|A very impressive performance, though the valuation is still out of line.|
PayPal outruns target, raises estimate
By Bambi Francisco, CBS.MarketWatch.com
Last Update: 6:53 PM ET April 17, 2002
PALO ALTO, Calif. (CBS.MW) -- PayPal, the leading online-payment service, exceeded analysts' profit estimates Wednesday and also raised its profit and revenue goals for 2002.
Earlier in the week, investors drove up shares of PayPal, amid takeover talk and anticipation that the company would beat Wall Street's projections.
Issuing its first quarterly report as a publicly traded company, PayPal of Palo Alto, Calif., said after the closing bell it made $1.2 million in net income, or 2 cents per share.
Excluding stock-based compensation expenses and other one-time charges, the company's after-tax income would be $4.3 million, or 7 cents per share. PayPal (PYPL: news, chart, profile) does not have to pay taxes until 2004.
Analysts had expected PayPal to earn 4 cents a share.
As for its revenue, PayPal topped the consensus estimate of $46.3 million, with sales totaling $48.8 million. The company attributed the quarterly results to an increase in the number of accounts. It added 28,000 a day in the quarter, bringing its total registered account base to 15.4 million.
PayPal earns a broker's fee of 3.3 percent of total payment volume. It then pays an average of 1.1 percent of total payment volume to process the transactions.
It appears PayPal maintained its lead as the dominant payment service on EBay, while proving that it is making progress in expanding its services to other businesses.
According to PayPal's release, the company "achieved further penetration of the online auction market; an estimated 72 percent of the auctions on EBay (EBAY: news, chart, profile) listed PayPal as a payment option in the first quarter of 2002."
But PayPal also said total payment volume of auction-related transactions were now 61 percent vs. 64 percent in the fourth quarter of last year.
Total payment volume of non-auction related transactions grew to 39 percent from 36 percent in the fourth quarter.
It's unclear what types of businesses are using Web payments as the means to exchange money or accept payments. PayPal's CEO, Peter Thiel, would only say that the transactions conducted were by a "distributed universe of people."
Legg Mason analyst Scott Devitt believes that the transactions are likely being made by merchants already selling certain products on EBay, but have separate Web sites to sell other goods.
Looking ahead, PayPal raised its second-quarter revenue estimates to $52 million and $53 million, which would result in a pro forma after-tax profit of between 7 and 8 cents. For the full year, revenue is estimated to range $220 million to $230 million.
Analysts had projected $216 million in 2002 revenue.
PayPal expects to earn 34 to 36 cents a share for the full year, vs. analysts' estimate of 30 cents a share.
Ahead of the news, shares of PayPal rose 6 percent to $25.38 in regular trading. Shares jumped 30-plus percent since the start of the week, amid speculation the company could be a takeover target. Early this week, a broadcast report said EBay and PayPal held and then aborted discussions about merger last week.
Addressing speculation earlier this week about an EBay and PayPal combination, PayPal's Thiel said on a conference call following the release that PayPal is a "standalone business." He did not outright deny or comment on whether the companies were speaking, but he did add: In the end, we'll do what makes sense for shareholders."
One analyst asked Thiel to offer some color on what type of synergies the combined companies could have should the two combine. Thiel would not elaborate.
But one synergy Legg Mason's Devitt points to is the improvement in margins that EBay could have by allowing its customers to maintain balances in their online payment accounts, much like PayPal offers now. That's because PayPal generates 100 percent gross margins from transactions funded through PayPal balances as opposed to credit-backed transactions.
Twenty-three percent of payment volume on PayPal came from customers maintaining a PayPal account. PayPal does not hold onto these funds, however. The funds are held by a third party, which allows PayPal to avoid being regulated as a bank.
PayPal raised $70 million when lead banker Salomon Smith Barney brought the company public on Feb. 14 in an initial public offering priced at $13.
Bambi Francisco is Internet editor of CBS.MarketWatch.com, based in San Francisco.