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

Yes. That's a great question. And we've got a ton of focus now on the -- we do quite well, obviously, in all forms of online right now. And we seem to be taking market share during this post-COVID period. So I'm really pleased with our MS volumes. But even now post COVID, something like 85%, maybe 80%, all shopping is done in-store. And so -- and retailers and consumers are reaching out to us, pulling us as opposed to us pushing, which is, in general, a good thing, but it really puts a lot of pressure on us to deliver contactless solutions in store. Because for merchants, it's sort of an existential issue. And they've got to keep their employees safe. They've got to make sure that their customers feel safe in paying. And as I mentioned, nobody wants to handle cash or touch a point-of-sale. And so we're spending a tremendous amount of effort. We're investing heavily in this because I think if we want to be an everyday use case, we need to be able to enable spend, both online and offline. And so we have pretty aggressive aspirations here as well, Tien-Tsin. So I think we have the potential of creating the most ubiquitous offline network of anyone out there. Why do I say that? One is we can use contactless cards, just like you showed, and that is working with the networks, working with FIs, really issuing these contactless cards and have -- link them directly into your PayPal or Venmo account. We'll be introducing the Venmo credit card shortly. And then we want to do QR. QR, across the world, is the dominant way that people pay. And QR, if -- and you probably know this because you play quite a bit with both Venmo and PayPal, we had already had scan and QR capabilities on the phone. So if you and I were at dinner, instead of me asking you for your user ID, you just hold up your QR code and I would scan it and we'd be instantly connected on that. So that was a P2P QR transaction. It's very simple for micro and small merchants to create a P2M transaction, a person to merchant transaction, where a micro-merchant at a farmer's market or on a food truck, whatever, can just print out their QR code and we scan it with Venmo or PayPal, and there's a take rate on that, and we complete the transaction. As you move up market, most of the POS devices already have a scan capability, where you pick it up and scan. And what they're going to do is scan your QR code on your phone. And so -- and we're -- that's what we're doing with CVS. We're working with well over 100 different retailers in Europe and the U.S. in different stages right now. We'll make announcements along the way, but a lot of interest in QR. And we also want to do tap-and-pay as well. Not only do we want to be embedded in all of the star pays, whether that be Google Pay or Samsung Pay or even Apple Pay. But we want to have our own pay capabilities. And the negotiations that we have with the network, several years ago, allowed us to use tokens, all of our agreements with some 40-plus FIs throughout the world allow us to use their tokens and that's both online and offline. And so we want to have card capability, POS capability with iZettle. We want to have QR capability and tap-and-pay NFC capability. And if you put all that together, theoretically, that should be a more -- a larger acceptance network than anyone else out there. And so we -- again, we have aggressive aspirations on this. It's going to take multiple years to play out. I'm really pleased with the initial results. It's growing incredibly rapidly, but we're just starting, so you would expect it to be growing incredibly rapidly right now. So hopefully, we'll see that start to play out in the years to come in both engagement levels. And then I also have seen a big halo effect when somebody starts to use us offline, they use us more online as well. And so I'm quite excited and quite focused and everybody on my team will tell you. We review this initiative at least -- at my staff meeting at least once to twice a week.

Yes. Look, the lines are blurring between offline and online and you've got the nodes to go after it. So I'm glad to hear that it's a priority for you. Since this is a Europe -- we're supposed to be in London doing this. But this is a Europe conference, I am getting some questions here on my screen around iZettle. Is there anything else you can tell us on iZettle? You touched upon how the point-of-sale piece fits within the broader acceptance network, but anything else to add on iZettle, Dan, if you don't mind?

I think a little like Square, iZettle got initially hit as all retail shut down and their POS. We've really seen that bounce back quite nicely as a lot of Europe has opened up, really have seen just a U-shape turn on that. By the way, we're beginning to see some other things on the Braintree side start to pick up a little bit as well. But we've got big plans for iZettle. Jacob de Geer is doing a great job in running that. He's very engaged. He's also in charge of PayPal here. Those are coming together, and we've got a lot of plans. We'll announce them maybe by year-end, the beginning of next year, but Jacob is a low key, very aggressive, very competitive individual, and he's got a lot of responsibilities now over and above iZettle. And I review them, just reviewed them, and he's got a really good game plan going forward.

Okay. We'll stay tuned for that, and thank you for that. So thinking about iZettle and acquisitions, your balance sheet does offer some capacity to acquire assets. And we've seen, Dan, some consolidation again in the space, right, with what a mix, Kabbage and SoFi-Galileo into Credit Karma, some interesting sort of combinations, Mastercard Finicity as well. I know you guys have done Honey. It has been a success. I'm curious where you guys might go next. I know you're not going to reveal the next chess move exactly with me here. But can you give us some idea on where acquisitions are on the priority list?

Yes. Well, clearly, we're a consolidator in the industry. We have an extraordinarily strong balance sheet. I mean our free cash flow number was -- I can't remember exactly what it was up last quarter, but it was 100x percent up year-over-year, I think, over $2 billion of free cash flow last quarter. So obviously -- and margins are going up. We said even with the $300 million incremental investment we're going to put into the business in the back half of the year, that margins would still go up even with that. And we've got a lot of positive feedback from investors on that, by the way, that this is the time to invest in the business. And we are investing in a couple of really key areas, QR being one of them, digital wallet, another buy now, pay later, that kind of thing. But -- and then the other thing, obviously, is we're doing 80-plus releases a day. So it's a radically different PayPal in terms of our ability to put out product. I mean, look, at one point, we probably would have bought some of those very high multiple buy now, pay later companies. But our product team was like, "we can build this." We can build it for so much less cost, and we can get it out into the market, and we can provide a fully integrated, beautiful experience into our wallet, into our merchant network and they delivered on that. And so I'm really pleased with the capabilities of the team, and we have a lot of partnerships like it. We partner with FIs, we partner with tech companies, we partner with a lot of people, and I'm perfectly happy to white label some of those capabilities into the platform, even co-brand some of those into our platform. But where that all doesn't work, where we want capabilities, where we want talent, we will acquire where we want to be in a geographic area where we may not have been. We have the wherewithal to acquire. We're a much larger company than we've ever been. We've got a significant market cap. We've got significant free cash flow. We've got significant cash on our balance sheet, and we are looking at a number of things. And look, I think PayPal should be a leader in most of these spaces, not a fast follower, but a leader. And so -- and there's a lot of things happening in the world right now. The world is clearly moving to digital. Digital currencies are on the -- are ascending right now. I've got a ton of conversations with presidents of central banks around the world who are contemplating CBDCs and other things. So we spent a lot of time thinking about where is the world going and how do we play in that. And clearly, the future, I think, of the financial services world is a digital wallet world. I mean that -- I mean governments are seeing that. Look at the stimulus payouts. Like mailing checks to households makes no sense whatsoever. But like being able to send that straight to somebody's digital wallet and for them to be able to then spend that online, offline, get cash for whatever they want to go do, that's the right way of doing these things. And so we want to maintain our market leadership position and will either invest internally to get it done or will acquire externally or we'll partner, and we've got the capabilities, I think, to do all of those quite well.

Yes. I remember speaking to treasury in the early part of COVID, and it was so important for them to level the playing field and work with the fintechs because the fintechs could be agile and move fast and accommodate that money movement better than the bank. I thought that was pretty telling and sort of revealing what you're talking about with the wallet. So to build on that, I know you said earlier, you want to talk about it, this idea of the wallet and the future of the wallet. I'll ask you maybe a little bit differently, Dan, just this idea of looking out to the east and seeing the super apps that are out there, and how they started with some transactional elements, but they've added a lot of different products within that at scale and using QR and contactless like you alluded to. So I'm curious how much of that informs your product road map or your strategy on where you want to drive the PayPal app or the PayPal wallet over the next 3, 5, 10 years?

Well, Eric Jing and I have spent a lot of time together. He runs the Ant and I think he's done a really nice job there. And we've compared a lot of notes. I think they've learned a lot from us, and we have learned a ton from them as well. And I'm always quite impressed when I go over to China and see kind of what the retail environment looks like. Many stores, there are no more shopping carts because you're just scanning what you want, right, in the aisle, and then there's no checkout anymore, and it's just delivered to your home in 10 or 15 minutes. China has a very different infrastructure than a lot of the rest of the world. They're very densely populated cities. So delivery can be in minutes, not necessarily out to the suburbs. They didn't have an embedded credit system and so the advent of QR codes was able to take off much faster and much more -- with much more ubiquity than here in the U.S. But I think we're now beginning to see in the rest of the western world, and seeing this in different places, in the Nordics and others that are being leaders in here, where people are moving away from cash. They're moving towards digital payments, and they want to live their digital life on their mobile phone and that includes payments and their shopping journey. And so I have been really all over this idea. If we want to have 1 billion users on our platform, using it every day, and that's our aspirational vision. And we have that aspirational vision because everything we do needs to be within the context of what are we trying to be. Whether that's 5 years from now or 10 years now, it doesn't matter to me, we need to put in place the building blocks to get there. And so a digital wallet is essential to that. QR is essential to that because there's more use cases. Bill pay is essential to that. Rewards management is essential to that. Shopping capabilities, shopping tool sets, my price wish-list, my drop list, my shopping cart list, coupons, coupon depositories, that kind of thing, being able to have direct deposit come on to platform. These are all things that consumers want that we will develop and/or partner with some of the people that we're quite close to in the industry to provide a comprehensive set of services that allow consumers to turn to PayPal or Venmo and use us every day.

Yes. No, that's great. No, that's a way to sort of frame the whole thing. I can't get you out of here without asking some kind of eBay question, I apologize. With the operating agreement there expiring, I'll ask you a different way, again. Maybe thinking about the pipeline of new marketplaces and platforms, kind of like we're talking about to interconnect all of this and create this big ecosystem to get to a billion users, Dan, what does the pipeline there look like? Is that exploration agreement? Has that been an impediment? Is that going to be an issue in opening things up pretty quickly? Just curious to get your thoughts on that.

Yes. So it's really interesting to see the difference between where we were when I first came into the company in 2014 and now. I think in 2014, when we were part of eBay, we processed, I think it was like $235 billion of TPV. Total for the year, we get a 1 billion transactions. Today, we're doing well over 3 billion transactions a quarter. We're closing in on a run rate of $1 trillion of TPV on the platform. I mean I think we did over 200-something million last quarter. So growing, I think, 30% last quarter. So -- and eBay has gone from something like 20%, 24% of our TPV. It's now in the single digits. They were like 26% of our revenues when we started last year. They were down to 14% and that's dropping. So they're an important customer and always will be for us. But the other marketplaces that we are part of are growing so much faster. I mean if you look at the 5-year CAGR, I think eBay, over that 5 years, was 1% growth. MS was like 30% growth over that time frame. If you look at marketplaces over the last 3 years, they've grown at 7x the rate of eBay. And even during the pandemic, they're growing -- at eBay's best quarter, we're still growing 3x what eBay was. And we have a lot of close partnerships, whether it be with Walmart, Facebook, a number of others, we're -- a lot of underlying payments capabilities for leading tech platforms. And the expiration of the OA clearly opens up some abilities to more fully integrate into those marketplaces. And the OA prevented us from some MOR relationships with those marketplaces, merchant of record, for those who are watching. And now we can do MOR with some of those marketplaces that were on the band list during the OA. And so we're working hard. These are big integrations that go on. So give us a little bit of time to show you what we're working on, but we clearly have known the OA was expiring, and we've been working towards that with a lot more flexibility now.

Yes. No, I think, look, that next chapter is going to be really fun. I know there's been a lot of books written on PayPal.

Yes.

That preceded you. I look forward to reading or maybe help write some of these books with you coming on. And obviously, that -- a lot of what you described is so important. And I know you led a lot of that effort. I know we have like 3 minutes left here, Dan. Any other priorities or topics you think are worth sharing here to close out, to emphasize or maybe that are underappreciated. I know you guys are -- we get a lot of traffic, obviously, on the stock, but with this rare opportunity, anything else you want to highlight before we let you go?

I do think it is a rare opportunity right now, Tien-Tsin, and I've over-tuned this. And I think this puts a lot of pressure on the team, and I'm -- I have very high expectations of the team right now to execute. Because this is our time, and if we do this right, the next 5 years will be way more impactful than the past 5 years, which arguably have been pretty good. But I actually think and what excites me and what gets me up every single day and really engaged, [indiscernible] I'm really engaged. And I've always been engaged. And so it's hard to believe there is another layer but there is. Because customers and merchants need us more than ever. We can be more relevant than ever before. And if we execute the next 5 years, it will be pretty amazing for us. So I'm very excited about the potential of the future.

Yes. No, it's been fun. And I think seeing it through the crisis and how you guys have adapted and seized that, not to celebrate COVID in any way...

No, of course.

But it's been really fun to track. So we look forward to further updates, Dan. I know your time is very, very valuable. And thanks for spending a few minutes with us today.

Tien-Tsin, thank you so much, and thanks, everybody, for watching us today.

Yes. We'll catch up soon, all right? Thank you guys.

Okay. Yes, look forward to that.

Thank you, Dan.