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

Hello, everybody. I'm thrilled to be joined today by my good friend, Dan Schulman. Dan, thank you for joining us. Dan has been the President and CEO of PayPal since 2014. He joined PayPal following the announcement of its separation from eBay. And since then, he has continued to focus on democratizing and transforming financial services and e-commerce, and I think he's doing a pretty good job. And so Dan, thanks for being here. Really appreciate you spending the time with us.

Yes. David, so great to see you. Can't wait to see you in person.

Me, too. So let's dive right in. I want to talk a little bit about leadership. The last time you and I connected, you were interviewing me and we talked about an important leadership skill, which was listening and being attuned to help people respond to the environment which you're in. Never has that been more important. I think you and I would both agree that in the last 9 months, some of the most challenging times, I think, for any leader. Reflecting back, can you share how you've navigated this rapidly changing external environment while listening and responding to the needs of workforce and customers? Talk a little bit about that balance for you and PayPal over the last 9 months.

Well, that's a big question. Obviously, a lot of parts to it. And it's obviously been a really difficult time for all of us. And so many of our customers and our employees and our fellow citizens, we've been battling through real concerns about health. Obviously, here in the United States, the pandemic is just blowing up, 220,000 cases yesterday alone, it's gruesome. Even though we've got vaccines on the horizon, every day, people worry about their health. You've got all the economic fallout that's occurred, and so you're seeing more and more people really move into desperate situations around their economic well-being. We've obviously all needed to deal with issues around social unrest and a quest for more social justice and all the political divisiveness that's occurred around us. Those are all the things that you are working through and I'm working through and probably everybody on the call are working through. I think one of the interesting things to me is the pandemic has both accelerated as well as exposed a number of trends that were already existing, right? There was a move towards digitization, but the pandemic basically took that gradual acceleration and fast forwarded it maybe 3 to 5 years. You've seen one industry after another digitized. You've seen the explosion now of e-commerce in retail, where there's really a blending of online and off-line together, explosion of digital payments, people using cash much less than ever before. And so these are trends that are now accelerated, and in my mind, are never coming back, and we'll talk about that maybe later on. But I think we are entering into not just what will be some people call it a new normal. I think that's a mischaracterization. I think it's a new paradigm that we're going to enter into. We're not going to -- it's not going to be informed by what was, it'll be informed by what we've gone through and where we are coming out of it. And I think all of those things play directly into our strengths as a company, our mission as a company, as you mentioned. It's to democratize access to financial services, to assure that both consumers and merchants can thrive, first survive and then thrive in this digital economy that is rapidly emerging. And then I just -- I'd end by saying like the #1 thing that I'm focused on, and I know it's the #1 thing that you're focused on, too, is the safety and health of our employees. I mean, I think we have that obligation to make sure that the physical and mental well-being is taken care of. I mean there's so many things that all of us as leaders of companies have put into place to support our employees, to make sure that they feel secure, that they're financially healthy, that they've got the right mental counseling where they need to have that and displaying sort of empathy and respect and caring in ways probably that none of us ever imagined before. And I think all of those things have probably made us better leaders in our companies and hopefully in our communities as well.

Yes. Well, I mean I appreciate that. I think you're -- I've thought about a lot about those things, too, and it allows me just to shift to a second question because you've -- more broadly than just specifically for us, you've talked a lot over the years as we've engaged about stakeholder capitalism. And I'm curious, given the pandemic and the lessons we've learned here, how has that changed or evolved your view of the role of business in society, business and the communities we operate in?

Yes. I think the same thing I've talked about before, I think it's accelerating that trend. We've been talking about stakeholder capitalism, thinking about more than just maximizing profit next quarter but really thinking about who we are as companies and who we are as leaders. Look, there's no way that any sane person could think that companies are distinct and separate from the communities that we live in, that we're distinct and separate from the economy that we're all a part of and the political issues of our day as well. I mean we are global corporate citizens. And we need to think about the fact that we can only thrive, I think at least, when we have a healthy economy, when capitalism works for everyone, when our democracy allows us to rise above our own personal self-interest and we can think about the betterment of the whole. And I don't think we can leave it to government or to nonprofits to take care of all of the problems that vex us as a society. I think we need to step up. As leaders, we need to look at the issues that our customers are facing, our employees are facing, our communities are facing. Because if we can address those, then clearly, we are going to be better off as companies over the medium and long term. And when that happens, clearly, we deliver more for shareholders over the medium and long term. I think this isn't about that profit and purpose need to be at odds with each other. I actually think that profit and purpose work hand-in-hand with each other. The more you take care of employees, for instance, the better talent you attract. And I think that talent in our respective companies, David, you and I have talked about this a thousand times, that's like the biggest competitive advantage that any company can have. And people want to work at companies that are making a difference and take care of each other. And then if I can attract the very best talent and retain that talent, I will serve customers better than anybody else. And if I can serve customers better than anybody else, then at least over the medium term, I'll return more to shareholders than anyone else can. And so I think this idea of thinking about multiple constituencies, it just makes common sense in my mind. And I think we have -- leaders, have an obligation to step up and demonstrate that.

Yes, yes. I mean well said. Couldn't agree with you more. There was an op-ed in the Wall Street Journal, I think today or yesterday, that tried to take the other side of that, but I come out where if you don't take care of your people, if you think that you have a given right to operate in any community, it will affect your relative performance, and you got to keep the talent. Very well said. Relatedly, talking about talent, your whole workforce has shifted to a remote work model. What are some of the ways you've been able in this remote work model to invest in your people, keep them inspired, engaged in the business? I think we all saw at the beginning of the pandemic, with the height of the start of the crisis, it was easy to keep people engaged. But as the time has gone on, there are complexities to that, and there's productivity gains and productivity losses. How are you thinking about that and investing in your people on this remote model that you're currently executing?

Yes. Well, I think we're going to be in this remote model for another 6 to 9 months. And then when we come back, we'll be in some kind of hybrid model. We're not going back to what was, that's for sure. We'll be in some kind of hybrid model going forward, but I don't think that will start until third quarter of next year. I think, look, one of the biggest things, and everybody recognizes this, is that our personal and our professional lives have completely blurred together. I walk down from my bedroom to my office, I kind of live in this chair right now, it knows me very well. And when I walk out, family members expect me to be a part of that conversation even if I'm just taking a quick break. They're not happy when I'm saying like, "Well, I got to get back to a meeting." Everybody goes through that. Parents are juggling -- they're working from home and their kids having to be educated at home. People are lonely, people want to go out and see people. There's a ton of mental stress that is going on, and so I think we need to figure out how do we find space for personal and professional when it's all being done in the same place at the same time. Not easy. We've done a ton of things for employees. I mean we've given a lot of what we call global wellness days where these are incremental vacation days where the whole company is on vacation that they know because people are finding it hard to take vacation because we are all working so hard right now. I mean I've never worked more hours. You probably have never worked more hours. Our employees, like their productivity is still sky high. We're putting out something like 16% to 18% more releases every day than we did pre COVID. Part of that is we're very focused now. I mean one of the things that working remotely forced us to do probably we should have been doing before is to cut down on the number of things we're doing and really focus on the things that are going to make a real difference in the market. We call them initially moonshots, but like everyone is focused on delivering against those. But we've got global wellness days. We've got more psychological counseling that we've been able to do. We -- everything we're doing is around how do we create more understanding, more coming together. I don't think my senior team and I have ever been closer. We used to meet once a week for staff meetings. We meet 3 times a week, 3 hours pretty much almost every single time. We review every initiative during those time frames. So we're probably more connected and more focused as a company than ever before, and we are trying to be more empathetic than ever before as well. But it's a tough balance all the time.

Yes. Yes, it definitely is. I want to shift to performance. And there's no question there...

It's near and dear to my heart.

And it should be. It's near and dear to our heart because with everything we've still said, performance is also super important in terms of being able to do the things that you want to do, and so performance matters. And PayPal has certainly benefited tremendously from the rapid expansion of e-commerce that the pandemic's driven. You're expecting to process more than $900 billion in payment volume this year, which is really extraordinary when I step back and think about it. Talk about some of the trends and changes that you're seeing, what you think is temporary and what you think is here to stay.

Well, as I mentioned before, I think there's just this massive acceleration to digital. McKinsey says it's been pulled forward by 10 years, like the math would tell me that it's maybe 3 to 5 years acceleration. It's not hyperbole. That's just like what the numbers are and what the percentages are. I was talking to a couple of CEOs of the largest retailers. Their holiday season like last year was 30% online, 70% in-store, and that's flipped completely this year. We're at 70% online or pick up in store, pickup at curbside, delivered and 30% in-store. And then I ask them like, "Well, what do you think is going to happen going forward?" And I would say all of them are somewhere around 2/3 of that behavior will continue on. Like they think that people have just gotten used to the fact that this kind of blurring of online and off-line on the ordering online, having something delivered, it's just simpler, it's easier, it's faster for consumers. We get good food when we order online. People were worried about that before. Now everyone understands it. People like my mom, who despite the fact that she loves her son, like never used PayPal because she just couldn't figure it out. And now she uses PayPal all the times. She thinks like I'm a genius because of PayPal. She now understands it. So you've got new demographics coming on that are also understanding how to use online. And people don't want to use cash anymore. Something like 40% to 70% of consumers say they want to use cash less. Think about it, that's like 80% to 85% of the world's transactions, and that's now going to move into digital. So even a lot of people will maintain their online behaviors, and I think all the retailers are gearing towards that. But even when people come in store, they're going to be using digital forms of checkout. And why are they using digital forms of checkout? Part of it is because they think it's -- contactless is more healthy. But now what we're finding out as we go into store is that the value proposition of being able to pay with your mobile phone and look at the deals and offers and loyalty and engagement you get from a retailer perspective when somebody pays with their mobile phone as opposed to with a credit card or cash are enormous. So the conversations that we're having now are fundamentally different with sellers. We're talking with the head of marketing and the head of growth as opposed to for Treasury and Finance, where we were when we were a checkout solution. And now we're really thinking about, how do we help with engagement? How do we grow sales? How do we leverage the scale of our consumer base to be able to help them survive and thrive in the digital economy? And when I look at where were we second quarter or third quarter or fourth quarter, other companies have talked about this pull-forward effect. I'm not seeing really a pull-forward effect, I'm seeing a very consistent higher demand than we've ever seen before. And companies that start to move into digital, like small businesses, are seeing their sales grow as opposed to small businesses that aren't in which they're shrinking. And so I think this is going to be a fundamental new paradigm that's just been dramatically accelerated because of the pandemic.

Yes, makes a lot of sense. Are there a handful of products or initiatives that you're investing in that you want to highlight for the audience at the moment, a couple of things you'd highlight?

Sure. We talked about them on our earnings call. But clearly, the shift towards digital is creating this -- a spotlight on digital wallets. And digital wallets were, at least for us, predominantly ways to safely, securely, quickly check out both on screen or on the mobile device. But that's clearly expanding dramatically. I think now you've got an explosion in digital payments. Digital wallets are more and more moving into financial services, bill pay, budgeting, savings, that kind of thing, where you'll do your payments, you do financial services, capabilities on the digital wallet. And you'll also have a host of shopping tools or commerce-oriented services on those digital wallets. And those 3 things will all won't be just like a list of services and capabilities. They will all be sort of somewhat integrated together into a whole. So if you're using one service, the data and information generated from that will lead to better personalization on offers and that kind of thing, and that'll flow back into budgeting capabilities and tool sets and then into digital payments and new forms of paying, buy now, pay later, using cryptocurrencies, that's funding instruments going forward. I just think clearly, in our industry, how many times have you and I talked about this on many a time? We've spent hours together traveling in one place to another, talking about like what is going to happen to the financial services industry. And with the dissipation of money, paper money happening and a financial system that has been around for several hundred years, our infrastructure is not as modern as we want it to be. It can take time for payments to clear. It can be expensive, like the take rate overall for the financial services industry has been relatively flat the last 20 or 30 years. And that take rate is disproportionate. If you're not affluent, you have a much higher take rate to manage and move money than if you are affluent. And we had our government mailing out checks to individuals who were part of the system. That's so ridiculous. It takes forever. They're sent to the wrong addresses, then somebody has cash they're checking. Sort of this combination of digital wallets and the move into digital currencies and modernized technological infrastructure is clearly where we are all moving towards. And we think we can play a role working with regulators and working in the ecosystem to really shape how that moves. Digital wallets will be a essential element of that. And then obviously, we are pulling together a host of services into one integrated solution for merchants to enable them to really look at the digital economy, full omni capabilities and really not just survive but thrive against a number of digital giants that are emerging. I think we as a country, we as an economy, we as communities are better off if we have small businesses that can thrive in the digital era. It would -- don't just consolidate around 100 large new dealers or so.

Well, I mean your comments about digital wallets, and you and I have spent a lot of time talking about this and thinking about this, it's super interesting. I watch the headlines, you're talking about digital currency. I watched the headlines around your cryptocurrency offering. And what's interesting to me when I see that is there's a lot of attention and debate about the value of Bitcoin. I won't offer a point of view. I can see the -- I don't know the answer, and I can see it'd be worth a lot or very little. But what I think people are missing when you look at someone like you in a digital wallet is a social network that's created around people affiliating with your platform because of that and the value that all that connectivity creates. But tell me a little bit about your decision around all that and how you see that evolving.

Yes. Well, I think your -- the insight that you just brought out is exactly right. I mean, first of all, we didn't want to just have people buy, sell, enroll cryptocurrency on the platform. People obviously want to do that and they trust -- they tell me, trust the brand and the platform to enable them to do that simply and easily. But we really thought, can we move crypto from being more of an asset class, something you trade, into being more akin to a financial instrument in which you can use it to conduct commerce? And that's what we're going to do. At the very beginning of the year, you'll be able to use crypto as a funding instrument, immediately translate that into fiat and then buy at any 1 of our 28 million merchants. So you take away all volatility risk from merchants and consumers. Merchants don't have to do any integration, and consumers now can invest in an asset but then immediately change that over into fiat to conduct commerce. So I think we're going to increase the utility of the cryptocurrencies. But to your point, this is really interesting. 50% of the people who are now using our crypto service on PayPal, 50% open their PayPal app every single day. That's unbelievable. We've been talking about this move towards PayPal being an everyday app because I think there are going to be 6 to 10 everyday apps going forward as we look into the digital era. And we want PayPal and Venmo to be 1 of those 6 to 10 everyday apps. That means that we need to have much more of a super app, much more of a comprehensive set of services inside the digital wallet, needs to be online and off-line, and they need to build on each other. But just a crypto example, it's a perfect example. You add one service. People open their wallet, you have 50% every single day they're opening their digital wallet, and then they're using that to do other engagement inside the PayPal ecosystem. So these all do play on each other. And -- but I do think crypto -- and then which is one form of digital currency that, by the way, the new infrastructure, smart contracts on top of that, the capability of digitizing assets, I think, increase the utility of crypto not to the point you and I were just discussing. Is it going to be higher or lower tomorrow? Like when you're investing in something, anything, one day, it can be higher, one day, it can be lower. You have to understand the risk of that. But if you can start to move that to have more utility in everyday functions, then I think that stabilizes it more, and it starts to move into a utility. And then you have the central banks, who across the world are looking at what are the pros and cons of issuing CBDCs, digital currencies, they're fiat-based. And in all of my conversations with different presidents of central banks around the world, there's clearly an interconnect between digital wallets and digital currencies and the interoperability of those. And so we're working hard to be sure that we have the infrastructure inside PayPal to be able to work in this new era of digital currencies, whether they be CBDCs or more crypto cards used or anything else that will emerge.

Yes, yes. And the CBDCs are coming for sure. And obviously, that'll have a big impact on all this. To round out here, there are a couple of questions that have popped up. First is when will you roll out Venmo outside the U.S.?

When we're ready, I guess. So look, we have aspirations to go and do that. We have a lot of work yet inside the United States to put a ton of incremental services on Venmo. We talked about Venmo reaching $900 million next year and turning profitable in 2022. I feel good about those objectives. But Venmo is clearly a beloved service. It's used by generation right now, and we think it has applicability outside the U.S. as well, but it's just a matter of road map capacity and focus.

This question popped up. As rising scrutiny of digital payments is related to controversial sectors like firearms, pornography, white supremacy group, how does PayPal navigate the scrutiny going forward, especially where crypto might shield transactions?

Yes. Well, I mean we take that responsibility incredibly seriously. And as you know, we've been a leader, and we don't support PayPal being used for gun sales. We took down PayPal, the ability to use it on sites like Pornhub. We monitor our site and do our best to assure that people who use PayPal or Venmo comply with our acceptable use policy, which states that it cannot be used for causes that advocate violence, hatred or racial intolerance. And that's very difficult to monitor. A lot of things are done in code so that you can't just look for words. You need to understand codes that are out there. And we do our best to monitor. We take down sites every single day that don't adhere to that. I feel we have a responsibility to go and do that. I think that is part of stepping up and being a good corporate citizen. And so -- and I think on the crypto side, we -- like you need to do full KYC. And if you want that money to leave our system, it's got to be through fiat. It doesn't go crypto to crypto. So we're going hand-in-hand with regulators and FinCEN, AML, all that, that's just table stakes on every single thing that we, as responsible financial stewards, have to do.

Absolutely. And I know from my own dialogue with you how focused you are on that personally and how importantly you take that. Dan, we ran out of time. I appreciate it. I thank you. It's great to see you. Can't wait until we can be together live, and thank you for joining the conference today. Have a great day.

Yes, me too, my friend. Look forward to seeing you soon. Thanks, everybody. Bye-bye.

Be well. Thank you.