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

Good afternoon, everyone. I'm Jason Kupferberg, the payments, processors and IT services analyst here at Bank of America. And we're very excited, for this keynote session, to have Dan Schulman with us, CEO of PayPal. Dan, we really appreciate your time.

Yes. It's a pleasure to be here with you, Jason.

I wanted to start out just by kind of reflecting on the past year, so many changes in kind of how we all work and live. And certainly, since the start of the pandemic, PayPal obviously has put up record growth rates while also simultaneously ramping, I think, more growth initiatives than at any time in the company's history. So maybe you can just give us some insight into how you manage through this change. You're innovating at scale. You're executing well at a pretty rapid pace despite the challenging backdrop. So maybe just take us through some of how you've been able to accomplish all of that during this tumultuous period.

Yes. Well, thanks for the question. I think it's probably a combination of a couple of things, Jason. First of all, we've been putting a ton of investment into our tech stack and into our compliance and regulatory functions and platforms. And I think with or without the pandemic, those investments would have led to increases of productivity. And last year, we saw productivity increases of over 25%. And a lot of that is just platform investments that we've made. The second thing is great things can only happen through great teams and talent, and we've been working on that for quite some time. And I just love working with my senior leadership team right now. They're exactly the players I want on the field. They work extremely well together. They are incredibly talented. And there's no substitute for having a great team and being able to attract great talent. And the more successful PayPal has been, the more trusted our brand has become, the more it's seen that we are really trying to shape the future of what the financial system can look like, the more talent we can attract and the better that talent is. And so I think that's been really, really helpful. And finally, I know this is kind of weird, but we saw what was possible and what was needed at the same time. And what I mean by what was possible is if I had told my team before the pandemic that I wanted to move from 56 offices to really about 40,000 offices, home offices, across the world in 2 weeks' time, they would have said I was crazy. They would have said, "Look, it's going to take us 6 months of planning and then another year. We got to think about security, tunneling, VPN -- everything, right, and equipment." And we got it done and we saw what the art of the possible is when there is no choice around getting things done. And that really opened our eyes to what it meant to have moonshots, to really what could we do if we all rallied around what customers needed. And clearly, we became an essential platform during the pandemic, and so that really drove us. And I think that pride in what we could put out and knowing that we are an essential service really drove us.

That's tremendous. One of the metrics that I think has been also a byproduct of all this has been your net new adds, and we continue to ask a lot about that. They've been pretty eye-popping for the past year. Obviously, you've had a lot of brand-new users adopting PayPal amid the pandemic, but maybe an overlooked piece of the growth in this metric is just the improvement in retention of existing users. So I wanted to see if you can perhaps quantify the degree of improvement in active user retention since the start of the pandemic and also discuss some of the initiatives that PayPal has implemented to really help promote this dynamic.

Yes. Well, net new actives, it's a math equation. It's sort of top of the funnel, what is demand, new demand coming in minus churn, what's coming out of the bottom of the funnel. And clearly, as we get bigger and bigger -- we're 400 million-or-so people on the platform now. That's a pretty huge number, and so the bottom of the funnel is extremely important to manage. Look, demand -- we're seeing consistent demand for our services, maybe even growing demand. We put on, I think, 2 new customers every second last quarter. We put on a new merchant every 5 seconds last quarter. We're seeing new segments of the population. And man, silver tech, more of -- greater than 50 years old is still flocking to the platform. We're seeing more and more use of the platform. We're going into more and more countries. We'll expand Venmo internationally. I mean there's so many things we can do better at top of the funnel. Our marketing is finally starting to kick in, in ways that we can really measure and look at it, invest wisely and get a return on that and bring in high-quality net new actives at the top of the funnel. In churn, churn is really all about how do we reduce that. It's really more about new products coming in, new use cases, beautiful experiences so that people want to use our platform not 4 times a month but every single day. That's clearly the goal that we have. And if we get anywhere close to that, our net new active numbers are going to increase dramatically from what already are, as you mentioned, pretty good numbers in terms of the NNAs. And I would say, as I look at the year, I'm feeling really good about the year. This quarter -- we've always had a forecast or target about 11 million or so. I think we'll be right around there and maybe a little bit above. We said we were going to be 52 million to 55 million for the year. I would bet that we're going to be closer to the high end of that range than we are to the low end of that range. And so I'm feeling really good about our progress on NNAs, our transactions per active going up really nicely, and I'd expect that to continue.

Meanwhile, Venmo continues to evolve from a verb to really a multifaceted platform. And there were certainly some exciting discussions around future [Technical Difficulty] at your Analyst Day in February. Now with that said, if we look at 2021 specifically, based on your forecast, Venmo is only going to be about 3.5% of total revenue. How would you encourage us to think about where that percentage could maybe go over the longer term, especially as you consider some of the longer-term plans on the road map? We had Darrell at our payments conference a few months ago. We've been talking about things like taking Venmo outside the U.S. ultimately. I would love some of your thoughts and perspective there.

Yes. Well, listen, the Venmo team is knocking it out of the park right now. I couldn't be happier with their performance. I couldn't be happier with the results. They're just doing a great job right now. And when I think about Venmo, yes, it's, whatever, 3.5% of our revenues this year. We're at that $900 million number. So I'm assuming you did the math right on that, Jason. But Venmo is like a nascent PayPal of like 5 or 6 years ago. If you look at TPV annualized of Venmo and you look at the TPV of PayPal 5 or 6 years ago, they're equivalent. And the ability to monetize that user base, that growth rate is so exciting for us. I mean we're just scratching the surface right now. We're going to do $900 million. I feel very comfortable in that number. And next year, we'll become profitable on the Venmo side. It's been a long time coming. I expect to see those revenue numbers continue to ramp quite nicely in the years ahead. We got a whole bunch of things we're putting out. First of all, Venmo is going to become a digital wallet. And you know that the millennials that live on Venmo want to do more and more with them. That has been a clear ask that's been going on. They want to live their financial lives on Venmo. We're going to allow them to do that. We're going to take -- a lot of the function that we're putting into the PayPal Wallet 2.0 that we'll talk about, the digital wallet, the super app, we're going to move it into Venmo as well. And Venmo has got a ton of things just on its road map right now. Pay with Venmo is obviously going to be a very large thing just like PayPal became a very large thing off of eBay. Goods and services are going to come on to PayPal. Goods and services are a huge revenue stream on the PayPal side. We just ramped [Technical Difficulty] to 100% of the base, seeing huge usage already on that and demand. Credit card, accelerating. Business profiles, all-time records last month. So I feel really good about where Venmo is, and I think everybody should. And it's been a long time coming, but we've clearly reached that tipping point.

Yes, for sure. And let's pick up on your point around the super app strategy. You certainly can't have a conversation with or about PayPal without touching on this topic. And maybe just to crystallize this point, if you're, let's say, sitting here a year from now, and hopefully, we'll be doing it in person, what are really some of the key differences and enhancements that a PayPal user will be seeing versus what the platform plus the app looks and feels like today?

It will be somewhat night and day difference. We're going to put digital wallet 2.0 out. We're pretty much code complete on that. We're doing trials -- employee trials right now. We're going to start ramping a slow ramp around that. But if you look out a year from now, we'll be fully implemented on digital wallet 3.0. We're already thinking about what does 3.0, what does 4.0 look like. And we've got 3 major food groups, right, inside the digital wallet. We've got payments of all types, and that'd just expand. And those payments will be both online and offline, so it will be ubiquitous across an omnichannel approach. They will include not just ways of paying, but how you pay, Buy Now, Pay Later and a whole slew of different form factors. Basic consumer financial services will continue to grow. We've already talked about things like high-yield savings, bill pay, subscription management, budgeting tool sets, direct deposit capabilities. These are all just going to get better and better, and we'll add more and more functionality as we look into next year. And then commerce, I'm really excited about the commerce tab in the new wallet. That's all done through machine learning, personalization, working hand in hand with merchants to really create these demand curves, create the best offers and rewards tailored to each of our users. And that will just get stronger and stronger as we go forward. And what I would expect to see a year from now is you should start to see TPA start to accelerate in terms of transactions per active. That will probably be the best view of that. As a result of that, if that starts to move up, you should think about our net new active numbers moving up as well. These are all tied in hand to hand. And so look, when we start to talk about super app, we start to talk about opening our platform, meaning open APIs for other apps to integrate into that, bringing in potentially things like digital ID into that as well, there are a whole host of things that we are very carefully and thoughtfully thinking in terms of introduction into the wallet. We want to be sure that we do that in a very beautiful way, in a simple way. And so it's not just a list of things you can do but really designed individually for you, Jason, and individually for any of the people who are watching us right now. So every wallet will be slightly different and personalized to those individuals. So this is going to be a multiyear process for us. Our machine learning and algorithms are going to get stronger and stronger every single year. We're going to have more and more feature functionality probably every quarter or so, and it's going to be a real exciting journey for us.

Yes, for sure. We look forward -- I look forward to seeing that on a personal level. Maybe we -- you mentioned Buy Now, Pay Later briefly. It seems like you've had some really nice early success. You've disclosed some metrics there in the past couple of quarters. Just talk about your biggest priorities for the Buy Now, Pay Later business over the next year or 2, if you would.

Sure. Well, obviously, it's been a pretty massive success story for us. But I would say our credit team in general is really stepping up and doing a super job. Buy Now, Pay Later is a great example of the work they're putting out there, but our basic consumer credit product is going to be substantially increased in terms of its value proposition. Our working capital is really starting to accelerate all over again. I see really pretty impressive things from that team as I look out over the remainder of the year and as I look into next year, all of it done in an asset-light manner as we are all used to. But the value props that they're thinking about are really going to be night and day different from where we are today. I expect to see us continue to grow quite substantially with Buy Now, Pay Later. It's a great value prop, right? Obviously, we're the most trusted brand in the space. We're most well-recognized brand in the space, so consumers know us and are perfectly happy to click on the Buy Now, Pay Later. We've got a tremendous amount of momentum on upstream presentment on product pages for our Buy Now, Pay Later, and it's no surprise on that. I mean for merchants, we have higher take rates because people know the brand. We have higher approval rates because we already know those customers. I mean we're dealing with almost 400 million-plus customers on that. So approval rates are good. Our loss rates are low. It's free of charge to the merchant. We're already seeing 50% of users repeat within 3 months, 70% repeat within 6 months. And we're going to expand the limits on that so it can go higher limits to use Buy Now, Pay Later. We're going to do things like the ability to do a higher upfront purchase and lower subsequent installments. I mean there's -- the sky is the limit on what we can do on Buy Now, Pay Later.

Yes. And I know so far, you've really focused mostly on the -- at least in the U.S., in the Pay in 4 market, right? So it's 4 equal payments over 6 weeks, no interest for the consumer. Do you foresee kind of opening the aperture there a little bit? It sounded like you were just alluding to the potential to allow kind of higher average order value transactions to take place within your Pay in 4 model. But do you ultimately foresee PayPal expanding to kind of a wider range of pay-later solutions and kind of moving into other parts of the broader BNPL market?

Have you been listening into our product road map discussions, Jason, because you know all of those things? We obviously want to give consumers flexibility and choice, whether that's related to funding sources, duration, number of payments. That's going to include shorter- and longer-term installment products. We clearly increased AOV. The current limit of $600, that will go up substantially to offer things like, as I just mentioned, the ability to make a higher initial payment, lower subsequent payments, these are just the tip of the iceberg, include Buy Now, Pay Later into really all of our checkout flows as another way to pay in that payments tab of our digital wallet. So a ton of exciting things there. And by the way, just -- it's a win for consumers. It's a win for merchants. It's a win for us. Our halo effect of that is like plus 16% on our TPV. Our margins increase on those. So the more we can do on that, the better. And we have a tremendous amount of inherent advantages with our scale and our number of transactions and our history with our base.

I wanted to switch gears over to digital currencies. PayPal has been a real champion here just from a financial inclusion perspective. I know that's been a priority of yours forever. We segment the market into cryptocurrencies. You've got Bitcoin, for example; the free-floating cryptos. You've got the private market stablecoins and like a USDC, and then, of course, you've got the prospect for central bank digital currency, CBDCs, still kind of in their infancy. So against that backdrop, I wanted to get your perspective on sort of these 3 different categories of digital currencies. To what extent do you see them as an asset and an investment versus potentially becoming a real transactional currency over time?

Yes. Those are all really good questions. First of all, I think what most people think of when they think of Bitcoin and they think of cryptocurrencies, I think they still predominantly think of them as an asset to be traded, fascination, what the price is of Bitcoin. Is it $30,000 or $60,000? Is it going to $1 million or lower? It's -- but to me, that actually is the least interesting part of this whole idea of the utility of digital currencies and cryptocurrencies. Clearly, we started offering that with buy, sell, hold. We're going to increase capabilities there. I think Jose who runs our blockchain and digital currencies business unit recently announced we're going to allow people to move money off the platform. We came in. I think we did it in what I would say was responsible innovation. Let's put guardrails around buy,sell, hold. Let's listen. Let's learn. Let's understand demand. And so we're going to do a lot more. We're going to increase limits. There's a number of things that will happen on that piece of it. But as I mentioned, I think what's really exciting about digital currencies, cryptocurrencies, central bank-issued currencies -- digital currencies is really the utility that, that can give to payments, whether that be smart contracts, whether that be the ability to digitize assets. You're seeing some of that happen through NFTs. But NFTs can be really functional, not just quirky -- it can really add value to the capability to digitize a number of different things and create added value around it. I think there's the promise of lower cost, potentially enhanced access by billions of people outside the system, if we're able to do this the right way. It can be faster and more efficient. And I think, clearly, the financial system needs to move into a much more modern infrastructure. It's too slow today. It's too expensive. It is not inclusive. And I think that CBDCs are -- the central bank-issued digital currencies, based on our conversations, and I have conversations with presidents of central banks around the world, government officials, regulators, I think it's a matter of when, not if. You're already seeing a lot of experimentation around the world, and I think there's a lot of promise with that. And I think there is a lot of excitement about directly working with PayPal. I mean we have a tremendous number of digital wallets. Digital currencies and digital wallets go hand in hand. We can do things like interoperability between digital currencies. And so I'm quite excited about what that potential future could look like. And our blockchain and digital currency business unit was formed to help think about how could we shape the next generation of the financial system because, clearly, forms of currency are changing. Cash is dissipating. More and more forms are moving into mobile phones. So even things like form factors of credit cards and debit cards, eventually, they all move into the mobile phone. It becomes -- you still have credit and debit and that kind of thing, but the form factor will change, and therefore, point of sale will tend to be cloud-based. New rails will emerge. And so there's a ton to think about, and we really want to not react to that but help shape what that future could look like. And so we're spending a lot of money, a lot of resource. We're getting the very best talent throughout the world to come to PayPal and help us imagine what a new future system could look like and how we work hand in hand with governments and regulators and central banks and other players inside the financial system to evolve and yet assure that the integrity and the stability of the system are at the highest levels as we go forward.

I think PayPal has said in recent months that cryptocurrency offerings are targeted primarily at, I think the term was, crypto-curious consumer. So I'm just wondering, is that the profile of the crypto users that you have seen trade on your platform so far? And to the extent you do end up mostly attracting the crypto-curious, I'm wondering just what the implications are for adoption of your pay with crypto service because, conceptually, one might think that, that would appeal more to kind of every crypto user that have sizable stored balances and might be more interested in using those balances as a fungible currency via PayPal.

Yes. Look, the initial target was crypto-curious, as I mentioned. Look, we just wanted to get our feet wet. Like go into it, understand demand, put on guard rails, work hand in hand with regulators to make sure we could manage all of this in a responsible, compliant KYC manner. But we've seen tremendous amount. Demand exceeded our expectations by something like 5x from where we came in. Venmo, as I mentioned, just ramped to 100%. Seeing great demand there as well. And so now it's time to start to move into other segments of the market; to start to think about being able to take your crypto holdings and move them into other wallets, if somebody wants to go and do that, increase the limits that people can do, create more and more utility, as you mentioned, of pay with crypto, moving crypto from an asset into a funding source to be able to purchase at any of our 30 million-plus merchants; start to think about next-generation digitization of assets, how do we start to play in that. We have a very robust road map. And what you see right now from us in the digital currency space is clearly the tip of the iceberg.

All right. I think a lot to look forward to there.

Yes.

I know you showed at the Analyst Day in February that the in-store retail TAM is 4x that of online, and PayPal has had an in-store presence for a while. You have PayPal and Venmo co-branded cards. You've got the iZettle asset. But now the latest angle for PayPal into this market is the use of the QR codes, obviously, in your app, both for very large merchants as well as very small sellers. So I wanted to see if you can describe the value proposition for both of those groups to adopt the QR code solution as well as, equally importantly, for consumers to actually use in-store QR codes via PayPal.

Yes. So first of all, the pandemic opened up a huge opportunity for us to move in-store. This was a -- instead of us pushing a solution, these were retailers pulling a solution for us. We -- it would have probably taken us 18 months to put out QR codes in 26, 28 countries. It took us 3 months to go and do. It's clearly going to be a multiyear process, Jason. You don't go into offline retail overnight. It takes time. You got to integrate with point-of-sale systems out there. And what we are clearly trying to do is not just be a form factor change but be a full value proposition change for both consumers and merchants, to really integrate fully into the loyalty programs of merchants; to be able to offer deals, offers, loyalty rewards points at point of sale; to be able to do Buy Now, Pay Later at point of sale; to have a full omnichannel experience, whether you're offline or online with that particular retailer. That's why we're seeing AOV go up on the retailers that we're really starting to integrate with. And so I'm really pleased with the progress we've made. We're putting on a merchant location with QR codes something like every 25, 28 seconds right now. These are all pretty massive numbers that are going on, but it's a huge marketplace out there. But the thing is that it's clear that payments are becoming digital, whether they be offline or online, and it's clear that retailers are looking at things now in a fundamentally different perspective. They are not dividing things into online and offline. It is full omni for them. That really plays right into our strength, plays into the strength of the digital wallet, plays into our scale that we have, the trust that consumers have in us. And then clearly, when we talk to merchants, we are now leading with our PayPal Commerce Platform, which is not just a checkout solution. It is a full integrated omni digital commerce experience for merchants. And you look at some of the acquisitions we've done, whether it be Chargehound, Happy Returns, iZettle, these are all part of this platform to help merchants not just sell more but also, in the post-transaction process, be able to do things more efficiently on chargebacks or returns and do the same thing for consumers who want to be able to track what do their purchases look like post purchase, how can they return it in an efficient manner as well and integrate all of that into the digital wallet so that we really become a platform for the digital era, for the digital commerce that we are clearly in, not entering but we are in it, and it's growing.

For sure, for sure. I know that just prior to the pandemic, PayPal was building some momentum on the China front. You had the GoPay acquisition. You had the UnionPay partnership announcement. Presumably, the pandemic obviously slowed down some of those initiatives. But now should we see more movement on that front potentially as we think of the next 12 to 18 months? And can you tell us a bit about to what extent does China play, kind of domestic versus cross-border or both and how the recently announced partnership with Alibaba plays into this as well?

Yes. There's a ton going on, on the China front. Look, as being the first foreign payments company to 100% own domestic payments license inside China, we had to stand up a full kind of platform inside of China. It took a lot of resource. Still a lot of focus on that to assure that we're fully compliant with PBOC regulations. It's our #1 thing that we focus on. Right now, we have a very good productive relationship, both the PBOC and with many of the financial institutions and players inside China, China Post, China UnionPay, some of the banks, obviously, some of the tech companies there, too. Alibaba, you mentioned. We could talk about that in a second. But the way that it started to work is be compliant, be able to faster -- better cross-border traffic and cross-border traffic both ways, for Chinese merchants to be able to more effectively sell to PayPal consumers outside of China and enable that to be done in a compliant manner and then open up the Chinese consumer to be able to buy from PayPal merchants across the world, and that is a big potential opportunity. And then the fourth thing is to start to do domestic capabilities. We're working with China UnionPay. You've got the Olympics coming up in China next year, having the ability for somebody to have a PayPal wallet and pay for things in store with QR codes from the PayPal wallet instead of having to download either the Ali wallet or the WeChat wallet, be able to use a wallet that you're used to PayPal, but be able to make transactions inside China with that. So I think we're scratching the surface with so many things we are right now. That's what makes me so excited about like as I look out over the next 5 years. We've clearly had a good run over the last 5 years. But the amount of really, honestly, tailwinds that are behind us in terms of just demand for the capabilities that a trusted brand, that a compliant and regulatory-embraced company like PayPal can do is pretty tremendous and has all of us quite excited as we look out into the future.

Well said. Well, we need to leave it there, unfortunately. Great commentary and insights from you, Dan, as always. Really appreciate the time. And thanks to everyone for dialing in today. Have a great day.

Thanks, Jason. Thanks, everybody. Bye-bye.