(Bloomberg) — PayPal Holdings Inc. jumped after saying activist investor Elliott Investment Management is now one of its largest shareholders and recent cost-cutting moves will result in savings of $900 million this year.
Such savings will swell to $1.3 billion next year, the payments giant said Tuesday in a statement announcing second-quarter earnings. PayPal also announced that its board authorized a new $15 billion share-repurchase program. The stock rose as much as 11% in premarket trading in New York Wednesday.
“We are also still sharpening our pencils to identify additional areas of productivity improvements across our servicing, marketing and engineering functions as well as opportunities to rationalize our real estate footprint and shift our hiring to lower-cost geographies,” Chief Executive Officer Dan Schulman said in a conference call with analysts.
Schulman has been vocal about his plans to improve PayPal’s operating leverage — or the ability to grow revenue faster than expenses. Still, expenses soared 18% to $6.04 billion in the period. While that was in line with the average of analyst estimates compiled by Bloomberg, revenue climbed just 9%.
Elliott said it took a $2 billion stake, making it one of the company’s largest investors. The firms have entered into an information-sharing agreement and Jesse Cohn, a managing partner for Elliott, said in the statement that he looks forward to working with Schulman and PayPal’s board.
“Elliott strongly believes in the value proposition at PayPal,” Cohn said. “PayPal has an unmatched and industry-leading footprint across its payments businesses and a right to win over the near- and long-term.”
PayPal, which closed at $89.63 on Tuesday, has slumped 52% this year, steeper than the 18% decline of the S&P 500 Information Technology Index.
“Tough love from Elliott Management helped steer PayPal in the right direction,” Dan Dolev, an analyst at Mizuho, said in a note to clients. “PayPal’s cost basis was way too high, and it needed to return capital to shareholders.”
PayPal has been in the midst of a series of management changes, and it announced Tuesday that Blake Jorgensen will take over as chief financial officer after John Rainey left to join Walmart Inc. earlier this year. The company said it is also conducting an external search for a new chief product officer following the departure of Mark Britto later this year.
Jorgensen joins PayPal from Electronics Arts Inc., where he was both chief operating officer and CFO. He is also a former CFO of Levi Strauss & Co. and Yahoo! Inc.
Payments Volume
PayPal has faced pressures in recent quarters from supply-chain disruptions and once-in-a-generation levels of inflation that hindered e-commerce spending. And EBay Inc., PayPal’s former parent company, has been rapidly moving payments away from its platform. Payments volume climbed 9% to $339.8 billion, missing the $344.3 billion average of analyst estimates compiled by Bloomberg and the smallest increase in at least two years.
PayPal said earlier this year it was pivoting away from a previous strategy of trying to add millions of new users. Instead, it is seeking to encourage existing customers to use its app more frequently.
The firm showed progress on that front: Transactions per active account climbed 12% to 48.7 in the quarter. It continues to expect to add roughly 10 million new users this year.
The company now expects total payments volume for the year to climb by 16%, compared with an earlier range of 15% to 17%, according to the statement. PayPal boosted its forecast for adjusted earnings per share for the year to a range of $3.87 to $3.97, compared with earlier guidance of $3.81 to $3.93.
“We are advancing our priorities and sustainably improving our cost structure,” interim CFO Gabrielle Rabinovitch said in the statement. “We are focused on creating value for our shareholders and strengthening our position as a leading global digital payments platform.”
New Strategy
PayPal is weighing a sale of its loan portfolio after it ended the quarter with $6.2 billion in gross receivables, Rabinovitch said. The move would follow the 2018 sale of about $6.8 billion in loans and receivables to Synchrony Financial at face value.
“To optimize the use of our balance sheet and remain maximally capital efficient, we’re assessing opportunities for additional strategic credit externalization and we’ll update you on our progress as we move through the back half of the year,” Rabinovitch said.
Last year, PayPal said it was considering adding stock-trading capabilities to its app. The company has since abandoned that push as part of its focus on reducing costs and keeping headcount in check, Schulman said. Instead, he said PayPal will deepen its investment in its online checkout button, and revamp the Venmo app. It plans to allow teenagers to sign up for Venmo.
PayPal and Elliott have largely been aligned in their discussions about how to turn around the company, Schulman said.
“Our discussions are focused on operational improvements, revenue-generating investments and capital allocation,” Schulman said. “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.”
(Updates with premarket trading in seventh paragraph.)
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