PayPal shares climb on news of $2 billion Elliot investment

(Image sourced via PayPal)

PayPal’s shares shot up 12% following its second quarter earnings announcement this week, as the company undergoes a series of leadership changes, focuses in on its cost savings initiative and announced a $2 billion investment from activist shareholder Elliot Investment Management. 

As diginomica has discussed previously, Elliot has a solid reputation in the technology industry for its activist approach, implementing extensive change programmes within companies that it has its eyes on. The focus often being return on investment to shareholders. 

Commenting on the Elliot news, CEO Daniel Schulman told analysts this week: 

I'd like to take the opportunity to provide some color on the discussions we've had with Elliott Investment Management. First of all, the discussions have been both constructive and collaborative, and we appreciate the partnership we've built with Jesse Cohn and his team. We are completely aligned in our mutual goal to maximize shareholder value, and we are substantially aligned on the areas of focus for achieving our objectives.

Our discussions are focused on operational improvements, revenue-generating investments and capital allocation, and they are consistent with our short- and long-term objectives and plans. We've been working on a number of initiatives such as improved profitability and return of capital and we appreciate Jesse's collaboration and input on these important topics.

We continue to engage with Jesse and his team at Elliott, and they have communicated that their investment is a vote of confidence in our strategy, in our management team and our ability to generate long-term value for shareholders. We have also entered into an information sharing agreement to maintain our collaboration across the previously mentioned initiatives, and we look forward to our continued partnership. That's the extent of our comments on Elliott's position in PayPal. 

The market reacted favorably to the news, alongside PayPal’s Q2 numbers, which were strong. The highlights include: 

• Net revenue of $6.8 billion, growing 9% or 10% on an FX-neutral basis

• Operating cash flow of $1.5 billion, growing 12%, and free cash flow of $1.3 billion, growing 22%

• Total Payment Volume (TPV) of $339.8 billion, growing 9%

• $900 million of cost savings expected to be realized by FY2022

• $1.3 billion of cost savings in FY2023

Commenting on PayPal’s ongoing change programme, Schulman said: 

This transformation is supported by 3 major initiatives. The first is to seize the opportunity to grow our market share as many of our competitors retrench and reorient their business models. We are focusing our investments in the areas where we have tremendous advantage due to our scale and the inherent network effects driven by our 2-sided network. We are doubling down on Checkout, our PayPal and Venmo digital wallets and our Braintree platform. These efforts are having their anticipated effect as we, once again, took share in Q2.

Secondly, we are meaningfully reducing our cost structure…over the past 6 months, we have taken action to exit the year with operating margin leverage that will continue to grow in 2023. 

And third, we have reinvigorated our organizational operating model, and we are recruiting world-class talent to our product, engineering and technology functions. And later in my remarks, I'll expand on our progress in these areas.

PayPal also announced some executive leadership changes. Blake Jorgensen has been appointed Chief Financial Officer, effective August 3rd (taking over from interim CFO Gabrielle Rabinovitch). Jorgensen will be joining the company from Electronic Arts, where he was CFO and COO - and has previously served as CFO at Yahoo and Levi’s. 

It was also announced that Chief Product Officer Mark Britto will be retiring at the end of the year, with a search underway for their replacement. 

Going forward 

In addition to the operational cost savings being pursued by PayPal, Schulman was keen to point to the organization's focus on customer engagement as key to its strategy. He said: 

We have been working to drive productivity improvements across all functions. Our strategy shift to focus on customer engagement, from our unparalleled network of consumer and merchant accounts, led to significant opportunities for greater efficiency and, importantly, deeper investments in our world-class portfolio of assets. We have narrowed our focus, driven greater productivity and increased our market share gains with profitable growth.

We are currently testing our new mobile SDK, software development kit, which enables native in-line checkout, removing friction to make our payment experiences faster and more convenient. And we are also enhancing our checkout user experience to better serve our nearly 400 million consumer accounts, by surfacing the most relevant funding instrument based on past purchase behavior, merchant category and purchase price, among other attributes. 

We believe innovations like these will continue to differentiate our value proposition and drive increased conversion for our merchants.

PayPal is one of the most trusted consumer brands in the world, and we have built a diversified platform with unparalleled global scale. We believe the recent turmoil in both the e-commerce and fintech sectors has created an unparalleled opportunity for PayPal. 

Looking forward, interim CFO Gabrielle Rabinovitch provided the following outlook. She said: 

When we provided guidance last quarter, we contemplated that there would be a challenging macro environment for the balance of the year. As everyone has seen across the market, macro conditions remain highly dynamic. We guided last quarter to a range of 11% to 13% revenue growth, and given today's environment, we think it's important to be conservative.

Accordingly, I would point you to the lower end of that range on a currency-neutral basis. While the macro remains uncertain, I also want to underscore that we have strong momentum across the business with accelerating revenue growth from April to May to June and now through July, and the team is focused on achieving our targets for the year. 

We expect third quarter revenue growth to accelerate 2 points to 12% on a currency-neutral basis and that we will exit the year with revenue growth of approximately 14% in the fourth quarter.

My take

A company in transition. One thing we know about Elliot is that they will have a firm view of what they think needs to happen in order to deliver returns, which means more changes could be on the way. But PayPal looks in a solid position at present, with solid growth, operational efficiencies being delivered and a clear focus on customer engagement. And the market appears to be responding favorably to the moves…