PayPal Holdings, Inc. (PYPL) Earnings Call Transcript & Summary

All right. We'll go ahead and get started here. Before we kick off, let me just note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at morganstanley.com/researchdisclosures or at the registration desk. So I'm James Faucette. I'm the U.S. payments analyst here at Morgan Stanley. Very pleased to have Dan Schulman, CEO of PayPal, joining us to help kick off what I finally refer to as big-hitter afternoon. So you helped kick us off of that, so I appreciate you being here today. But before we kind of go into the business itself, why don't we kick off with you, like we have with most everybody else? And just last week, you made an announcement related to the coronavirus and the impact it's having on PayPal's business. Can you just kind of refresh for us what impacts you're seeing and how that played into your decision to revise slightly your 1Q revenue targets?

Yes, sure. First of all, thanks for having me, Jim. Thanks, everybody, for being here. So we guided revenues for the first quarter, I think it was $4.78 billion to $4.84 billion or something like that and 17% to 18% revenue growth. And what we basically said is that we still see ourselves in that range but more towards the lower end of that range that we see the COVID-19 impacting overall sales by about 100 bps of growth year-over-year. The way I would break that down is we had a quite strong January, actually, hitting on all cylinders, core business doing quite well. You have Chinese New Year, typically, expect that to bounce back. And we really saw continued levels really coming -- cross-border coming out of China at lower levels than we would have expected. We see some impact in Hong Kong cross-border, a little less in Southeast Asia, but still some impact. Strong overall core results through the world a little bit. We're not really exposed to the travel vertical much, but a little bit of weakness in the travel vertical. But overall, we still expect revenues to be in the same range that we gave. We expect EPS to be in the same range that we gave as well. And so while we are seeing an impact, at least in the first quarter right now within the expectations that we originally gave.

So -- and I think in the press release, you noted that while there are some weaknesses there, like -- and as you articulated just now, but you also said that there's things that were a little bit better. Any color on kind of maybe what was tracking a little bit better than what you've formulated?

Yes. I mean the core business was obviously tracking better than our maybe initial expectations. I mean, look, in general, we live in a good neighborhood. I mean the digital payments continues to grow quite rapidly. E-commerce, which we're directly tied to, depending on the market, has gone between 15% to 20%, sometimes a little bit above that. We typically take share each and every quarter on that. We wound up the year with 305 million or so subscribers, engagement growing by double digits and a lot of big customers really starting to implement. And so we really saw -- we came out of last year on an upswing that continued into January. We're seeing some impact from corona. But I would basically say the core business is good. And look, I think one of the things we're also beginning to see is some stabilization and a little bit of recovery, on the China side, they attacked this first. They're now beginning to see some of the factories returning. Still a little bit of skeleton crews, but we're seeing stabilization and maybe a little bit of acceleration coming out of China now.

Well, that's good to hear. So -- okay. So let's leave that to the side. I think we can hash that for days and days and really not get anywhere. Yes. And I'm sure that it will be done. But let's make better use of our time and start with, look, from my perspective, 2019 was a big year. You got a lot done organizationally. And looking at 2020 and beyond, I would now break down a new to-do list. I think in 2019, you got a lot done, but you also created a big to-do list to go along with that. And I break down that to-do list into 3 main areas: grow global reach, grow acceptance and grow functionality. So let's start with global reach, and we'll dovetail with your comments on China. I don't think many people are expecting to hear you announced -- hear about an acquisition in China before you announced the GoPay deal. That certainly took a lot of the investment community by surprise. Can you talk about how you envision that opportunity playing out?

Yes, sure. Look, we've been working on getting a domestic payments license to operate both cross-border and in-country digital payments inside China for as long as I've been here. Into China, many, many times, as has the team, we've met with government officials. We've met with the PBOC. We met with folks like China UnionPay. Literally, the last couple of years, we have had conference calls on our -- on this every single night, every single night on this. And so we were the first non-Chinese company to be granted a license. And to us, this was really important. First of all, China is half of online commerce in the world. And although you've got some excellent players inside the Chinese market, you got approximately, let's call it, 600 million or so users today. In the next 4 years, that's expected to grow to 1 billion users, so almost double. It's about $1.5 trillion of e-commerce volume in China. That's expected to double in the next 4 years to over $3 trillion. So it's a huge market and a growing market. Very, very importantly, the PBOC is cracking down. If you don't have a license, you're really not allowed to operate there, work -- or carry cross-border traffic. We're one of the very few players that does have a license. And so we think there are a couple of important elements for us. First of all, cross-border. Obviously, ex corona, obviously, but let's just normalize that, huge amount of cross-border trade between China and the rest of the world. That's both Chinese merchants selling to consumers outside of China. We have some 300 million consumers outside of China, Chinese merchants eager to sell to them. And people like China UnionPay, UnionPay International, eager to work with PayPal to link their cards. China UnionPay has something like 7.5 billion cards, yes, on their network. The 160 million from UnionPay International outside of China, that will connect directly to our merchants. But the reason it's so important in terms of the number of cards that China UnionPay has is they will also give us access to their point of sale inside of China through QR functionality. And so we believe there's a big opportunity for us to carry a lot more cross-border. If you're a multinational operating inside of China selling outside of China, it will likely come through our platform. If you're a consumer going to China, whether it be events like the Olympics and others -- right now, if you've been to China, and I know none of you have recently, but if you've been to China, it's very hard to create payments unless you have a Ali or WeChat Pay. Eventually, you'll be able to use your PayPal app inside of China to pay at point of sale as well as online. And so we think it opens up our addressable market substantially. We have a lot of work to do. We've already invested a lot in our compliance, our infrastructure to be able to go and do this, but we're really excited about the opportunity. And I think it's a meaningful one for us.

So if you look at the developments in China and the work that -- and the progress that you've been able to make there, how have those developments, if at all, changed your perspective on regionalization or nationalism of financial services and payments? And any change in how you would view PayPal's opportunities in places like Europe or Russia or India, et cetera?

Yes. Well, I think there are definitely some trends that are happening. There's much more kind of, call it, data localization requirements. The infrastructure we're putting into place for China is something that is reusable. We reuse a large chunk of that in India as well. I think you'll see more and more countries start to look at data localization. That's different tech architecture than most technology companies have. They're actually probably most global institutions have. So kind of we're well on our way to developing that. We're spending resource and time this year to make that happen. But here's the thing, Jim, I go around the world all the time. I speak with government officials, ranging from finance ministers to prime ministers to regulators around the world. And here's what I find, pretty much every single time I talk to any of them, they want almost exactly the same thing. They want, basically, their citizens, their small and mid-sized businesses to thrive in the new economy. And a lot of times, that means looking at the transformation of commerce. It's moving from off-line to online and really omni right now. It's looking at using platforms to open their marketplace. Inside the U.S., small businesses that don't use PayPal, something like 5% of them do cross-border. If you use PayPal, it's something like 80% do cross-border. So it's a huge difference because of all the protections that we put on for international transactions that we can do because we control both sides of that network and have had tons of machine learning, fraud detection to be able to put those guarantees in place. And so I think there's still a huge opportunity to -- for global trade to continue. Now we're not talking -- like the global trade we do on our platform, our average selling price is like $60 or something like that. So we're not talking about aircraft, large or massive amounts of aluminum sales one way or another and B2B. These are predominantly B2B, it's smaller and it's consumer to business. And I think that will be a growing opportunity for us.

Got it. And the last question I have on global is -- and this is a question that we get a lot particularly from potential incremental investors in PayPal. And the question that they have is, basically, you've made investments in a range of global partners over the last couple of years. Why did you feel compelled to make those direct investments? And when and how much do you expect those investments to ultimately impact your growth?

Yes. So we have a capital allocation plan. Those include -- are included in our capital allocation plan where we say, on average and over time, we'll do something between $1 billion and $3 billion of acquisitions, assuming we find the right acquisitions or investments or partnerships that makes sense to us. I'm quite disciplined on that. We look for either strategic partners that we want to be tied very closely to because they have global ambitions. They want to avail themselves of our platform in a very strategic manner, and we want to integrate very seamlessly with them. MELI was an example of that, MercadoLibre. We have a Board observer seat as a result of that. We are tying our infrastructures very tightly together. We expect to be in market this quarter with that, and that will grow over time. But I feel really fortunate that we're such tight partners with MercadoLibre. On the Uber side, we just announced we're expanding with Uber into Europe, Brazil, India. Dara and I talk almost every other week or so in terms of all the things that we're doing together. It's a very, very tight partnership. And now they're growing rapidly, and we're their infrastructure for a large chunk of what they're doing on the payment side and for their wallet. I wouldn't expect a large number of those to happen. Yes, there could be 1 or 2, but we have very high expectations for what the incremental revenues and profits would be for us. In addition to that, we do a ton of small investments. We have a ventures fund. We look at 200, 300 companies a quarter. So we see almost everything out there. We invest in what we think are market leaders. We typically have Board observer rights. We get a lot of sensing mechanism from that. We don't do it for financial return. Although, for the most part, we get a pretty good financial return because we're investing in those that we think are market leaders. We do partnerships with them. But we try to stay very consistent to our capital allocation plan, and we think there's incremental 1% plus of growth that happens on revenues with those year-over-year.

Got it. Now we've talked about -- and you've kind of laid the framework for the opportunity to grow users and acceptance globally in different parts of the world. Let's talk about it from a more product perspective and off-line. Obviously, you -- our own proprietary data and data tracking shows that you have a massive lead online acceptance versus other digital wallets and alternatives, and you're actually growing that faster, albeit off of a much larger base than most others. But off-line is a different story. And you've talked about off-line for some time. How might your off-line strategy look like in the U.S. versus in other markets? And what kind of adoption do you think is feasible? And do you have to pursue it, whether it be QR codes or NFC, et cetera? So just help us imagine what needs -- what you think needs to be done and the opportunity to grow off-line for PayPal?

Yes. So I'll take one step backwards. Just to tell you sort of aspirationally what we're attempting to become as a company because I think you need to put everything within the context of what strategically are you trying to go and do. And I would hope that absolutely 0 people put this into your model, but it's important to still understand what we aspire to. And our aspiration is to have 1 billion people on our platform, and that would be over, like, call it, like the medium term. And there's ways that we can imagine that, that could possibly happen. And we want our users to be engaged every single day with us, every single day. When I first came to PayPal, people who are using PayPal 17 times a year. They're now using it over 40 times a year. That's still a far distance from 300-plus times a year. One of the key elements to engagement, and there are a lot of elements to engagement, and which I'm sure, and hopefully, we'll talk about anything from Honey to bill pay to a number of other recurring payments. But one of the key elements of that is being able to use PayPal wherever you want to shop, whether that be on the web, mobile web, in-app or in-store. And today, although it's growing quite rapidly, the e-commerce segment, as I mentioned, 15% to 20%, depending on the market, sometimes higher in -- you look at the overall commerce today, it's something like, depending on the study, 10% to 13%, 14% is e-commerce, and the rest is off-line. And my view is that for PayPal to be an everyday app, we need to move into off-line. There are a couple of different ways you can move into off-line. The simplest and easiest way, and we're doing that in a number of places already, is by linking a card right into your Venmo or PayPal account. And the debit card on Venmo has been a huge success for us. You tap your card or insert your card immediately -- for those of you who have it, you've seen this -- shows up right on your mobile app. Do you want to split that? Do you want to post that? So it's tied in, in a very seamless way right into your Venmo account. That's the easiest way, and we are now a huge issuer of cards into our base, and we're seeing an increasing amount start to use that off-line and engagement grow as a result of that. But eventually, everything is going to move into the mobile phone, unless you're a card player then we'll see whether -- but our view is, over time, things migrate into the mobile phone. And there are 2 predominant methodologies for that. One is QR codes. And QR codes really are the methodology for most of the world. And if you are a PayPal user or a Venmo user, and we're rolling out -- we upgrade our app all the time, you're going to see scan to be much more prominently featured so that we can start to move into QR codes. So that's a relatively easy thing to do. And in the U.S., micro, small merchants will increasingly use more and more QR codes because there really isn't a complicated integration into POS. Honestly -- and if you've been to China, you've seen this. You can print out your QR code and just put it on your kiosk and somebody can scan it and send you a -- basically a P2M, person to merchant, payment, and there will be some fee associated with that. So QR codes is simple, and you can do QR codes across any operating system. And it will be in a certain segment of the market in the U.S., and it is a growing segment of the market overall. And so that will start to roll out. We've already done experimentation with that last year. That will start to roll out this year. And then you have NFC, which most people here have heard of, near-field communications. That's kind of tapping your phone on a point of sale. There, a couple of things happened over the course of the last several years that have enabled us to be in a position to do something like a PayPal Pay, if you will. One is our agreements with Visa, MasterCard, Discover, American Express and others around the world allow us to use industry standard tokens, and our agreements with all the FIs that we've done partnerships with over 40 of them throughout the world also allow us to use their industry standard tokenization. We also used to have card-not-present rates, and we would use PayPal. Now it's card-present rates. So we have -- that's a huge, big deal that we got in our negotiations. And so now anywhere, either like a Samsung phone or an Android phone is used, we will be able to use a tap-to-pay inside our phone. The one place we can't do it, and it's an important place, is with the Apple NFC chip because they don't allow access to that. We have a good, increasingly close partnership with Apple. We're in discussions on a number of different fronts with that. There are also a lot of pressures around the world to open systems up, that kind of thing. And so I can't say when or if, but we're working to have, just like we do on QR codes, cross-operating system ubiquity. We'd like to have a cross-operating system ubiquity on NFC. But we'll be able to have QR codes. We'll be able to have NFC on Android, Samsung, that kind of thing. And that will put a good dent into the off-line market for us. And again, that will start to roll out this year, really start to gain traction in the years ahead, but it's an important element for us.

Got it. Now when you talk about the...

I'm sorry, Jim. It's a really long answer. I really apologize. But here's the important thing. I think when we do off-line, it's not just a tap-to-pay versus insert your card. There's a value proposition on top of that. So for instance, if you're tapping your phone and you want to use your rewards points right at the point of sale, you want to do split tender right at the point of sale, you want to get an offer from Honey or whatever it may be, right, we'll be able to utilize that, so that there's actual value in using that form factor versus another form factor. And I think that's a really important thing that you can do with an app that you can't necessarily do with a card.

So -- and that actually dovetails perfectly into where I want to go because that, to me, is grow the functionality to do part of the to-do list, right? And Honey is an acquisition that frankly attracted a lot of attention, probably more attention than I would have guessed, at least if I would have known about it beforehand. But can you talk about how that new asset fits into your overall strategy to increase the usage? Like, can you just continue to play out the scenario that you just laid out?

Yes, absolutely. I would say, I'll get to Honey in one second. But like if you just look at the core business, I think there's so much more we can do with core. Like, every year, we increase authorization rates. Every year, we use ML and our machine learning capabilities to making the core checkout process better. So there's a ton of room just in the core part of our business to increase engagement, to increase functionality, to increase the experience of just our core checkout, which I think is important. And a lot of people kind of -- we talk a lot about moving beyond the button, which we are, because I think that's essential. But that doesn't mean that, that core functionality isn't going to improve every single year. And I think it's really important that we focus and spend attention on all the little things that matter in terms of conversion rate versus other wallets, et cetera. When we go and talk about Honey, I don't think that many people saw Honey on the horizon for us nor understood it nor had heard of it per se. We've been following Honey for 3-plus years. We had tracked them because we saw Honey as something very different than what most people -- sort of it's like a couponing type of thing, browser extension couponing. It's way more than that. It's really a platform and a set of commerce tools that enable consumers to have a shopping assistant to do price tracking, to be able to get the best offer, to be able to do a drop list or a wish list, which I'll talk about, and now to be able to put merchant tools to access the demand curves that are coming in. So what Honey really is, is it basically moves PayPal up the funnel to much more intent-based commerce. And what does that mean intent-based commerce? This is a really exciting thing that Honey is doing right now. First of all, it's finding loads of savings for consumers. Last year, in 12 months, it found about $1 billion of savings for consumers. That fits right into our vision of democratizing financial services, driving financial health. But the really interesting thing that Honey is doing is they are creating demand curves by individuals. So for instance, you're browsing or shopping or looking at things, and you find that you want these cowboy boots, which I know you want and...

They're pretty cool.

Yes, they're good, and they're comfortable. And you want these cowboy boots, that style, and you're willing to buy them for $240. So we know exactly the SKU you want, the price you want. And you just add more and more things into your drop list and your wish list. And you tell us when it hits that, I want to buy it. And you could say to us, "When it hits that, buy it for me. Buy it for me." And so imagine us accruing tens of billions, if not more, of demand curve and then allowing merchants to basically have self-servicing tools to be able to -- in Europe, now a consumer, you're constantly checking pricing. You're coming into our app all the time, checking on it. You get rewards based on using this. You now have Honey Gold reward points that you can use for purchases that merchants are funding for us. And now you're a merchant, and what are merchants ask PayPal for? I think the #1 thing they say is how can you help us drive more sales. And today, what we typically do is we've got a great platform. Our fraud is less. Our conversion rate is higher, and that's how we can help you at the actual checkout. Now what we're going to be able to do is say, "Here, actually are demand curves." And if you, instead of saying we want to be -- do a promotion, 10% off all Nike sneakers or these cowboy boots or 20% off. Now, basically, you can say, "If you spend $252,000, we can guarantee $4 million worth of sales to you, and you can do that yourself." It's actual demand curves that are real. And imagine if you think about the 300 million-plus people that we have, and we fully integrate Honey into our mobile apps, move it away from desktop, can still be on desktop, and move it into our apps and start to increase the functionality, the engagement and the value that we add to consumers and the engagement and value that we add to merchants is, I think, something that fundamentally repositions the value proposition of PayPal. So we will have both intent-based and purchase information, which is a perfect closed-loop view of what commerce can be. And so we are now -- by the way, that vision will take several years to play out, but it is incredibly powerful and incredibly meaningful when we talk to the 30,000 retailers that use Honey right now and the over 17 million consumers that use Honey. And we think combining it with our data sources, our capabilities, our scale can really redefine the engagement that we have with both consumers and merchants.

I think that's a really important point that you make. It's interesting even now, and it's been months since the deal was announced, but I have lots of conversations with investors that are just of the view, like, "Oh, merchants will want to pull back from Honey because like somehow, like they're being exploited." And I'm always like, "No, merchants discount to drive revenue. They're not just giving away free money." And so if it gets away from -- like, that's how they manage promotion, right?

That's exactly -- it's customized individualized offers as opposed to being a little bit blind to actually what your promotional strategy is and knowing kind of really 2 elasticity curves. So this is a tool that I think can be incredibly powerful for merchants of all sizes.

So last fall, we had a chance to meet with Amit Jhawar, who's the GM of Venmo, and he talked about some of the various monetization efforts that are underway. And some of those also have to do within that brand, with brand promotions and targeting and that kind of thing. But for you looking at Venmo as like this discrete brand opportunity for PayPal, what are the things that you're most excited about for that group?

Well, one, I mean, I'm incredibly excited about just the raw popularity of Venmo within the millennial segment. I mean it is a phenomenon and a growing phenomenon of over 52 million people using Venmo in the U.S. Imagine kind of the size of that segment and imagine sort of like what that relevant share is of that. We did something like $29 billion of volume last quarter on that, growing something like 56% year-over-year. And I think I want to look over at my team over here because they're going to go, oh no -- I think we said we did something like $450 million of revenue run rate on that. So the revenues are really taking off right now. And the opportunities for incremental revenues, we've just started on that. Really, today, you've got the debit card, which is this is that off-line, online, seamless. That's just every single month growing. You have Instant Transfer. So you can pay a site fee to get your money instantaneously or wait a couple of days and get it for free, more and more people doing instantaneous. By the way, we're finding with instantaneous, people are keeping more money on the platform because they can access their funds more rapidly. Then you have Pay with Venmo, which is still very nascent right now. We had a dynamic button. A lot of that dynamic button had to do with cookies and stuff. A lot of people change cookie rules, so we've had to adjust some of our strategy. That went a little bit slower than we initially anticipated, but we are really seeing like one important merchant after another really put a Pay with Venmo button on their websites. So I believe we'll start to see that begin to scale nicely. That will be a big push. We obviously announced a credit card. Credit card was incredibly heavily bid, as you might imagine. You had a very popular brand. You had issuers and networks competing heavily for that. So the economics are good, and we'll launch that this year. Excited to see the potential. We also have some really interesting ways of looking at credit scoring that are -- I won't give this away, but they're different and we think will be quite impactful for this particular segment of the market. Another thing that we're going to put in place that I think I have very high hopes for. One of the things we have on PayPal today and our P2P services is a thing called goods and services. So if I'm just P2P-ing you as a friend, that's -- we just -- that's free of charge. But if I'm buying tickets from you, and yes, I know you, but I don't really know you all that well, Jim. You're a little suspicious from my perspective, and I don't know if you're going to send me those tickets or not. With PayPal, you would pay a site fee where we would guarantee that transaction. And we see -- and we have a lot of data and information to know that transaction is either going to be good or bad. And so we're going to put goods and Services on Venmo as well because there's a ton of services that get done on Venmo and a lot of people who would like those guarantees on it. And then one other thing that we're -- these are all things that will be coming into place this year -- is we're going to allow multiple profiles. So you'll be able to put -- if you're a gig worker, you'll have your Venmo account and then you may have a separate profile for like a dog walker or whatever it may be -- I don't know why I said dog walker, but it just came to mind -- where you could do then payment services back and forth on things like that. We also have, obviously, a ton of brands right now that are doing rewards payouts through Venmo. We're starting to get parts of that. We're having things like customized emojis that brands are doing. Every time a consumer chooses one of those, we get a revenue cut on that. So I feel like we're scratching the surface on Venmo. I'm very pleased with it, but I'm seeing really good results coming out of these early tests. And on the flip side, on the cost side of Venmo, fraud rates are coming down dramatically. And so if you look at the P&L, there's a really clear line of sight for us to both break even and start making money on that. So overall, I think a lot of people were -- I don't know if they're skeptical or just wait and see what you can understand, but I think we're beginning to really prove out that model on the Venmo side. And it's an important element for us.

Absolutely. So last 45 seconds. We kicked off this conversation with me giving you what I think your to-do list is: grow global reach, grow acceptance and grow functionality. How would you prioritize your to-do list sitting here right now?

Yes. Well, we try to -- actually, it's one of the things that I had to do when I came in. So PayPal had like a list of like 300 things that we were trying to work on. And when you're working on 300 things, pretty much nothing really gets done, and all of them that get done are small. We have a list today of about, call it, 15 to 20 things that we are very focused on. Off-line is one of them. Recurring payments, like making sure that -- because we work with all the credit card companies. When you have a recurring payment like with Hulu or Netflix or any of those, if your credit card expires and then you got to go through and you lose your credit, whatever it may be, is...

Man, there's nothing -- nothing gets my kids more upset than when we had a credit card expire, and Netflix doesn't work, right.

Yes. So we can -- we have all that automatically updated from all of the issuers so that you can see exactly what your recurring payments are, what that file is. It's automatically updated for you. That's a big one, obviously. Off-line is a big one. Bill pay, we're partnering with Paymentus and a number of other bill pay players to put bill pay into it. So the consumer app is going to grow in functionality. The integration of Honey into that will be very important. And then on the merchant side, full omni capabilities to a merchant are going to be very important. At the small, midsize and micro with iZettle, and iZettle now has come together with PayPal Here, we've got an omni solution. Up-market, where we do our Braintree platform work with full-stack processing in the numbers, we actually want to move into full omni. And so you'll see us make some significant moves to try and do that through our development.

Dan, thank you very much. We're out of time. But thanks for helping us kick off the afternoon.

Thank you so much.

Thank you.

Appreciate it.