Digital payment pioneer PayPal is adjusting to an e-commerce slowdown and bracing for a potential recession, partly by aligning itself with big-name partners, including tech giant Apple and marketplace behemoth Amazon.

In announcing third-quarter results Thursday, the company’s executives provided a view of the holiday shopping season and demand next year in the context of its performance. They warned that e-commerce shopping for the holidays is getting a later start this year than in 2021, as online purchases drop from a burst of activity triggered by the COVID-19 pandemic’s impact in the past two years.

“We think that e-commerce is going to be pretty muted in the fourth quarter and right now we are not planning that that comes back for any reason as we look into 2023,” PayPal CEO Dan Schulman said on a Thursday earnings call with analysts who follow the company.

The San Jose, California-based company is counting on increased ties to Amazon and Apple to bolster the consumer transaction volume flowing through its digital payment system.

“These relationships are aligned with our practice of working collaboratively with the major players across technology and financial services to provide more choice and superior experiences to our mutual customers,” the CEO said of the ties to Apple and Amazon.

Leaning on Apple and Amazon for growth

Specifically, U.S. customers will be able to use their PayPal and Venmo branded debit and credit cards in the digital wallet provided through Apple phones online and in stores in the first half of next year, Schulman said, calling that a “significant step forward” in the relationship.

It’s also expecting growth in use of its Venmo payment tool, which was absorbed into the company when it acquired Braintree in 2013. Making that payment option more available through Amazon, the biggest international retailer, is a key part of PayPal’s plans.

“We continue to ramp ‘pay with Venmo’ on Amazon and we plan to be fully ramped in time for peak holiday shopping,” Schulman said, noting that Venmo has particular appeal for younger consumers.

PayPal’s executives also noted its buy now-pay later offering and more merchant ties are boosting revenue.

Recession looms over plans

Nonetheless, in light of a changing economic climate, with higher inflation and interest rates potentially triggering a recession, PayPal executives said they’re girding for a downturn. The company began cost-cutting measures earlier this year after it acknowledged that it wasn’t increasing its number of new customer accounts as fast as it had previously expected it would.

The company has been pursuing a plan to cut $900 million from costs this year and now it’s aiming to knock $1.3 billion off expenses next year as well. Those austerity measures kicked into high gear after activist investor Elliott Management took an ownership stake in the company with a $2 billion investment and joined PayPal’s board. 

“Our efforts to reduce our cost structure and drive productivity gains are yielding strong results,” Schulman told the analysts, referencing the cost reductions. The cost-cutting will continue to allow the company to expand profit margins, regardless of the economy’s impact on revenue, he suggested.

“We’ll adjust to potential lower-growth environments,” Schulman said. “We can keep our (operating expenses) very well controlled. We’ve demonstrated that now and we’ll continue to enable operating margin expansion next year.”

The company’s net income jumped 22% to $1.33 billion for the third-quarter, relative to the quarter last year, as revenue rose 11% to $6.85 billion, the company said in its Thursday earnings press release. 

PayPal’s customer count continued to expand in the third quarter, with the addition of 2.9 million net new accounts for a 4% increase over the year-earlier period, the company said in a presentation of related metrics. Still, that amounted to slower growth than in the prior five quarters.

Total payment volume rose at a 9% rate for the quarter over the year-ago period, but that was also weaker growth than in prior quarters, down from 40% expansion in the second quarter of 2021.

Analysts weigh in

Analysts at the financial firm William Blair who follow the company noted PayPal’s pledge to “post growth in excess of e-commerce market growth, which was estimated at low-single-digit growth in the September quarter, with some deceleration in October.”

“We continue to view PayPal as a leader in the e-commerce checkout and digital wallet space with continued innovation and substantial long-term opportunities in a $110 trillion global market,” the analysts said in their Thursday note to clients.

The company’s interim chief financial officer, Gabrielle Rabinovitch, also participated in the call and there was no mention of when recently appointed CFO, Blake Jorgensen, might return to his post after he took a medical leave in September following one month on the job.

Schulman held out hope that the economic picture could improve, but kept a downturn in view, too. “If the macro picture gets better these numbers can improve dramatically, but we’re anticipating a difficult economic cycle and preparing for that so we can invest and deliver robust (earnings per share) growth at the same time,” he said on the call.