PayPal Soars As Analysts Cheer Elliott’s ‘Tough Love’

(Bloomberg) — PayPal Holdings Inc. jumped after it said activist investor Elliott Investment Management is now one of its biggest shareholders and recent cost-cutting moves will lead to $900 million in savings this year.

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Such savings will grow to $1.3 billion next year, the payments giant said Tuesday in a statement announcing second-quarter earnings. PayPal also announced that its board of directors approved a new $15 billion share buyback program.

“We are also still sharpening our pencils to identify additional areas of productivity improvement in our service, marketing and engineering functions, as well as opportunities to streamline our real estate footprint and shift our hiring to low-cost geographies,” said the chief executive. consultant Dan Schulman. on a conference call with analysts.

Schulman has expressed plans to improve PayPal’s operating leverage — or the ability to grow revenue faster than expenses. However, expenses rose 18% to $6.04 billion in the period. While that was in line with the average of analyst estimates compiled by Bloomberg, revenue rose just 9%.

Elliott said it took a $2 billion stake, making it one of the company’s largest investors. The companies have entered into an information-sharing agreement, and Elliott managing partner Jesse Cohn said in the statement that he looks forward to working with Schulman and PayPal’s board.

“Elliott believes strongly in the value proposition at PayPal,” said Cohn. “PayPal has an unmatched and industry-leading footprint in its payments business and the right to win in the short and long term.”

The stock rose as much as 14% after the announcements, ending regular trading in New York at $89.63. It has fallen 52% this year, steeper than the S&P 500 Information Technology Index’s 18% decline.

“Tough love from Elliott Management helped steer PayPal in the right direction,” Mizuho analyst Dan Dolev said in a note to clients. “PayPal’s cost base was too high and it needed to return capital to shareholders.”

PayPal is in the midst of a series of management changes and 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 after Mark Britto leaves later this year.

Jorgensen joins PayPal from Electronics Arts Inc., where he was both CEO and CFO. He is also the former CFO of Levi Strauss & Co. and Yahoo! Inc.

Payment volume

PayPal has faced pressure in recent quarters from supply chain disruptions and once-in-a-generation levels of inflation that have hampered e-commerce spending. And EBay Inc., the former parent company of PayPal, is quickly moving payments away from its platform. Payments volume rose 9% to $339.8 billion, missing the $344.3 billion average of analysts’ estimates compiled by Bloomberg and the smallest increase in at least two years.

PayPal said earlier this year that it was moving away from a previous strategy of trying to add millions of new users. Instead, it seeks to encourage existing customers to use its app more often.

The company showed progress on that front: transactions per active account rose 12% to 48.7 in the quarter. It continues to expect to add about 10 million new users this year.

The company now expects total payment volume for the year to grow 16%, compared with a previous range of 15% to 17%, according to the statement. PayPal raised its forecast for adjusted earnings per share for the year to a range of $3.87 to $3.97, compared with previous 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, Rabinowitz said. The move will follow the 2018 sale of approximately $6.8 billion in loans and receivables to Synchrony Financial at face value.

“To optimize our balance sheet utilization and maintain maximum capital efficiency, we are evaluating opportunities for additional strategic credit outsourcing and will update you on our progress as we move into the second half of the year,” said Rabinovitch.

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 cutting costs and keeping headcount in check, Schulman said. Instead, he said PayPal will deepen its investment in its online checkout button and revamp its Venmo app. It plans to allow teenagers to sign up for Venmo.

PayPal and Elliott have been largely aligned in their discussions about how to turn the company around, Schulman said.

“Our discussions focus on operational improvements, revenue-generating investments and capital allocation,” Schulman said. “We are working on a number of initiatives such as improved profitability and return on capital and value Jesse’s partnership and input on these important issues.”

(Updates with CEO comment, strategy changes starting in third paragraph.)

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