PayPal's Worst Category In 2015

PayPal is executing on many fronts.

2015 has been a banner year for payments processing pioneer PayPal.

Not only did it enter the public markets after a spin-off from parent eBay in July 2015, it's offered shareholders convincing performance:

• 14.7% revenue growth through the first nine months of 2015.

• Free cash flow growth of 8.3% during the same period, and 20% in Q3 2015 alone.

• Operating income margin of 15.7% during the first nine months of 2015.

The company is setting itself up for

more outperformance

next year.

•PayPal enjoyed Total Payment Volume (TPV) growth of just under 27% through the first three quarters of the year. TPV is a measure of the total transaction volume across PayPal's payment platforms.

•Paypal's active customers are also utilizing its services more frequently. Over the last six quarters, PayPal has improved its transaction rate steadily within this customer group:

Source: PayPal Q3 2015 Investor Update.

But not every revenue stream has

proved an unqualified success.

In almost every category, PayPal has exhibited crisp growth in 2015. So singling out a category as "worst" doesn't necessarily mean the category was detrimental to PayPal's business.

It simply indicates that relative to other categories, this one underperformed.

PayPal's Worst Category in 2015 : International Transaction Revenue• While U.S. revenue has achieved an increased

year-over-year growth rate each quarter in 2015, the growth rate of international revenue has diminished slightly during the same period.

• We can see this clearly in the comparison chart on the next slide:

Source: PayPal Q3 2015 Investor Update (highlighting by author).

This relative weakness is

apparent in TPV.

Overall company TPV growth hit 27% in Q3 2015.

U.S. TPV actually increased 28% during the quarter, but overall volume was weakened slightly by International TPV of 25%.

Why the drag? PayPal isn't immune

from larger currency trends affecting many

other multinational corporations.

The strong U.S. dollar provided a four percentage point headwind on total company revenue growth in Q3 2015. On a currency-neutral basis, total revenue grew 19%, versus the reported 15% expansion.

The dollar's position against other major currencies has curbed international revenue during 2015, and is again expected to trim total reported revenue by 4% in Q4 2015.

The greenback's strength reduces the value of international

sales. It also raises the cost for international

customers who use PayPal brands to

complete transactions in local currencies.

The Big Idea

“In the words of new PayPal CFO John Rainey:

"As we conduct business in 203 markets across the world, the stronger dollar [has] had an impact on our results, not only from a translation perspective, but also on consumer demand. We experienced weakness in China exports, specifically from our merchants off of eBay, which were impacted by lower demand from both Australia and Europe."Source: Q3 2015 earnings conference call transcript.

Going forward...

As we noted earlier, everything's relative. The 17% year-over-year growth rate in international revenue in Q3

2015, for example, still deserves investors' praise.

But the dollar may continue to generate international revenue

headwinds for PayPal throughout 2016.

Investors should watch for PayPal's next earnings report in late January, not only to gauge currency impacts, but to judge

the effectiveness of the company's foreign currency

hedges during Q4 2015.

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