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

Okay. Why don't we get started? Thank you, everyone, for joining us. This is the inaugural Guggenheim Fintech and Software Conference, and we have our keynote for today. We're very pleased to have Dan Leberman from PayPal here with us today. Dan, thanks so much for doing this.

My pleasure. Thanks for thinking to have me, Jeff. Really appreciate it.

Yes. We're really excited to have you here as a keynote. And I'd love to start things off back here. Maybe can you tell us about yourself and your work with PayPal?

Of course. I've been at PayPal for about 7.5 years. I now currently lead our global sales teams that cover our small and medium business units as well as those that cover the channel partners that we serve many of those customers through, think of the Shopifys and the WooCommerces and the Intuits that integrate PayPal products into their platform. So we have sales teams that both directly sell to merchants all over the world as well as those partners through which we deliver product to millions of customers all over the place.

Great. For everyone who's listening, we're going to do a fireside chat for about 30 minutes. But it will be interactive, meaning that you want to ask a question, just feel free to raise your hand using that Participant button at the bottom of the screen. And we'll get to you. If you'd prefer to e-mail me your questions, please feel free to do that, jeffrey.cantwell@guggenheimpartners.com, and we'll get to all of the questions for Dan. So Dan, I'd love to -- just a great start off -- because I'd love to focus on what's top of mind for you right now. There's always so much happening with PayPal, just tremendous business in this company. So what's top of mind for you right now?

Yes. It's -- there's a lot in my mind right now. But I think the most important things we're focused on in the business and for our customers, continue to relate to essentially the basics of helping businesses digitize. We obviously saw last year through COVID lockdowns a massive spike in the amount of businesses that were coming online. And I think to some people, that was a bit surprising. Like, wow, there still are a lot of businesses that haven't brought their business into the digital economy. And even now, there's still -- the vast majority of the global economy is happening in person and with cash. And we still see PayPal as being able to help even the slowest-to-evolve businesses enter that digital world, both with our services as well as those that we deliver with partners. And so we're really thinking about trying to make that digital economy as easily accessible to as many customers in many markets around the world. And I do think that while that pace of acceleration of businesses start to digitize really spiked last year, you're continuing to see these elevated levels that we believe are going to continue in a secular way for a couple of years to come here. So we're really focused on making sure those core capabilities are strong and help customers sell in more places as quickly as possible. And I would underscore that last part about -- as you think about what it means to digitize, it really is about getting your product and your services to as many customers through as many channels as possible. And that's the benefit -- a lot of us take this for granted, but it's the basic benefit of the Internet is this connectivity to disparate end points to customers all over the place. And so when we think about not only what we do from a core set of services point of view, but the real story to customers, it isn't just about digitizing for the sake of digitizing. It's about accessing more channels to sell and finding new customers in a low-cost, very efficient way that allows businesses to grow. And while there certainly are businesses we help that are small businesses and staying small, most businesses are trying to grow and find new customers and increase sales. And so that's really the kind of economic outcome we are seeking for our customers, and we're starting to deliver in more specific ways growth measures that they can take on with us and with our partners.

You're touching on everything that I think we can build on as far as what matters right now with small businesses. So let's focus on that because I'd love to hear the other side of that. There's always PayPal from an execution standpoint and what they're focused on delivering. But also what's top of mind for SMBs right now? Because there's so much such change over the past 12 to 18 months. So what are you seeing? What's changed for SMBs because of the pandemic? Can you kind of describe what you see?

Absolutely. I think, first, you have to acknowledge that SMBs are not a monolithic group, and you have very different situations by vertical, by geography, by age of the ownership of the business, by things they've tried before. And so you have a very diverse set of starting points. And I think if you cherry pick a few of those to look at, the businesses that we're already selling online, I think, are seeing that, that has been a very strong investment for them, and they're looking to take advantage of more online selling channels. If they were selling only on their website before, they're now thinking about selling in new marketplaces. If they were only selling on marketplaces before, they may be looking at building their own direct-to-consumer website. So there's an evolution in those that have previously adopted digital channels to add more. I think if you look at verticals that were slow to participate in the online channels, you see a rapid movement into easy-to-use platforms that make it very quick to go from not being online to online. And that, in some sense, is the magic of Software as a Service. You now have these template-based tools that make it very easy for non-technical business owners or their kids or their friends who want to help them just get on and build a store or build a marketplace listing. And I think that what you're seeing is those businesses that were slow to come online are realizing this isn't as hard as they thought. And whether they need a little bit of help or do it themselves, they realize they can go from 0 to 1 fairly quickly and then they start to become part of that population of sellers that can sell in more channels off of that hub, that starting point that they've created. But I also think there's still some verticals especially and in many geos where we are still in the early stages of digitizing what they do. One example that I spend a lot of time working on and thinking about is bill pay and utilities. And in the coming months and into next year, you're going to see PayPal start to talk a lot more about this as it relates to the way we link billers to consumers and make it easier. I think all of us can relate to the myriad of bills we pay, whether they're utility bills or telco bills or different billing relationships we have, it's all over the place. You have some that you set up, auto pay on their website, others where you have to send a check, others where your bank will allow you to send it. But there really isn't a simple way to see all that in one place. And that's in large part because the billers themselves haven't matured their operations. They haven't quite figured out how to make it really easy for customers to engage with them in lots of different channels. And just the same, you have a lot of legacy consumer behavior that just continues by the mere inertia of it, and people continue to write checks because that's what they think they're supposed to do. And yet, we know that's not an efficient engage. There's collections businesses that emerge just because people don't have easy ways to pay. You see this in the data. There's something -- double-digit percentages of unpaid bills are what we call sloppy payers. They're not -- they don't lack the money. They just have forgotten to pay in whatever channel they're supposed to pay in. And so the more channels you open to them, the easier it is for them to engage. Their lights aren't going to get shut off. Their phone is not going to stop working. And the company who's billing them is going to, of course, make more money and have lower losses as well. So PayPal sees this as an opportunity to engage on both sides of this kind of laggard network of payments. And what we're doing there is we're working with big platforms that are innovative in this space. One in particular is called Paymentus, which is a newly public company I'm sure many of you guys know about. And that helps these utilities bring their platforms into the modern era, end-to-end. And what PayPal does is process all the payments on the back of that and allow those bills to be presented into the PayPal consumer app. And that is still coming to market in stages over the next 6 to 9 months. What you can imagine there is we're bringing together both sides of the network to try to leap forward into a much better experience, one where billers don't have to do unique things to go and have consumers have every way to pay. They will take advantage of our scale and the Paymentus' scale in order to do that, but also a leap forward in terms of consumers having one place where they can see not only their traditional bills, but their Netflix subscription and their other subscriptions. And so they can think about these recurring payments, these financial responsibilities in one place and start to have a singular view of all of those commitments and the different payment types that they associate with that. And so we think it's a really big step forward and represents the other side of the spectrum from those that are already digital that we want to help grow and get into more channels in a more aggressive digital commerce way. This is the other side of that spectrum of basic digitization, helping leap forward into a modern economy. So we're really privileged to be able to help on both sides of that spectrum.

That's great to hear. There's a lot there. And I'd love to stay on this point because I'm putting all the pieces together as far as the wheels can turn very slowly in this particular hub. So just bear with me. Bear with me.

I will. We got time.

We do. We do. So can you think back for us a little bit about the development that PayPal has seen here internally product-wise, that's allowing this transformation to happen? Because we go back to the Investor Day, where there's a ton of detail about the tech stack, the technology development that's occurred over the years. And we also -- outside, we understand that there's a lot more to do to solve for a lot of pain points that are out there, particularly for small businesses. So can you maybe help us here fill in the blank?

Of course. Of course. It's -- there's elements of this that I think some of us take for granted as very basic reasons in the tech stack why this is possible and why PayPal and maybe others are in a unique position to be able to help these businesses operate in so many channels. And it really does start with in order to nimbly navigate across channels, you need to have single partners that can be a hub for you. And PayPal is that financial hub for so many SMBs. It makes that a single place for their dollars to settle, for them to be fungible in how they are accepting payment and making payment for things across all channels, again, both what their customers are paying them as well as the way they use those funds to pay for supplies and pay for marketing dollars. And it's a simple idea, but the one-stop shop value proposition to SMBs is incredibly powerful. While many of them do want to understand best-of-breed services, what PayPal can do is bring those services into a single integration and not have customers have to have 1 card processing integration with 1 provider, a PayPal Wallet integration with us, a separate ApplePay integration if they want that. Instead, they can come just to PayPal and get everything, get card processing, get not only our wallets but other wallets through our smart payment buttons. And what that does is it helps these customers get out of the tech stack. They don't need to be managing direct integrations. That's not a good use especially of a smaller business owners' time or an operator's time. They need to be focusing on their sales, their products and not navigating a tech stack for payments. Payments should essentially be a background feature they count on and can rely on without having to think about it too much. And so that is why that one-stop shop element of what we can do for businesses is so powerful. I do think that the other element of what we've developed from a solution point of view is beyond payments. And I think there's a lot of new horizons for us, both in commerce services and financial services that we're going to continue to build on as modules on top of our existing stack -- as you've all seen, we will do that both organically and inorganically. But what we've built is a tech stack that allows us to be modular and allows us to add things like working capital and cleanly plugged that into existing customers' experiences, have them go through a very simple onboarding and underwriting process that's much cleaner than what you would see from a traditional loan. And they're taking advantage of the existing relationship and the existing technologies that they enjoy with PayPal, and they get a better loan at a cheaper rate and a much better experience on that basis. And so that's an example that exists in the market and has existed for 6 or 7 years now at PayPal, but it really does just represent the tip of that spear. And you'll see us do more and more, both organically, inorganically and through partnerships, to add those kinds of commerce and financial service modules such that we and our partners can continue to attach customers to new channels, to new experiences without them having to go do integration work or at least heavy integration work and making it very, very easy for them to do that. So in that sense, the open ecosystem approach that we have, both commercially, strategically as well as technologically through our stack, is going to enable this multifaceted set of partners to work together and still deliver that one-stop shop integration benefit, not lots of integrations that merchants have to directly do, but single integrations that grow with them and that are future-proofed as new experiences. As new wallets, as new commerce services and financial services come to market, it will be very easy to add them in a software-as-a-service environment through us and our partners. So that is really the essence of the technology strategy. I'll stop there because if I keep talking too much about technology strategy, I'm going to get out of my depth because it's not what I am an expert on. And obviously, at PayPal, we have some of the world's best experts on exactly those choices at the tech stack level, and I wouldn't pretend to be able to speak to it to that amount of depth. But it certainly is important when we talk to our customers, to SMBs, to explain to them in simple terms why that single integration, why that 1 tech stack makes sense. And that's what our teams think about doing, it's helping customers understand the benefits of it to them and to their business.

That's some great color. And it sounds like there's a lot of opportunity for you guys as you're thinking on. I was curious if maybe we could put some context on all of this. I mean can you give us a background on the size of the SMB customer base for PayPal and just in terms of new customers, like your customer acquisition? You're talking really about verticals, so which verticals is PayPal seeing the greatest epiphany right now, if you will, that PayPal is mission critical for them?

Sure. I don't think we break down all the data externally, but I can give you kind of directional answers to some of the numbers about the customer base and then how it breaks down. But we have tens of millions of businesses globally that we're working with. But when you really start to break that down, what you see is as you see in the general economy, you have a lot of big businesses. That top 1,000 retailers really are very large in our not only digital economy, but just in the broader economy. And there's some interesting dynamics there that we're seeing of shifts between consolidation to larger retailers and reemergence of SMBs and growth of SMBs. And so we're in an interesting place where that dynamic of large versus small is oscillating a bit. But when you then start to look at it by vertical, you look at the traditional historical PayPal customer base and there is a lot of retail, people that are selling goods whether they're selling goods in their own web store or in a physical store or through a marketplace. The PayPal customer base 10, 15 years ago was in a sense, almost exclusively that when you think about commerce. But you also have businesses that are really small, sole proprietary businesses that may or may not have a website but use our tools for direct payments. They might be using our peer-to-peer payments and using that goods and services flow to accept payments at a fleet market, for example. So you do have a bit of that historical set of use cases that start to fragment into smaller sellers, into services providers. The people that might cut your lawn or cut your hair, they may use these tools, too. But really, that was more nascent several years ago. And this is what you're seeing in the newer cohorts of those that we've acquired more recently is a broader distribution of verticals. You're starting to see that local hair salon that used to only accept cash now have a Venmo QR code in their store, and their customers love it. The woman who cuts my hair in San Francisco, I helped her figure out how to for the first time accept digital payments, and she now has a Venmo QR code. And she told me last week that more than 50%, 5-0, more than half of her customers are now paying her via Venmo, which we need to get a case study for that and publish that because it's an amazing story that represents the smaller businesses that have those personal interactions with customers, they're really seeing dramatic uptake of these products, especially those kinds of experiences like Venmo that are more of a close-knit experience, right? We're used to using that between friends. I think it was a really nice analogy there, the way we will use that with small businesses, with local businesses. So these newer cohorts, you're starting to see a bit more of that diversification of verticals, a bit more of diversification across sizes and more diversification of channels that they want to sell in, in the first instance. And so this is connecting the dot to the earlier points. What you used to see is somebody might build a web store first and then 1 year or 2 down the line, decide, "Oh, maybe I should use that as a hub to sell in a couple of other marketplaces or maybe I should also have a pop-up shop, and I'll add that down the line." What you're seeing now is more businesses are coming out of the gate multichannel or omnichannel. And they want to start by selling in marketplaces but also have a pop-up shop capability from day 1. And so they're thinking about those problems as a single set of problems. They're not thinking about it as, "Oh, I can go get a device from one provider and I can go list my inventory on a marketplace through another hub." They're thinking about it as, "I just want to sell. I want to sell in all these places, and I need singular solutions. I need single partners, single payments rails to be able to make that very seamless." And so those kinds of new cohorts are very exciting, I think, to the economy. When we think about consumer experiences and the way we engage, I think that, that is very exciting for all of us who like to browse on our phone, but like to then go in the store to look at the object, but still want to fulfill through an app or through a marketplace. Those kinds of connected experiences, we consumers are starting to expect them. And we're helping these smaller businesses that don't really have the scale to figure that out for themselves out of the gates. We're helping them deliver those experiences to consumers from day 1 along with our partners, of course. And so that is, I think, one of the more recent and exciting trends. When you talk -- I'll connect back to your question of the scale of this and really the way PayPal sees not only the historical cohorts, but the size of new cohorts coming in. I mean last year, we did publish our numbers around net new actives, and that is both consumers and businesses. And these recent cohorts are huge in size, just the number of merchants. And it does reinforce the earlier point about there's still so much of the economy that has yet to really come online or come into digital channels. And depending on which research you believe about how much of it, it's somewhere between 70% and 80% of the global economy that's still in this person-to-person kind of inefficient cash environment without access to digital channels. And so what these new -- the size of these new cohorts tells you is almost in spite of the scale we've achieved and in spite of the penetration rate that we have with existing businesses, that white space for new business cohorts to come in is still enormous. And it's not just new businesses that are getting formed and our friends that want to start these digital-first businesses, it's still massive amounts of legacy businesses' existing volume that are digitizing that volume. And so that's across verticals, it's across geos and it's a trend line that's continued even into this year on the back of what was a very big leap last year in terms of the volume of those cohorts coming in. And this year, yes, there's some lapping effect, but the absolute number is still at a very elevated rate. And it's obviously exciting from a business point of view, but it does speak to just how big that world of businesses is that we can continue to help serve.

I'd love to hear, what was the Venmo in-store rate that you said? What was that? That was the anecdote that you were talking about.

Yes. So the Venmo in-store experience is just part of what we're doing to help our customers transact in store. Now some people argue and have for years, and especially in a market like the U.S., we're all pretty content with the way we transact in store. We were happy to pay with our cards. We're happy to pay with cash in certain instances. But what you've seen in the last 1.5 years especially is that, that has changed. I think in many use cases, we're not as comfortable transacting in that way. A card that has to be swiped or cash that has to be handed to a cashier, especially in the more intense moments of COVID, those are not truly kind of socially distant, contactless experiences. And PayPal has, along with many other companies, made a big bet that QR codes are a way to deliver that experience to consumers at scale. Now if the audience is like me. A couple of years ago, you had said QR codes is the answer, we probably would have chuckled in the U.S. We would have said, "You mean the thing that's existed for 25 years that nobody uses in the U.S.? It's like that weird barcode thing?" And I was in that camp that, that can't possibly be the answer given the power of our phones and NFC chips and different devices and wearables and all that. But it's unbelievable how my point of view has changed and I think how most of the consumers' point of view has changed. And there's a couple of use cases that have really brought that to life. I'll come back to the salon and tell you about that one, but I think the one that we've all probably seen in some form is the restaurant use case, where you go and you sit down at a table and there's a QR code on a piece of paper, not some digitally rendered thing, but a static QR code that triggers and what is actually an e-commerce experience in the store. You're using your phone to add menu items to a checkout, and you check out and you're paying like you are ordering online. And I think those have been fantastic experiences in -- at the point of sale in the restaurant environment. And it's the kind of thing that's helped consumers realize, wow, these are more interesting experiences that I thought. A QR code might have previously been perceived as an entry point into some marketing experience. Now people understand, wait, this is actually a very easy-to-access way to go find different experiences, whether they are restaurant experiences or offers or other things that may come to market. And the salon story is one that is -- [ Amy ] wanted to give her customers a way to just not have to hand her money or not have to do anything, and we printed her out a Venmo QR code from her Venmo account in about 3 minutes. And she just put a piece of paper with the Venmo QR code in her store. And over time, we kind of made it a little cuter and put some lamination on it. But what it really represents is 0 technology knowledge needed to accept a form of digital payments in store. Zero technology investment needed. It's just a piece of paper and the money goes straight into her Venmo account. And so it really does democratize that access in a way that I think surprises a lot of people. Now QR codes are only one part of the PayPal story in store. Of course, we bought iZettle, which we're branding as Zettle in the U.S. And we've now brought Zettle to market as one of that many sets of point solutions that help us serve customers in an omnichannel way. That's really the other part of the one-stop shop story for PayPal is not only one-stop shop for payments as you do your online stores and marketplaces online, but, of course, if you have a store as well. And yes, we've had the PayPal Here product in a couple of markets in the U.S., U.K. and Australia. But Zettle really represents a world-class product experience that is going to be part of the overall PayPal solution set, and yet it also allows us to speak directly to those in-store use cases. So what you'll see PayPal focused on this year is speaking to [ Amy ], the salon owner, the physical store first and getting PayPal as a solution provider into the in-store-centric cohorts and really balancing our online presence with this much more dedicated in-store presence, and as we evolve over time, bringing those things into a true omnichannel offering that hits those most innovative customers in the first instance with a true one-stop shop offering, in-store and online.

All of the pieces are there. It's really interesting to see. And the QR code thing, so I'm in a restaurant -- a quick anecdote on this. I was at a restaurant and saw the QR code. I have to admit, the first time I saw, I was kind of like "not going there." The second time I tried it. And then the third time actually paid a bill through the QR code at the restaurant. And PayPal is there where you're going to pay the bill. It's really interesting. It's all about just sort of getting comfortable with the use cases, which, I mean, clearly, you have the demographics in your favor, right, because just all these digital natives coming down the pipes. And they use Venmo and they know like the back of their hand. So all the features are there. It's really interesting.

Exactly right. Exactly right. Well, keep doing that, Jeff. You got to keep getting used to it because there's -- these are experiences that are evolving a lot, too, right? We're so early on, especially in the U.S., but there's been a lot of evolution in other markets. This is something that has existed at scale, QR code specifically, in many APAC markets for a long time. They've been used to drive not only commerce but promotions and marketing, and yet different geographies are different. These things are going to evolve in a very different way. And especially in the U.S. and in other Western markets, I think you're going to see these things evolve. And so the more we engage with them, the more feedback we give to our businesses, to the people we see every day, the more feedback we give to PayPal, the more you'll see these things evolve. And it's incredible, the pace of the evolution. We see these new experiences, these new lessons that we take occurring every week, every month. And so we're still evolving quite quickly in how we deliver those experiences and the value on the back of them. And so there's going to be a lot there. So I'm excited for all of us to keep experimenting with it and see what works and what doesn't.

Helpful, definitely. Dan, we're just at the 30-minute mark. And if you're okay with it, I'd love to pause here, and I'll see if anyone would like to ask a question.

Of course, please.