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

Well, good afternoon, everybody. I'm Jason Kupferberg, the payments analyst here at Bank of America, and we're very pleased to have Dan Schulman with us, President and CEO of PayPal, as you all know. Thank you, Dan, for being here. We appreciate it.

[ Of course ].

So a lot to cover, so we'll kind of jump in here. And I guess one place I wanted to start is just if we reflect on all the volatility of the past few quarters, it seems like one of PayPal's key messages to the Street is that you're going back to basics, narrowing your focus a bit on a smaller number of primary strategic initiatives. And for example, you've mentioned that PayPal users choose PayPal Checkout, only about 50% of the time when it's available to them. So this is an area you're focused on strategically. Can you maybe give us some context in terms of where could that 50% number go over time? Where was it pre-pandemic? Just to kind of set some context there of what you guys think is achievable based on those efforts in core checkout?

Yes. Well, one of our key things that we've been working on for a long time is obviously Checkout. I mean Checkout is to PayPal as search is to Google. I mean we have taken share for the last 6 years in e-commerce. We either held or took share depending on how you define e-commerce growth in the first quarter, again, as well. But I think we have some really large advantages in Checkout. We have a lot of things we can still yet do. We're obviously probably about 8x the size of the next largest digital wallet in terms of Checkout, we're at 35 million merchant accounts, almost 400 million consumer accounts. Consumer preference is overwhelmingly to choose PayPal. 60% would choose PayPal first. The next largest is 8%. So there's clear trust in PayPal, clear size advantage. We have the highest auth rates in the industry and the lowest loss rates in the industry. Typically, those 2 things work at odds with each other. For us, they're complementary. So those are advantages that we can play off of. But there are a lot of things that we can do better in Checkout that we're quite focused on. First of all, there's sort of basic hygiene of Checkout. Uptime and availability needs to be 5 9s from our perspective, especially when you're doing full stack processing. And so we've gone from when I first came in, 3 9s to we're well over 4 9s and on our way to 5 9s availability. When you have as large a base as we do, any reduction in latency leads to incremental improvement in Checkout. And I think we can cut off several seconds of latency this year alone in our Checkout. The next thing is what I would just call presentment, kind of where are we presented in the stream. And that has to do with, where do merchants position you? Where are you compared to a buy now pay later player? That's why we went so heavy Buy Now, Pay Later. It's not the economics of Buy Now, Pay Later because as all of you know, we decided to have the clearest best value proposition Buy Now, Pay Later, no late fees for consumers, no incremental fees for merchants because we see a 21% halo effect on Checkout when people use Buy Now, Pay Later. 200,000 merchants have already moved us upstream on their product pages as opposed to Checkout. And there's a lot more we can do to move upstream that I'll talk about in a second. The other thing is for too many of our experiences, the Checkout is in context. So you push the PayPal button, you bounce out of the app and then back into it. That comes from just having a legacy and tech debt. We are working on kind of starting with the top 100 merchants down to the next 500, next couple of thousand, just addressing that one by one, working with the merchants on that. We also, to your point about the 50% check-in. Too often, customers start to use PayPal and they forget their password. And it's a little ridiculous that that's the case because user name and password are the 2 things we use least to verify the identity of somebody probably all of you, if not 95% of you have your credentials stolen and they're on the dark web. And so for us to actually pay a lot of attention to user name and password, we would have loss rates and fraud rates that are multiple fold where we are today. And so we do about 200 other checks once somebody comes in to be sure, on every transaction, to be sure that it's you. And so we are going towards password-less log-in so that people don't need to worry about their user name and password to be able to do a one-click checkout on that. All those things, if we make good improvements on those will lead to quite nice gains overall in Checkout, share of Checkout and revenues. But I think the most interesting thing that we're really working on right now is how do we use all the data and information we have inside our vaults to help merchants take customers who come to their website or to their app. And only 5% of customers who come to a merchant's website actually checkout. We've been doing a lot of optimization on the Checkout bid, but the real gold is in helping a merchant to move those customers through the checkout process. We have -- this is actually an astonishing number. We have 8 billion financial instruments involved in PayPal or Braintree. If you think about the whole idea of vaulted instruments being able to use those vaulted instruments across different merchants being able to do a seamless one quick checkout. We put as many vaulted FIs into our vault every day as [ Bolt ] has done through their entire history as a company. And what we want to do is take that data and information. And without giving away any PII information, present that to a merchant so that they can customize their web page or their app to that individual coming in that's an individual that has made a similar purchase somewhere. It's an individual who has already been to their website. It's a Black Card customer, so it's a higher-value customer. There's a lot of data and information we can give to help a merchant customize. And that's really where the next generation of Checkout goes really moving up, not from the Checkout page to the product page but to the entry page. And nobody in the Western world has the amount of data and information we do to help merchants on that. And we're looking to start trials on that even later this year.

What about some of the other enhancements that you mentioned? Will we see those in 2022? Or are they more of a 2023 event?

No. I mean we'll be sitting here next year. We're talking about enhancements to Checkout. And every year, we'll be doing enhancements to Checkout, but all those things I mentioned are all beginning this year.

So one of the themes we've been emphasizing for PayPal is really the need to maximize this execution in terms of product rollouts as the company is shifting strategy to emphasize average revenue per account over net adds. So just wanted to get your perspective, do you agree with that premise? And are there enhancements to the product organization that perhaps you're looking to drive to maximize this execution?

Which premise, again?

Well, the premise is just that execution from a product standpoint needs to be really tight, right, as you're talking about some of these new initiatives, whether it's in core checkout or other areas.

Yes. Yes, I mean, clearly. I mean what I just said all of my vice presidents in around the globe for the last couple of days, and one of the things that we've been talking about is PayPal is in the envious position that we have a ton of opportunities, but that's a blessing and a curse because you really -- you can't bite off more than you can chew. I'd rather do less things beautifully than more things in a lackluster manner. And we have a robust road map. I've just talked about some of those. We have a robust road map on our digital wallet on enhancing our merchant platforms. But we're going to focus on less and do that really well, and the whole team is behind that. We've organized now really are kind of really our P&L around our different products. We have -- and customer segments, we now have a P&L owner for our consumer, for our merchant for our small business and partners. And then below that, we have P&L broken out. So the reason we did that is I want our product leads to have end-to-end accountability, single-threaded leadership for the metrics that they are trying to drive. And the major metric that we are trying to drive improvements in is really engagement and ARPA. And the recent engagement is so crucial is, one, our aspiration is obviously to be an everyday app, but we can talk about that later, if you wish. But we are not a subscription business, right, we're a transaction business. 30% of our active accounts provide like 80% of our overall transactions. The more we can get people to become engaged in the service, the higher the average revenue per active account will be. And the more people are engaged, it also impacts our net new actives because our net new actives when you're almost $430 million active accounts on your platform. The bottom of the funnel is more important to us now than the top of the font. The top of the funnel is consistent and strong. But when you get to our size, if you don't start reducing the bottom of the funnel churn, it gets harder and harder to grow. And so when we made this shift to engagement, it was not to say that we weren't interested in growing our net new actives, and we were just focused on engagement and average revenue per active account. It is the single best way for us to grow our net new active accounts and drive our transaction business. When we add one incremental service, one, to somebody in our digital wallet, their average revenue goes up by 25%. And so we really have a tremendous opportunity to drive both customer satisfaction, customer need and our financials by focusing on engagement and average revenue bracket.

We've been asking all the executives at the conference this week, of course, just how they're feeling about the macro backdrop, and would love to just get your sense. How do you perceive the macro backdrop to have trended since the time of your Q1 call, I guess it's already 6, 7 weeks ago?

So well, we have, I think, a somewhat unique view into the market. We do have almost 430 million active accounts that do over 5 billion transactions a quarter with us. So we get to see a wide swath of what's happening internationally and domestically, again, predominantly on the online side. But -- and I have a chance to talk to all the CEOs of the major retailers as well as the heads of the IMF and others. Look, I think we are in the middle of a very tough geopolitical environment and that geopolitical environment has ramifications through the macroeconomic environment. I think it's going to be hard pressed to see inflation going a lot lower this year. I think we are still going to -- I think the Fed will do everything it can. But I think the Fed doing everything it can and maybe the ECB doing some things as well. Also raises the level of risk that we dip into recession as well. I think recession is more likely in Europe than it is here. But I'd still put the odds as at least 50-50 here in the U.S. So I'm not sure that it's much worse than when we were talking in the first quarter that I would say. But I wouldn't say that there's lots of shining light coming through either. I think for all of us, we're trying to be very conservative on our base case, but the degree of change that could go one way or the other. It's probably as high as it's ever been as well. And I think we all just need to recognize that we try to take our guidance to a place where we actually said like we -- this guidance anticipates things continue to get -- continue to get worse because that's kind of what we were seeing from everybody. And we were one of the first to call this for good or for bad. We were one of the first to call it. And everybody is talking about this right now. There are some slivers of light. China is slowly reopening. Domestically, they have reopened right now. We have quite a number of people in China. So we have a lot of insight there. They're rapidly moving to open their ports. Again, but you've got the whole global supply chain that's still in a bit of a funk right now. So even if China opens, whether they can get goods out of China into the U.S. is still TBD. But some glimmers of hope, but I would say, in general, I think we've got a long, tough slog for the rest of this year. By the way, is that consistent with what you're hearing?

It is. It is. I mean I think the general theme we've heard is that there's a lot of uncertainty. I think, depending on which company we're talking about, some are actually seeing pretty solid results. Obviously, Visa's numbers for the month of May, which I'm sure you saw, were indicative of what seems to still be a pretty healthy consumer, right, and unemployment is low. So there's that, but certainly, storm clouds out there, right?

Well, I think a lot of people have said that. Look, I think here's the thing, like lower-income consumers we're able to bank a lot of stimulus payments and their balance sheets in general, went up from, say, $400 to like $2,000. And they are spending right now. They're spending on travel, which really drives a lot of the network numbers, doing a lot less on what I would call nondiscretionary. Spending a lot more on discretionary, obviously, on gas, but they're still going out to restaurants. But I worry about what happens as those balance sheets of the consumer start to move down. And if they continue spending at the rate they're spending, they're coming back down either at the end of this year or at the beginning of next year to where they were. And so I think -- I don't think we should take a lot of solace in those numbers right now. I think there's -- you've got consumers that have good, strong balance sheets, but they're coming down. And so I think we need to think about that going forward as well.

Right. Because there's kind of been this transition from goods to services.

Absolutely, no question. And also the higher income segment, it's continuing to spend strongly. But we saw the lower income segment start to cut back early on. We saw that move into the middle income segment. And so -- but higher income, no change whatsoever. The others, I think we should be cautious on it.

Yes, coming back to the point you made about your guidance and putting some more conservatism in there at the time of the Q1 call. And I guess the question we've been getting a bit is trying to sort of calibrate what's kind of embedded in there. I mean I think you just mentioned that you did assume that the macro would get worse from where it was at that point in time. I mean, is that kind of what the lower end of the guide is for? Or is that more the base case in the middle? Or how do you guys think about that?

Yes. Before we always had our low end, it's sort of if nothing gets better, that's where we will be. Now our low end is if things get worse, that sort of, No, it doesn't mean are we going to a full-scale recession, the war spreads somehow in Europe. But otherwise, I'd still feel comfortable with that.

Okay. Yes. I mean it certainly doesn't sound like a -- flash back 3 months ago, you guys were talking about obviously a pretty significant intra-quarter change in macro, right? Because the war broke out after the time of the earnings call, that quarter, right? And it sounds like this quarter, you haven't seen, obviously, that kind of rate of change. So that's fair. Right.

Yes. No, for sure. For sure. What I'm pointing out is we really haven't seen though, like...

Improvement either, right?

Improvement either right now. And I think all of us we should be cautious about that. I think you need to get a couple of quarters go by and then see kind of how it will start to play out next year.

I also wanted to circle back on core Checkout again, just because it is such an important topic and...

Really, you don't think I covered that?

Well, you did, but I want to ask a follow-up on it. And specifically, I think you mentioned you've gained share in e-com for the last 6 years or so. I'm just wondering because there's a lot of debate out there. How do we -- what's the best way for investors to be able to measure and monitor market share and try and assess the question of is PayPal gaining share? Is there share study? Are they losing share in core Checkout? I mean what's the kind of the best, I don't know, objective data set? Or what do you guys use to kind of measure yourselves?

Yes. Well, we use a combination of a number of different studies that come out. So we look at all of the different e-commerce projections and then we kind of weigh them based on what we're seeing. We also have extraordinarily good insight on most of the top merchants. When we do Braintree, we see everything across all checkout. We understand exactly what's happening with our share versus somebody else's share. So like for our top 55 merchants, in Q1, 5 of them, we lost some share; 17, we gained some share; and the other, we were even. So -- and we see that across every market because we do the entire checkout process. So we know exactly what's happening from a share position. And we measure every single month what our overall share is versus what we think the market is also market by market as well. And I think just one of the hard things right now is figuring out what is that normalized growth of e-commerce. Because you went from pandemic where everybody was locked inside and online was just zooming. Then online came down as a percent of overall retail. But on exactly the same line that it's been on for like the past 10 years or so. So I think we all thought that there had been a fast forward of 2 to 3 years, and then it came back down, but you're still on this sort of traditional line of e-commerce gaining share versus in-store kind of year over year, over year. And I think the persistence of e-commerce growth will be there over time. The persistence of digital payments will be there over time. It's a matter of now understanding pre-pandemic to post-pandemic. And then as soon as we went into post-pandemic we go into this macroeconomic environment that has inflation depending on what part of the world you're looking at 40- or 50-year highs. And so you're trying to figure out like normalized...

What does normal mean?

And what does -- and when does it come back to normalize? And I think our -- what I told my team yesterday is there are things that you can't control. But there are a lot of things you can control. And ironically, this is probably one of the times where PayPal can probably do the best in the market. because not only do we have those advantages that I talked about, but we have a really strong business model. I mean, in arguably a year that is not our best year, we'll still generate $5 billion of free cash flow. We're still investing in our business where a lot of our major competitors right now are retrenching. They're either going out of business. They're laying off 10% to 20% of their staff. They're actually saying they're not going to try and grow. They're going to try and be profitable. And a lot of placement was done on deals that were -- we knew are not profitable. And because I will win any profitable deal out there. I'm like -- we have the wherewithal to be quite aggressive and I'm a very competitive person in general. But I'm not going to chase after nonprofitable deals. And I don't think anybody can chase after nonprofitable deals now not in this marketplace. And so I think this is a chance for us to be able to kind of double down, take advantage of the strengths that we have. We are truly the market leader out there in checkout in digital wallet. So many of retailers are kind of coming back towards us because nobody wants to be with -- it's too -- Checkout is like the lifeblood of a retailer...

Yes. And it's hard, yes.

You can't take a chance and it's incredibly hard. The amount of attacks that come in. The amount of fraud and the sophistication of that. You have to be excellent. You have to be excellent. And this plays right into PayPal's strengths. We know we can do better, but we have the wherewithal to invest and get better. And that's -- it's a different environment right now. And I told everybody, I was like, nobody likes where the market is right now or where our stock price is right now. But it is clearly, from our perspective, intrinsic value is much higher than where it is right now. We just need to execute on the things we control, continue to take share in the market. And at some point, you'll see the numbers begin to shift in turn for us from where they are. And then we hopefully emerge from this stronger than we were when we came into it.

Makes sense. We continue to see a lot of increased convergence of business models. There's the notion of the super app, right, and lots of companies kind of pursuing that strategy. PayPal obviously was one of the first to do that, and you articulated a lot of that at your Analyst Day last year. So maybe you can walk us through a bit of kind of the competitive advantages that you see for PayPal as you continue to pursue this race alongside others.

Yes. There are some who are doing kind of a full digital wallet or super app, but not that many actually in the marketplace. I think if somebody is going to trust their financial life on an app, they better trust that company as well. And I think PayPal is one of the most trusted brands in the world. Doesn't matter what study you come out. We are one of the most trusted brands in the world. Consumers are 2x more likely to shop if they see a PayPal button than if they don't. And merchants because of our history and our authentication and our loss rates will do on average between 4 and 6 incremental transactions for every 100 transactions that get to checkout. So huge advantages for us. And today, about 25% of our core markets we're penetrated in, in terms of people using PayPal. And if you look at the Fed study, the typical U.S. consumer does 800 financial transactions a year. 25% of those are online, that's 200. We do 47 transactions a year, [ overall ]. So we do only 25% of the online transactions, we have so much room to expand and grab more and more transactions. And as I mentioned, when people move into our digital app, their ARPA is 2x that of people who aren't in our digital app. The churn rate is 25% less than those who are not in our digital app and their satisfaction is much higher because they can do much more inside the app. We need to make all of those experiences more beautiful, more integrated, and we need to do a seamless job between what I would call pre-transaction like surfacing deals and offers to you based on your history and what you want, then we need to allow you to transact in the most flexible way possible. Use rewards points from anywhere and translate that into fiat currency, take your crypto, translate that into fiat currency, split it between rewards and fiat, Buy Now, Pay Later, do it in installment fees, paying for whatever you want to do. The most flexibility in how you want to look at that transaction and then allow you to track the transaction post the purchase. Like today, the way you do it is you get like 20 e-mails like for every -- you get a separate e-mail. If you want to consolidate all of that. If you need a refund, you should be able to do it right through our app, get that refund immediately and return seamlessly and easy and then take all of that and put it into sort of one fulsome picture of what your financial life looks like. Budgeting tools, savings, those kinds of things. And so they'll pay all of that. So that's kind of the vision that we have. Clearly, a lot of consumers want that. And I think we have the assets to be able to pull that off, that I wouldn't trade hands with anybody else on it.

Does some of this include the shopping hub that I think you guys were talking about?

Yes. Exactly. That would be the pre-purchase piece of it. And that really is like that's why we bought Honey because we knew that's where a large part of consumers are going. Honey is like really morphed into that, and you will see that shopping hub already has driven that 700% increase in offers that were -- that merchants have extended and customers going into merchants to buy those. But we're just beginning on that piece of it.

On the shopping hub. Yes. Okay. So more to come there. If we look at the outlook for the year, the guidance for Q4, obviously, you're going to see acceleration as you go through the year in terms of your revenue growth. And Q4 will be the high point, call it, high teens -- or sorry, mid-teens, mid-teens plus, right, based on what you guys have talked about. So I guess, hypothetically, let's say you deliver that call it, mid-teens plus revenue growth in Q4, assuming the macro cooperates. Is that a fair way for investors to start thinking about 2023 top line growth? Or is it just premature to make that kind of leap?

Well, I do think you'll see acceleration of revenue throughout the year. Part of that's just kind of math. Everybody has been dealing with macroeconomic and geopolitical and social issues and all of that. But on top of that, we've been dealing with like the transition from eBay as well, which overall put between $2.1 billion and $2.2 billion of the incremental revenue pressure on us. But the good news is eBay is now down to like between 2% and 3% of our revenues, 2% to 3% of our volume and 2% to 3% of our profits. That's down from 40% of our profits when we spun off from eBay. So it's been a huge transition. And at the end of this quarter, just coming up relatively quickly. The overwhelming majority of that transition will be behind us. And I know all of you will be happy about that as will we. So I think you have some math going. You also -- the effect of the stimulus and lockdowns. That was all Q1, part of Q2 last year. So then you don't have that, you're not comparing against that. And then we have a number of initiatives that we just talked about that will drive. So I think we feel comfortable and confident of that accelerating revenue growth through the year. I think we'll probably be able to show it in quarter as well as things go. So -- but as I look into 2023, I think it's premature to say like, okay, if you exit at mid-teens, does that mean '23 is mid-teens? Let's take a look when we get a little bit further out. See what the macroeconomic environment looks like, see if the war -- if the war is going to come to some sort of conclusion, it probably happens in the winter months before the spring happens. And I think there are a lot of things we want to look at before we declare what '23 is, just took out our medium-term guidance or not. Ready to put it in like 2 months later.

Fair enough. Fair enough. Just a quick follow-up on eBay. What are you guys seeing in terms of your share of checkout at the merchants who have cut over?

Yes, it's still robust on eBay, but it's at a lower price point. And so part of our take rate, [indiscernible], I think our take rate year-over-year is down 13 or 14 bps. About 7 of that was due to eBay. And again, that will level out as we go into the back half of the year. I think our sequential take rate decline has slowed quite significantly, and we anticipate that will continue to be the case.

You guys have been sounding pretty bullish on Braintree the last couple of quarters. And maybe you can just walk us through some of what you're seeing there. You've talked about, I think, some newer customers and perhaps, at some point, some newer disclosures, if you will as well. And maybe just for folks who might be a little bit less familiar, just level set on the Braintree product.

Yes. Braintree started off as a gateway. It's now moved into full stack processing and really even some what I call orchestration amongst multiple PSPs. So -- it has some of the world's largest and most sophisticated apps on it, Airbnb, Uber, DoorDash, Live Nation, Spotify all use entry for the vast majority, if not all, of their full stack processing. It grew 61% in volume in the first quarter, that's on top of 79% volume growth last year. It is our most sophisticated tech stack when a merchant integrates full stack processing through Braintree, they natively integrate Venmo, Pay with Venmo and PayPal. So remember, I talked about popping out of the app?

Yes.

Here, it's fully native, which means it's all in line. You never leave the app...

Much better experience, yes.

When you hit Pay with PayPal, Pay with Venmo, Pay with Google, Pay with Apple, Pay with a credit card. You never leave the app. It's a seamless experience. It's got some of our highest auth rates, lowest loss rates. We were hand in hand with those merchants on very specific road map issues. And if you think about the pay-in and the acquisition we did with Hyperwallet, which is one of the largest payout services. That combination pay-in and pay-out is a really powerful value proposition in the market. And so yes, we're winning extremely large customers on that. I am pretty bullish about what we can do with Braintree. And obviously, when they use Braintree, we have great positioning of our Checkout products as well.

So we only have about a minute left, so I'm going to ask my last 2 questions upfront. Maybe you can hit both of them. The first one is, what would you say to investors who are unsure if or when PayPal can restore credibility with Wall Street? And then second, any updates or time lines you might share on the permanent CFO search.

Yes Well, we've got -- I'm going to go to the second one first. I want to end on the first one. There's no shortage of really outstanding candidates that have raised their hands. And I've been interviewing left and right and over weekends and for people in my house, we have another person come in every other day to interview. So we're doing that as rapidly as we can. In the interim, Gabrielle is doing an outstanding job as a partner of mine. I couldn't be happier with her performance. So it's moving along quite well with quite good candidates. In terms of credibility, I hope a lot of what I said gives people confidence in PayPal. A lot of people have written PayPal off over the years. Since I've been here, there have been at least 4 times people have written off when all the wireless carriers came together to go after payments, when all the merchants came together to go after payments. When the networks individually went to go get the digital wallet, when the JPMs and the big banks went and then when all the networks came together to go and do that. And through each of those, we've continued to hold our own and take share going forward. I think our job is to be as transparent as we possibly can to do what we say we're going to go do and to do that consistently over time. And trust builds up over years, and we had quite a bit of trust over those years, for 6 years almost in a row. We delivered on almost everything we said. Last several quarters, we did not in a very difficult macroeconomic environment. But hopefully, we'll get back to our track record. And once we do, if we just keep executing, I think we'll regain that trust. I hope we will.

Very good. We'll have to leave it there. Thank you very much, again.

Thank you.