rabinovitch said, noting that going forward the majority of PayPal's BNPL loan originations will be funded off of the balance sheet via KKR, while PayPal will continue to handle loan underwriting and servicing.
PayPal is getting improved results from offering consumers BNPL loans in pre-approved amounts, and the company also is expanding the use of passkeys, a secure login standard created by the FIDO Alliance, PayPal CEO Dan Schulman said during the conference.
"This month we're expanding the rollout of passkeys in the U.S. and Europe, which will greatly simplify the branded checkout login experience and drive improved authorization rates," Schulman said.
PayPal also is experimenting internally with an AI-driven PayPal Assistant, which the company hopes to introduce later this year. The chatbot will provide insight into users' transactions to flag potential fraud, point them to customized rewards and improve PayPal's overall productivity. "It's pretty amazing what it can do," he said.
Schulman was cautiously optimistic about the economy in the immediate future. "As inflation cools, we would expect to see discretionary spending rise, which we believe will support and possibly accelerate the overall growth of e-commerce spending," he said.
PayPal is in the "very final" stages of narrowing its search for a new CEO, Schulman said, noting that he plans to work with his replacement for a smooth transition, after which he will continue to sit on PayPal's board.
At the end of the quarter, PayPal had 431 million active accounts, up 0.5% from the same period a year earlier, with 35 million merchant accounts. Transactions per active account reached 54.7, up 12% from 48.7 a year earlier.
PayPal ended the period with $5.5 billion in net credit receivables, a 3.5% decline over the same period a year earlier, due to designating $1.9 billion in BNPL receivables to assets held for sale.
Total operating expenses for the quarter were $6.2 billion, compared with $6 billion a year earlier. Net income was $1 billion compared with a $341 million loss during the same period a year earlier.
In a Thursday note to investors, analysts at equity research firm William Blair said PayPal is working through current margin pressures and remains on track to continue increasing customer engagement by leveraging its vast amount of data.
"We believe long-term opportunities remain substantial as the company has evolved from a traditional checkout button to a robust platform of end-to-end solutions for consumers and merchants," the analysts said.
