Digital payments pioneer PayPal reported a second-quarter net loss on Tuesday and pledged its allegiance to goals recently set with activist investor Elliott Investment Management, which the company revealed is now one of its largest shareholders with a $2 billion ownership stake.
As is the case with most activist investors, Elliott is likely to prod PayPal toward boosting its sagging stock price. It prevailed in that ambition Tuesday with the stock inching up from a slump that has shaved about two-thirds of its value over the past year. The drop came after the company reduced its growth goals for the year.
San Jose, California-based PayPal reported a net loss for the quarter of $341 million, compared to net income of $1.18 billion in the year-ago period. Revenue rose 9% to $6.8 billion as total payment volume increased at the same rate to $339.8 billion.
The quarter’s results will be a “low water mark for the year,” PayPal CEO Dan Schulman told analysts on a webcast to discuss the earnings. Although the company has already been cutting costs this year, including jobs, he said more reductions are on the way.
The company is targeting $900 million in expense savings for this year that will roll into additional savings of $1.3 billion next year, according to the Tuesday earnings report. “We are meaningfully reducing our cost structure,” Schulman said on the earnings webcast.
Schulman also noted the company will now prioritize a focus on building up its Braintree online and mobile payments services, which caters to customers such as food delivery company GrubHub and the taxi alternative Uber, as well as on its digital wallet and checkout services.
Those new priorities and savings initiatives follow “constructive and collaborative” discussions with Elliott Investment, the CEO said. He also noted that PayPal had entered into an information-sharing agreement with Elliott as part of their plan to continue working together. That Florida fund manager oversees $55.7 billion in assets, according to its website.
“We are completely aligned in our mutual goal to maximize shareholder value and we are substantially aligned on the areas of focus for reaching our objectives,” Schulman said.
The investment firm also chimed in on PayPal’s earnings release. “PayPal has an unmatched and industry-leading footprint across its payments businesses and a right to win over the near- and long-term,” Elliott Investment Managing Partner Jesse Cohn said. “Today's announcement highlights a number of steps that have been underway and are being initiated to help realize the significant value opportunity.”
PayPal has benefited from reducing supplier costs, but is also eying its workforce, real estate and consulting as potential targets for trimming.
“We're 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,” Schulman said on the webcast.
By next year, PayPal expects the savings to translate into an expanding profit margin. Its forecast is for a margin of at least 20% for this year.
For now, the company slightly reduced its revenue outlook for this year to $27.85 billion, from a range of $28.16 to $28.67 billion, noted RBC Analyst Daniel Perlin. “The change comes as a result of the uncertain macro environment, including a downshift in ecommerce growth,” Perlin said in an Aug. 2 note to investors regarding the earnings.
After PayPal said earlier this year that it would miss its goal for adding new accountholders this year, Schulman said the company was shifting its focus to doing more business with existing accountholders. But that was before news of Elliott’s investment.
PayPal’s interim CFO, Gabrielle Rabinovitch, said during the webcast that the company is gearing up to outsource more of its credit card receivables in order to free up cash flow for stock repurchases. In 2017, PayPal began to work with a partner on this front when card company Synchrony Financial acquired some of its receivables.
PayPal also on Tuesday announced the appointment of a new chief financial officer, Blake Jorgensen, after the former CFO, John Rainey, left in May to take that post at retail behemoth Walmart. Jorgensen is signing on with a base salary of $750,000 and a “new hire cash bonus” of $6 million, according to a Tuesday regulatory filing by PayPal. Jorgensen, 62, formerly held the same post at Electronic Arts and Levi Strauss.
The company also said its chief product officer, Mark Britto, would retire at the end of the year so PayPal has begun a search for his replacement.
