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

All right. Good afternoon, everybody, and thanks again for joining the Wolfe Fintech Forum. This is Darrin Peller. We're going to be doing audio for our session with Dan Schulman, the CEO of PayPal. And we're really excited to have you here, Dan. So thanks again for joining us. It's great to have you.

Yes. Thanks, Darrin. So sorry, the video isn't working, but we do our best in this day and age.

I think people just want to hear what you have to say. So it's great to have you regardless. But look, it's amazing. I was talking to my team before this, and we were looking at what your -- you guys even put up as your addressable market when you first went public as a company out of being spun out. And now you look at the addressable market and it's several, several multiples what it was. And so I think a lot of that was happening pre-pandemic, but you just start off taking a step back and looking at, what would you say the things that really surprised you after a pretty crazy 2020 for really the world, both positively and negatively about the industry, and specifically about PayPal is a good place to start.

Yes, great. Well, we are coming off of a strong year. Obviously, the world leapfrogged into really maybe the next phase of the digital era. As you mentioned, a lot of the trends were already in place. But clearly, they accelerated by 3 at a minimum, maybe 5 years in terms of their -- where they are today. We put on 73 million net new actives, our Q4 total process volume was $277 billion. So we're exiting out of the quarter with over $1 trillion run rate on TPV. We generated over $5 billion. And as you mentioned, obviously, the secular tailwinds are quite strong, and I think they're quite durable as well. And because of that, because of the things we're doing on our products and our focus areas, our total addressable market has increased substantially. And I -- so I think about it, I probably have never had more conviction in our business and our ability to innovate at scale. So really excited about where we are right now. We've got a lot of work ahead of us, but clearly a ton of tailwinds behind us.

Yes. And Dan, when we think about areas that you're most focused on, I mean, you guys have such a huge list of opportunities across the business, some of which you highlighted at the Investor Day. Just if you can give us a sense on how you're prioritizing some of these opportunities right now. And really, just how you spend most of your time. I think a lot of folks would love to hear that.

Yes. So I would say there are 4 major areas that I'm focused on that we do reviews at my senior leadership table multiple times a month. And the first one would be the digital wallet. I'm sure we'll talk about that later, but that encompasses a whole host of new products and capabilities that we're looking at for consumers, both in online space, but also in the physical store, the offline space as well. Second thing that we're focused on is a pretty radical expansion of our PayPal commerce platform. That's our, really, the equivalent of a digital wallet for consumers is the PayPal commerce platform to merchants. It enables a fully omni-experience. It enables merchants to move from a digital-only or a physical-only world into a full omni world. And we have a whole bunch of tool sets to help them not just do classic payments and processing, but really commerce enablement. We are looking at international expansion, we probably will get into that a little bit as well. But I think there's a lot of opportunity for us to expand our share internationally. And finally, we really believe that we are at this position right now within the industry, where the actual rails of the financial system are going to modernize. A lot of people think about that as cryptocurrency, I really think about that as digital currencies. We've established a full business unit to really think how do we help shape that next-generation of the financial system, working with regulators, central banks, et cetera. And those are the big 4 things we're working on. We obviously are recruiting a ton of talent into the organization. I really couldn't be more pleased with the caliber of engineers that we're bringing in and product folks that we're bringing in, because if we're going to innovate at the speed and the scale that we're planning on, we need to have the best talent. So I'm spending a lot of time making sure that we're both attracting the very best of talent and making sure we retain that talent as well.

All right. That makes a lot of sense. It's amazing, the more and more panels we have at this conference, the times that -- the changing in terms of the way payments are done and evolving in terms of digital is coming up more and more. And I think your investments in that are obviously showing, they were at the forefront over the past several years now. And that probably gives you a lot of the conviction in some of the guidance numbers you guys just gave us. When talking about 750 million accounts by '25, by 2025, and the revenue growth. I mean, from our perspective, something more permanent has fundamentally changed. Fundamentally changed, considering the organic guide being hundreds of basis points higher than your last despite your size. I think it would be helpful for investors if you could provide maybe just 2 to 3 high level assumptions that you considered when building this out. I mean, we still get that question from investors, is how they can really feel confidence in that -- those kinds of numbers.

Well, I think we have a pretty long track record of being, I would say, conservative but reasonable in our estimations. If you look at the guidance we've given over the last 6 years, we've pretty consistently either met or beaten our guidance. If you look at our 2018 Investor Day, we gave 3-year guidance around revenue, earnings, things like margin expansion. We exceeded all of those. And we obviously thought quite carefully about the guidance that we were giving over the next 3 to 5 years and wanted to have the same philosophy in terms of the guidance that we gave. So we obviously feel comfortable with that guidance, and we thought long and hard about it. I think the first thing is we clearly believe that we have entered into a new phase of the digital economy. Every single retailer I talked to is reassessing their strategy. They have clearly understood that consumers want to now look at things on a fully omni basis. Really, strategies are evolving from how do we attract consumers to our store to really how do we optimize for home delivery or curbside pickup. And that's a real opportunity for us, and we're well positioned to take advantage of that. Now, we have a -- we have pretty immense scale right now. We're one of the largest platforms in the world. We have 377 million people using us on an active basis, 29 million merchants. And part of our assumption sets where we're going to continue to put out new products and services, we talked about a number of those at Investor Day. All of those that we talked about, we intend to put out into the market over the next 12 to 24 months. So these aren't products and services that are way out there. These are going to -- we have these on our road map with definitive dates in terms of when we want to deploy it. We're going to move into incremental markets. We've identified those markets. We think there's a large opportunity for us to participate in the growth of international markets and substantially, increase our share of those markets. And we're obviously bringing in new demographics. We'll expand Venmo internationally. We also know from the products that we've put out right now that we're beginning to bend our traditional engagement curves that are accelerating right now. When those engagement curves accelerate, ARPU goes up and our churn goes down, and those are also baked into our assumption set. So we obviously are a very different company than we were 3 or even 5 years ago when we were predominantly P2P and online checkout. We've got a full suite of products and services. And so we think when we look over the next 5 years, Darrin, the opportunity is clearly much greater than the past 5 years, which obviously have been very good for PayPal. But we're positioned in a whole different place. Our tech stack is in a whole different place. Our talent is in a different place. Our compliance and regulatory, AML, FinCEN capabilities are at world class levels, I would argue. And so I think we're really ready to tackle the next 3 to 5 years. And that's why we felt comfortable with that guidance that we gave.

You touched on the international opportunity as a key part of this. And we were going to touch on that a little later, but maybe now is a good time as any. I mean, it's clearly a lot of white space around and I think you guys have the best position -- among the best positions to take advantage of that. So can you expand on that a little bit in terms of where you see the incremental markets and the most opportunities?

Yes. I think there are probably -- I'll talk about some specific countries, but I'll talk about region first. Obviously, EMEA, European market, we're seeing substantial traction there. It's complicated from a regulatory point of view, but that's probably one of our greatest strengths right now. I've invested hundreds upon hundreds of millions of dollars in our regulatory compliance capabilities. We've added multiple thousands of people into that domain since I've been here at PayPal. And I really think of that really as a competitive advantage for us. Our brand is very strong in Europe, and we've seen a large amount of traction. So we're going to really double down in that market. It's a good, strong, fast-growing market for us. And if you look at their move into the digital world, it's even faster than what's happening in the U.S. And then obviously, you've got a couple of countries, whether it be Brazil, Mexico, Japan, China that have tremendous opportunity that we're very well positioned in, that we're beginning to see growth rates that are, in some cases, triple digit. So we think there's a tremendous amount of opportunity as we build out our product set. And the reason we can do that now is we're finally pulling together our tech stack into one cohesive platform as opposed to many small subparts. It's all service-oriented right now. So we feel like we have a lot of opportunity. And we are very well positioned with those governments, regulatory bodies and central banks as well.

But you also have a number of -- I know there's been a number of partnerships internationally that have probably really given you even more of an opportunity from a reciprocal relationship. When we think about MELI or Gojek or maybe Alipay or others to come, who knows, but it seems like that's a big, big opportunity. Can you touch on that? How has that been progressing? Are there more like that to come?

Yes. Well, we're obviously really pleased with the relationship that we have with MELI. That is a robust relationship. Marcus and I are very close friends. We have a Board observer seat on the MELI Board. And there are more and more things that we can do together, and we're seeing a lot of traction already. Gojek is still -- and it's more -- I wouldn't call it embryonic, but I would call it still early stages. So a lot of opportunity there. And there's a lot of things happening in the Southeast Asia market, in Indonesia, Singapore, et cetera, that give us a lot of hope for expansion with Gojek. Obviously, the acquisition of GoPay in China opens up a big opportunity for us, both from a cross-border perspective, both inbound and outbound as well as teaming with Chinese banks, China UnionPay. And even, as you mentioned, the tech platforms within China. We've got a very close relationship with Ali that is growing. And we have good relationships and the beginnings of the potential of some partnerships with JetPay as well. So I think partnerships are going to be a large part of our future as they were in our past. We don't even really talk anymore about our partnerships with financial institutions, but those are growing. We're probably one of the largest digital distribution channels for FIs across the world right now. And as you see with our TPV, we did 36% growth in TPV last quarter outside eBay that was growing at 40%. Think about that at those -- that scale and what kind of volumes we're driving for both the networks and for our FI partners.

Yes. It's amazing. When we think about another key variable is, obviously, churn being down pretty considerably versus historic levels just given all the engagement and active user growth. I don't know if you guys have ever really quantified how much of a contributing factor that is. I don't think so, but maybe just qualitatively, how big of a deal is that for you guys?

Well, when you're at 377-million-plus people on the platform, every basis point reduction in churn matters tremendously in terms of the number of net new actives that you can bring on to your platform. Obviously, we've got relatively consistent and even growing set of customers and merchants we want to come on to our platform at the top of the funnel. I think we brought on something like 5.3 million merchants last year. That was up over 100% year-over-year. And so we've got new demographics, new markets, new products that are attracting new customers at the top of that funnel. But to me, what's really important is that we close down the bottom of the funnel where people drop out. And there, there are a host of things that we're doing. And I'm really very encouraged by the results that we're seeing in terms of engagement. We've seen double-digit increases in our 2020 cohorts in terms of their customer lifetime value. Our 90-day engagement rates for last year's cohorts are up 13%. Our daily active users are consistently up about 30% year-over-year. And if you adjust our transactions per active for Honey, which we don't include but it's in our denominator, and if you adjust like the number of net new access last year was 73 million. Typically, we're putting on about 35 million. If you said last year, we had done 35 million, and you looked at our transactions, if you adjust for those 2 things, our TPA was up 11.5%. And so all of our kind of engagement curves are bending and accelerating. And what I love is when they engage with our new products and services, like crypto, we are seeing people open the wallet 2x what they were previously our Buy Now, Pay Later, we're off to an incredibly rapid start there. But not only are we having all these first-time users coming on, but we're already seeing, like even in the first 3 months, like 40% reuse of Buy Now, Pay Later. So -- and you've seen on things like in store, we have 50-plus incremental transactions when somebody starts using PayPal in store. And so when you combine all those things together and you see kind of the reduction in churn and the increase in average revenue per user, those are pretty encouraging when I look at over what that will do over the next 1, 3, 5 years.

Yes. That makes a lot of sense. You brought up engagement. It's a perfect segue. It's one of the areas we focus on a lot, but look, when we think about your targets, you guys have said that you hope to see potentially doubling of PayPal core ARPU over the next 5 years. That would be a success if you really see this engagement drive where it should as part of a super app. And frankly, I don't think a lot of investors realize this, Dan, but you guys are effective in executing on the doubling of core PayPal ARPU and what you said about Venmo being up several multiples also. You can really reach your revenue targets almost with very little new users, just from the effectiveness of the engagement increasing almost entirely. It's incredible. But when we think about what your views are on that in terms of what it takes to be that super app and drive more usage, maybe just start off, what kind of attach rates do you have now in terms of folks using more than one product? And where do you see that going over the next several years?

Yes. That's one of the key metrics that are measuring our consumer team on as well as our merchant team. Really, cross-sell is such an important enabler for us. There's something like, when somebody goes from using 1 service of PayPal to 2 services in PayPal, even if that service is like P2P, which is basically, in some cases, a free service, the lifetime value of that consumer doubles. And think about, Darrin, all the new products and servicing capabilities that we launched in 2020, which is probably -- not probably, it was our most productive year in terms of new products and services we put out. I think that will be exceeded by what we do in 2021. And when you see things like somebody using PayPal for their direct deposit, you see their lifetime value going up 6, 10x from where it is. I mean, just little changes in this, to your point, create immense leverage in our model. And that's kind of one of the things, to your point, we put out our target so that we had a good realistic expectation of either hitting that or exceeding those long-term targets. And there are so many different ways that we can do that from further attachment, further engagement. And the digital wallet that we're going to put out is a pretty radically different look and feel for our app. Our app is being adapted quite rapidly. People are moving tremendously from desktop into mobile. We've seen that growth in the usage of our app. And our app now, if you open it and use it, you could see, it's well more than using it to check out. There's a host of different things in it. And this quarter, we're going to start to put out a ton more in the digital wallet. It will be updated. It will be a new user experience. And that will cross over not just payments, but basic consumer financial services as well as shopping tools. And those will be enhanced and enhanced and enhanced over time, where the data and information from every one of those separate and unique products and services will be used to create even better experiences as people use other parts of the wallet. And so we think we really have a real competitive moat and competitive advantage with the scale that we have and the ability to create payments from across multiple financial institutions, rewards points, into that Buy Now, Pay Later capability, into that crypto as a funding source, in that use all of those payments through budgeting tools, through savings tools, through investment tools. And then really create personalized, customized shopping experiences, demand curves so that consumers can put all of that together and really create the best of a new digital world and really achieve whatever their financial goals are as well. And so I think it's really exciting. And by the way, online and offline. That entire value proposition that I'm talking about is not just online. You can take it with you offline when you're checking out at a point of sale, and we're seeing something like 3 or 4 merchants every minute signing up for our offline capabilities. So there's a lot of good things going on that make us feel good about both the engagement and the ARPU levels of our existing base. And that obviously will drive larger cohorts of NNAs coming in as well.

Yes, that's amazing, and that's helpful color. Just in interest of time. I mean, look, the flywheel effect is obviously something that I think is clearly showing in the business. One of the areas that we do want to hone in a little more on is still Venmo, though. We consistently get questions from investors on when Venmo monetization begins to play out. I know at Investor Day, you mentioned there, you could potentially see 10x the ARPU, could get you well over $100 per user longer term. If you think about the building blocks you're getting there, first of all, if you could just touch on your plans there going domestically into international. And then what are the key drivers of that monetization potential? We get that question a lot, how you have confidence in it being that much more material.

Yes. First of all, we said that this year, that will be -- can't exactly say, but let's call it, $900 million. I don't know if we said approaching over or whatever, but let's call it, $900 million that's beginning to become a material amount of monetization. And that comes from basic things that we've talked about already. Pay with Venmo, really pleased with the progress there. I think that Pay with Venmo, honestly, could be way bigger than we imagine or even have in our models. It's really kind of the moral equivalent of what PayPal was 15, 20 years ago when it was all P2P and then started moving out into merchant services. Venmo is going to do exactly the same thing. Then obviously, you've got crypto coming into it, instant transfers coming into it. You've got the credit card and really seeing traction on that. But that's just the very beginning of Venmo. Venmo is going to have all the basic wallet capabilities set of PayPal, while it has -- if you look at the demographic of Venmo, younger users. They fundamentally trust Venmo and love Venmo to be their main financial services provider. And the more capabilities we can put on there, the more we know from our research that customers are going to use that. I think we are at the very beginning of the Venmo monetization. And that doesn't even include the fact that, obviously, we're going to take that outside the United States as well. And so when I look at Venmo, we think this year, $900 million next year. It will move into profitability, and pretty excited about the potential that Venmo has.

You mentioned crypto a minute ago, really in line with Venmo. But more broadly speaking, I mean, that's clearly been a really strong engagement driver for the business also, right? And it's one of the features we're excited about, not just because of engagement, but you're one of the few companies we've seen that's been saying you're going to allow users to use it at the point-of-sale once it's in the wallet and help with the conversion. Can you touch on the opportunity you see there? I know there was also a recent -- your recent deal announcement of Curv. Maybe expand on what your intentions are on that asset as well.

Yes. Well, we've established a new business unit to focus on cryptocurrency is, call it, blockchain, but really, call it, distributed ledger technologies as well as all forms of digital currencies, including Central Bank digital currencies. And the very beginning of this was allowing PayPal users to buy, sell, hold and then moving over to Venmo to buy, sell, hold and then moving that capability internationally. But that is literally just step one. To your point, it's really a very large engagement driver. The results of that have been so far beyond our initial expectations. We've made that simple and easy to do. But the real play in this is to enable more and more utility and functionality from cryptocurrencies to move from being just an asset class where you can buy, hold and sell to really having that be a utility in which you can create more value in transactions than we could in the traditional financial system. Our first thing, and we're on track to begin to roll that out even this quarter, is to allow people to utilize their crypto holdings as a funding source at any one of our 29 million merchants. So if you've invested in crypto, you see that just like you see rewards points as a funding source, you see fiat currency as a funding source. You'll see your crypto holdings as funding source. And you can instantaneously translate that into fiat currency and buy at any one of our merchants. Our merchants are just accepting it in fiat, and it's basically full liquidity instantaneously, no incremental fees to do that to be able to use crypto as a funding instrument. But that's just the very beginning. I mean, the capabilities that underlying ledger technology that from smart contracts to reducing cost, increasing speed of transactions, being more inclusive, allowing people to -- in developing parts of the world become part of the digital economy. This, to me, is the biggest aspect of what is going to occur over the next 5 to 10 years. And PayPal has gone from 15 -- maybe what most people thought of us, maybe 5, 7 years ago as being sort of antiquated, an old tech stack. We now have the most modern tech stack you can imagine. We are leading in innovation, and we want to work with central banks, with governments, with regulators, to really think about how do we shape the next-generation of the financial system so that it's faster, less expensive and more inclusive. And that is a huge opportunity because digital currencies and digital wallets go hand-in-hand together. And I think over the next 5 to 10 years, the very foundation of our system is going to change. And I think PayPal can be a major player in helping to shape that.

That made sense. Dan, we're just about out of time here. Look, overall, this has been extremely helpful. I still think the market may be underappreciating some of the magnitude of different opportunities you guys have across the ARPU potential, the engagement potential and the products. So really good to hear you expand on that. Thank you very much for joining us. And for everyone on, guys, the next presentation is at 1:00 p.m. with Square. So you'll have to tune back into a new link for that. But Dan, thank you, again, really appreciate it. And be safe.

Okay. Thank you, Darrin, to you, too. And everyone tuning in, thanks for taking the time. Take care, everyone.

Thanks, guys. Take care.

Bye-bye.