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

Good afternoon. This is Ashwin Shirvaikar, Citi's Payments Analyst and Global co-Head of Fintech Research. It's been a great and very informative 4 days here at our Annual Fintech Conference, and I want to thank folks in the audience for your time and support over these 4 days. But we're not done yet. I mean how great is it that we can end on a high note with our top idea in the space, which is PayPal. And it's my great pleasure to welcome John Rainey, who is CFO and EVP, Global Customer Operations of PayPal. John, welcome to our event, and thank you for doing it.

Thank you for having me Ashwin, I'm looking forward to it.

Absolutely. So let's take off, John, maybe with a couple of questions around planning outlook. 2020, obviously, has been a pretty remarkable year in many respects. And coming out of 3Q, normally, PayPal provide some idea of what next year might look like. But this year, you indicated it wouldn't be prudent now. The high level of uncertainty is obvious, but which factors are you most focused on that drive that uncertainty?

Sure. Well, it's -- I want to be very clear, like our not giving guidance is no indication at all about our belief in the fundamental strength in our business longer term, which we have a ton of conviction around. It just so happens that for obvious reasons, like we're in a period of time, we're forecasting in the near term, but even out over the next 12 to 14 months is incredibly difficult. At the time that we had our earnings release, we were on the threshold of a presidential election, which has some impact. But then as you think about things that could impact our financial results like further stimulus measures. When those stimulus measures are actually take hold, further lockdowns or shelter in place, all of these things impact our business. And while our business is quite strong, the degree of variability in those outcomes is greater because of that. And as we look out over the next 14 months, we just thought it really wasn't constructive to provide that wide of a range. It's better to focus on the near term. I think as a last point, Ashwin, that came at the same time where we talked a little bit about this transition from eBay. And I think some incorrectly assume that those 2 were related. It's not the case at all. We've got a firm grasp of the impact of eBay. And we've got a lot of conviction in the long-term strength of our business. Just -- it's one of the more difficult periods to forecast in right now, given all of the various things that can impact our business.

That's fair. So how has your own business changed due to COVID? I mean we've obviously seen the impact on your net new adds and growth and such. But any cost considerations to think about as you plan forward in real estate, other factors that impact margins or capital spend? Any color around how investors should think about that?

Sure. Well, one thing to start with and just to tie it to your last answer about giving guidance, we've never had a period where we've launched so many products in such a short period of time at the tail end of the year. And so even seeing the ramp-up of those and how they perform impacted our thoughts around guidance. But our business has changed tremendously. We're obviously like most companies, entirely work from home. And we've got 10,000 people that are serving our customers around the globe and who work from home environment. And that's -- it's very different than what it was before. But the channel by which we're serving those customers has changed to be more chat versus phone-based. And that's all in a lower cost -- lower marginal cost around that customer contact. So that's impacted us. But even as we look into the next year and think about returning to work, the -- I think we'll probably have some type of hybrid model where we have people that some are in the office, some are working from home, and some are only working in the office part of the time. The fortunate aspect of that is it allows us to basically recruit talent all over the world. We're not sort of restrained to the certain catchment area around a certain city for people driving into that work. And so in many ways, we can optimize in cost there as well. The other thing I'll add to this is in our core business, we've certainly seen a shift to debit during this period of time, and that's benefited our transaction expense. I suspect some of that is stimulus driven, but some of it is just the huge growth that we've seen in our branded transactions, and those tend to be a lower-cost funding instrument.

Right, right. And we've done during the course of this conference numerous sessions, where multiple people basically said that we shift to debit, a lot of it was going to be sustainable. So that hopefully plays out. Talking about growth. Now the acceleration in the growth of net new adds has been quite dramatic this year. And when we think of comps, it would be reasonable to expect a slowdown just because of what you've achieved this year and there's a set of investors that believes that. But there's another way to look at it, which is that you've not perhaps yet started completely leaning in on your partnerships for growth. And maybe you're still, frankly, underpenetrated in a long list of fast-changing emerging economies. So which of those 2 alternatives would you agree with? And what should we expect for account growth?

Well, so if we step back and say, okay, is it reasonable to assume that we'll see a step down from the 70 million net new actives that we're adding this year? Probably so. I don't know that we should model that out in perpetuity. Some of this happened during the initial period of lockdown. And we saw a lot of customers come to PayPal in e-commerce more broadly, that had never done e-commerce before. 14% of U.S. consumers shopped online for the first time post pandemic. And the fastest-growing market segment that we've seen is this demographic above 50. And so I expect some step down from where we are right now. But to your point, whether it's partnerships or other measures that we're taking, there are a lot of other ways to accelerate this or keep this going, I should say, at a higher level than what we entered prior to the pandemic. We're kind of in the early throes of some of these partnerships, like what we've done in China with UnionPay, what we're doing with MercadoLibre down in South America. Even some of the technology platforms we're not at a full run rate yet with where we expect to be with Facebook and Google and others. And so I think there's tremendous opportunity as these are effectively new channels for customer acquisition. The important thing to also consider though around this is that net new actives are a function of not only new customers coming to us, but those that churn. And in any given year, we have a lot of customers that churn that simply have gone 12 months without using us. A lot of the measures that we're taking this year are to preserve those net new actives so that they don't churn. And so we've done things around our risk rules to make sure that customers have better first, second, third transactions not getting declined. Our marketing efforts are targeted towards things that will increase their level of engagement. So that bodes well for us going forward with the level of net new actives as well.

Yes. That's good to understand. I want to get to another part of growth in accounts because investors are often focused on consumer accounts. But you've actually grown merchant accounts in the middle of the pandemic. It was $24 million at the end of 2019. It's $28 million at the end of 3Q '20. I mean, our assumption -- I love PayPal, but our assumption was a possible shrinkage in the number of SME merchants, I got to say. So I know omnichannel adoption by merchants has gone up significantly. But how are you winning over these merchants?

Yes. Well, it's -- I think when any customer thinks about acquiring a service or product, they're thinking about the cost of that. The reliability of it, the ease of use, the credibility of that. And all of those things, I think PayPal stands out, and so far as -- like we're a known brand. We're -- we stand behind trust and security, and that matters to these merchants. And if they do their research and they really think about what matters online is conversion. Converting that basket to a sell. And objectively, third parties have suggested that we're twice as high as the average conversion rate in the industry. And if you're a business that has relied on an in-store presence, and you've got to move to online, then you've got to find a way to basically have those sales come through. There's a merchant in the U.K. that I've cited and as an example, Big Bags Bakery. They were entirely online. I'm sorry, entirely in-store prior to the pandemic. And when their business shut down, and they couldn't have any in-store traffic, they had to move to online. And now today, their online sales are greater than their total in-store sales prior to the pandemic. And so -- and that's enabled through companies like PayPal. And so it's -- if this is, to your point, this is one of the more exciting aspects of what we've seen this year is the huge growth in SMBs. And I think it's fair to say that if you were of the mindset that as a merchant, having an online presence was maybe a nice to have before, it's an absolute necessity right now. We don't know how long this is going to go on. And we've seen the shift in consumer behavior to where that may be the first thing that people look for going forward versus what's the store around the block where I can go drive and get a particularly good or service. And so we absolutely believe that e-commerce trend has been pulled forward several years because of this.

Okay. Okay. In one of your previous answers, you mentioned partnerships. Could you maybe categorize those partnerships because bank partnerships is big tech, there's product line partnerships, which are your top 2 or 3 that you're currently focused on? Top 2 or 3 in terms of current contribution? And for us, looking in externally, how should we judge the success of a partnership? What can we tell?

Yes. Well, hopefully, you see that our overall results continuing to grow our margins, grow revenue. Last quarter, we had the highest revenue growth we've ever had. And it's not one thing, it's many things, but the partnerships contribute to that. But to your point, it's multifaceted. One of our biggest investments in the back half of this year as well as next year will be China, launching a larger presence in China, and part of that is a partnership with UnionPay. Where now UnionPay customers can vault their financial instrument into the PayPal wallet and pay anywhere that we're accepted around the world. It's a big step forward in what is the largest market of digital users in the world. That's one aspect. But we also look at things like MercadoLibre, where we don't have as large of a footprint among the consumer base in Latin America, and this allows us to partner with one of the leading marketplaces down there. And then with financial issuers just in general, we are a digital distribution channel for their wallet. Everyone recognizes that they've got to have that presence in a wallet. And with PayPal, where we are technology agnostic, we're financial institution agnostic. Any financial issuer can allow their customers to evolve that as a payment mechanism in our wallet. And that's what allows us to really grow and expand our partnerships around the world because we're not beholden to one type of partnership or one type of technology platform. And it's what's allowed us to not only grow at the rate that we came out of separation, but accelerate that growth over the last few years.

Okay. Is it worthwhile in your view to spend the effort to kind of -- does it matter to you where a net new add or a transaction comes from in terms of one or other of the partnerships?

Well, there are certainly characteristics about users that we see that will result in being a more engaged customer and having a higher customer lifetime value. But that really covers the gamut in terms of whether it's a particular geography around the world as we're in over 200 markets. Or whether it comes to us from a Facebook or an Instagram or something like that, or even the demographic. It doesn't matter to us. I think the theme for us is, we need to take actions on our part that make a very good experience for that customer and gives them a reason to want to come back and use us.

Got it. Okay. Okay. I wanted to talk about engagement. You've kind of mentioned this in one of your answers. But rather than a broad question on what grows engagement, maybe we can talk about it in -- from the perspective of some of these new things that have gotten added or are in the process of being added. Maybe let's start with bill payment. Why should a consumer use funds resident at PayPal for bill payment instead of whatever it is that they currently use? And is it only consumer bill payment or is business bill payment also included?

We certainly want to get into more of the B2B, we do that today, but it's a growth vector for us going forward. When we talk about bill payment, more recently, it's really focused on the consumer side. But this is -- and the thing here with all of this around engagement is just getting customers using us more as kind of an everyday use case item. And bill payments are inherently sticky. People aren't really vacillating from 1 payment instrument to the next from month-to-month. It's kind of a set and forget something. And it makes it good for the consumer. It also makes it very good for us because of the recurring nature of that payment. Bill payment tends to have a lower take rate, but it's also typically something that's funded with like an ACH and so it's a lower funding cost as well. So again, we focus on the incremental margin there, much more so than the headline take rate. But an extension of that, Ashwin, is -- are things like subscription services, where one of the new aspects that we're launching in our digital wallet is to basically, when a customer comes to PayPal and signs up for the first time, they can have a menu of items like an Uber, like a Spotify, where they can elect to vault that payment, vaults PayPal as the payment method there. And why that's good for the consumer and good for the merchant is, we've all gone through the experience where maybe a credit card is -- expires or the credentials are compromised. Well, we can simply move that to the next funding instrument in your wallet where we can notify you in advance that the credit card is expiring, do you want to update that. And it's just a much better experience overall than a consumer having to figure out, okay, I lost my credit card. And now I've got to go reenter my financial credentials at all these different subscriptions that I had.

Okay. Okay. That makes sense. The Paymentus implementation, it has dragged a bit. So why has it dragged? I think on 3Q, you mentioned that other partners would follow. So could you talk a little bit about what we should expect?

Yes. Well, we're glad to be where we are with Paymentus right now, which is 100% migrated. With any integration, you're dependent upon not only your own pace of technology, but also that of your partner. And that impacted the overall migration around Paymentus. But bill payment, and we tend to focus on Paymentus when we talk about bill payment, but it's much broader than that. One of the experiences that we're launching on our mobile app is to have thousands of different providers, utilities, phone companies, whatever, around the country that you can go in and search and select and vault that as PayPal as your payment option to those various payments. And so this is -- this being Paymentus is a first step in a much broader area around bill payment that we hope to complement in the wallet.

Got it. Got it. So I want to move to a couple of areas where we get a lot of questions: One is crypto; and then Buy Now, Pay later. On crypto, obviously, a major announcement. What are the key points of the announcement? And are there initial observations from introducing crypto on the platform? Is it already driving higher engagement? How has it been compared to -- I know it's very, very early days compared to expectations.

So we're exceptionally pleased with what we're seeing thus far. And by the traditional measure of engagement in terms of a transaction per user, there's been an uptick, but we're very early on here. But what we're really pleased about is the more general term of engagement in terms of how frequently someone was coming to the wallet. And that's been -- that was the whole thesis behind us. To get someone that is coming to the wallet every day to check their balance, to maybe complete a transaction, whatever. And look, there were others in our space that have done this well, and we recognize it. And our thinking around this is, given our platform, given our customer base and given some of the unique capabilities that we have, this is our space to win. And so let me talk about why I think that. I think there's a few key reasons: One is, we provide capability to our customers and merchants that no one else in the world can do, meaning that you can use your crypto to go shop at any of our 28 million merchants around the world. Historically, there's been sort of an impediment to doing that because merchants did not want to accept the volatility risk with crypto. But what we're doing is converting that into fiat prior to the transaction. So the actual form of payment is opaque to the merchant. And that's settled in U.S. dollars or euros or whatever the local currency is. And for merchants, the other aspect of this is it requires no integration on their part. They're now able to accept crypto as they form a payment among any of our users. The last thing here is that we're bringing 360 plus million customers to the equation here, that have the ability to do this. So we're excited about this. And certainly, I think it's a first step in sort of broader crypto and other financial services that all go back to your question around increasing the level of engagement for our customers.

Okay. Okay. To the merchant, it's PayPal. Obviously, to the consumer, it is funding PayPal using crypto?

Exactly.