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

All right. Thanks, everyone, for joining. My name is Tien-Tsin Huang. I follow the payments and IT services sector. And I was just telling Dan Schulman, of course, CEO from PayPal, how grateful I am to have him. I know he's super busy, traveling the world. And I'll say it upfront, like I've seen Dan present in a lot of different settings. I always enjoyed hearing him talk whether it was from American Express. We've had you at this different events, which again, I'm always grateful to have a conversation with you. But the thing I always liked about you the most, Dan, was hearing you speak at the NYU, and I'm not an NYU guy, but not smart enough. But I always thought you had such a great connection with your professors and the students. And I know we always get caught up in the numbers and branded, unbranded payments. But I just want to say that upfront, Dan, I always appreciate sort of the way you connect with people and the stuff that matters. So thanks again for being here.

So let's get right into it. I guess, if you don't mind, Dan, fireside chat. I've taken a lot of questions from the audience, and we'll take questions from the portal as well. But if you don't mind, let's start off with sort of your views on e-com and the health of the consumer. I know we want to benchmark PayPal growth, whether it's branded or unbranded against e-com. How do you see e-com trending today year-to-date as well as going forward?

Yes. First of all, thanks for those kind words, Tien-Tsin, I appreciate it. So the year is off to a better start than we originally anticipated. We saw our TPV accelerate by about 300 basis points from Q4, 200 basis point acceleration in branded checkout and 100 basis point acceleration in unbranded from Q4, both above our expectations. Look, I think that e-commerce is probably off to a bit of a stronger start than most of us expected. We had pretty muted expectations coming into the year. I thought it'd be anywhere from negative 2% to positive 2% globally. I now think that's more likely to be in low to mid-single digits growth as I look forward. But I think we've got to remember that a lot of e-commerce revolves around discretionary spend. And there's definitely been a move post-pandemic into more kind of services, entertainment, travel, away from goods, that will normalize back. But you've also had pressure on discretionary because of inflation. Inflation is moderating a little bit here in the U.S., and we're probably seeing a bit of a return to more discretionary spend. But across the world, it's still stubbornly high. When I look at comps for us and I look at other discretionary retailers like Target, their e-commerce was negative 3%. Home Depot was negative 3%. Best Buy was negative 13% on their e-commerce. So I feel pretty good about our 6.5%. I think in general, probably held a couple of markets we grew on the branded side, and we clearly took share on the unbranded side.

Good. So I know you have less exposure, some travel in some of these areas. So it's really hard to index, and I think it's somewhat underappreciated. The benchmarking exercise, which I know isn't easy. So thanks for going through that. So yes, let's go into the numbers. So you did outperform on revenue and EPS. I know the sticking point for the quarter was around margins. What surprised on the margin outlook in your mind? Do you mind running through that again for us?

No. I mean we did have a good Q1. We'd be pretty handily on the revenue side by about 150 basis points of growth, 10.4%. I think really importantly, I think most people came into the year thinking we were going to grow mid-single digits on revenue. We kind of came out of the first quarter saying it's going to be high single digits. We also exceeded on EPS pretty handily and took our EPS growth up from 18% to 20% EPS for the year. And we also put out PPCP. We took down our nontransactional OpEx by 12%. Our monthly active users, which are 20 to 30x more valuable than just an active user also grew the quarter, our new cohorts are performing extremely well. So we had a really good Q1. The one place that people pressed on was our transaction margins. They grew by about 1% in the quarter. Look, over a 5-year period from 2017 through 2022, we've grown our transaction margin dollars by an average of about 13%. We are kind of in a place right now where there are a couple of things that are putting pressure on that. One is e-commerce is slower growth than it's typically been. I truly believe that will begin to normalize. I think you're not going to have e-commerce growth in the low to mid-single digits. It will be to the mid- to high single digits over time. And we're extremely well positioned when that rebound happens. Also cross-border, which is a very high-margin piece of our business is under pressure as well, but we're beginning to see that normalize. I mean China was negative 30% growth over the last couple of years. That's beginning to move in a really positive direction as our other markets, even the U.K. is beginning to rebound. And obviously, the big thing that happened is that our unbranded really is being a lot more successful in the market than we anticipated. We've put a lot of resource and effort in fixing our unbranded platforms in launching things like PPCP. We grew something like 40% year-over-year last year. We expected that to come down, and we're seeing a really strong pipeline. We're seeing existing customers give us more volume. And so the reason we took down our transaction margin expansion from 125 basis points to 100. It's just because we're seeing more growth in a part of our business that's lower margin. But we've got clearly well thought-through plans in place to increase the margin structure of the unbranded business. I'm sure we'll talk about that as well as continue to grow our branded checkout, which is not just the bread and butter of PayPal, but our highest margin opportunities as well.

Yes. And I know you should have to apologize for growing very fast even if it's a lower margin piece of the business. But before we get into the details, I get this question a lot, Dan, when might that mix shift turn and turn in your favor? Are we far away from that? Or is it somewhat imminent?

I don't even know what that question really means when you say turn in our favor because I'm not going to tell our sales force to slow down on winning unbranded because unbranded is massively strategic to us. First of all, unbranded carries with it our latest checkout integrations. And when we have our latest checkout integration, we either hold or grow share against anybody out there. You know part of the blessing incurs of PayPal is, we have massive scale, 35 million active merchants who use us, but we have 20 years of legacy out there as well. And so upgrading that to our latest checkout integrations, which are best in class is incredibly important. And any time we upgrade somebody on to our unbranded with that comes our latest checkout integrations, both across PayPal, Venmo and Buy Now, Pay Later. And so I want to grow that unbranded as fast as we can. I also want to grow the profitability of it as well. And so we know exactly what we need to do there as well. We need to expand internationally because there are better margins. We're predominantly on Braintree domestic right now. We're going to move down market with PayPal Complete Payments, PPCP, which has higher margin structures, and we're adding value-added services on top of that, that have higher margins. Those will take some time to play through our margin structure, but they absolutely will as the year progresses. And as we go into 2024, we're executing really well right now. When we say we're going to do something, we typically do it. We typically do it on time. [ This time, I'm talking ] about our product roadmaps right now, and they're making a difference in the market. So we have a real good game plan around driving margin structure around unbranded. And I hope it continues to take share going forward because over the long run, that would be a real positive for us.

Yes. I think the improvements to check out. I mean, that's big. I know we've been talking about it for years. There's still a lot of white space with guest checkout being such a big part of the market. But can you dig in a little bit more for the audience. What is this advanced checkout going to look like? Will it put PayPal in more of a level playing field experience-wise as with Apple Pay for example? Just give us a little bit more feel for what that means.

Yes. Well, there's so much to it. So first of all, our goal is to be best in class and not to be on par with anybody to be best-in-class. We have a lot of assets to leverage on that for merchants. Merchants want checkout providers that are cross channel. In other words, not just mobile, they want mobile, desktop, laptop, whatever it may be. They want cross operating systems because 75% of the world is still Android and iOS is obviously an incredibly important part of that ecosystem, but it's a part of it. We have more checkout choices than anybody else. Our wallet is more robust than anybody. Our scale is larger than anybody. And as I mentioned, it's really our legacy that we need to upgrade. We are taking this step by step. We are reducing latency. We've reduced latency by 40% over the last 2 years. We're going to reduce another 10% this year. Every second that we improved from latency, it generates a large amount of revenue for us because it's conversion checkout. Passwordless is going up another 10% this year alone. We've increased that quite dramatically so that people don't need to put in their password, they can do kind of a one-click checkout. Over 1/3 of our top 100 merchants are on our latest integrations will be about 50% by year-end on that. And as we roll out PPCP, our PayPal Complete Payments platform into our channel partners, they bring with them a lot of the long tail of our merchants as well. So once they upgrade to PPCP, if they're a hosted channel provider, then all of that merchant base, which is really the higher end of the small business and the lower end of the midsize business automatically upgrade to our latest checkout. And when somebody is on our latest checkout, conversion rates go up, anywhere from 3% to 10%, which is a massive improvement. And again, as I mentioned, when you're on our latest checkout, we either hold or grow share against anybody on that. So we have a number of, what I would call, basic hygiene initiatives underway. We've made a huge amount of progress on that. But we also are thinking about what is the next generation of checkout. How do we win not just against other wallet players, but how do we take guest check out? How do we use our unique data sets? We -- last quarter, we did almost 6 billion transactions through the platform last quarter alone. That is a -- and by the way, that doesn't include a lot of the PSP traffic that we put through as well. So we have a unique and extraordinary large data set. And when you think about how we can combine that with various forms of machine learning, neural networks, advanced forms of AI, together with our data set, we think we can kind of redefine the full checkout experience for merchants, not just improve the PayPal part of it, but look at the entire checkout and how do we create that to become a one-click process for our merchants. And we're starting to roll that out to merchants. We just did that at our sales conference, huge excitement around like how game-changing that could be. So we're thinking about all the things on the here and now, and there are a lot of basic blocking and tackling that needs to get done, a lot of friction that needs to be taken out of the process, a lot of in-app, native transaction that has to occur. But we're executing against that. And we're really now thinking about what's that next generation of checkout look like. And how can that be fully differentiated from any player out there?

Yes. I know you've mentioned legacy a couple of times, Dan. When we do our surveys, and I don't know others do it as well, even with sort of a big legacy user base, the share is still very dominant, whether it's across iOS, especially within Android. I mean it's 5x more popular from our work relative to Google Pay. So my question is this. with guest checkout is still big opportunity, you still have a subsegment of the market that's doing Card on File. Is there a lot of competition for branded checkout in your mind in terms of direct wallet competitors? I know we get a lot of questions around this. But how do you see the competitive landscape? Are we looking in the wrong places? Is it more Card on File, guest checkout, that's the competition? What's your view?

Yes. Well, all digital wallets are probably 35% of online checkout right now. So there is a lot of white space for digital wallets to take share from Card on File, vaulting, guest checkout, manual entry of cards. And so we're focused on all parts of that. But I do think we want to be best-in-class of digital wallets because I think if it's -- if you're best-in-class in digital wallet, you won't naturally take share from that other white space of the online market space. I looked at your survey very carefully. And I think it's really actually quite interesting in your survey. If you look at from '21 to '22, not '22 to '23 because that's only about a quarter that you can look at, but look at all of '21 to '22. PayPal grew, I'm going to show you this and remind you, PayPal grew in its preference and its share of checkout substantially. Well, Apple Pay actually came down in that. And that's sort of like not a thing that most people would have expected. From '22 to '23, Apple Pay has grown, and we've come down a little bit. But if you look at '21 to '23, just that, that we're up in share, we're up in preference. And so I think a lot of the things we're doing are making a real difference. That's really important as well. And my expectation, my full expectation is that as the year continues on that our growth in our branded checkout will accelerate. And so that's something I mean for everyone to take a look at because obviously, if our branded checkout growth accelerates, that will help on the transaction margin dollar side of it as we start to put value-added services on unbranded, which our customers are demanding as we roll out PPCP, and go down market with higher margins as we roll out more and more internationally that have higher margins, that will also play in transaction margin dollar growth. And I think the one really important thing about saying that now we are looking at high single digits in revenue for the year is the jump off as we go into 2024 is massively different than what people were expecting before. And so if we can grow core branded start to put in more value-added services and higher-margin stuff into our branded and began to see more engagement around our monthly active users because of what we're doing in the digital wallet, that bodes pretty well as we look out towards the end of the year and into '24.

Yes. No, I think -- I'm glad to hear you say that as we think about exit rates with respect to branded. I know there's a lot going on there, but you've mentioned PPCP, PayPal Complete Payments, it's easier for me to say than the acronym. I feel like moving down market with this PPCP, I mean that's a big deal considering who sits there, but there's still a lot of opportunity to go after that SMB space. You've owned that from a branded standpoint. So how -- what can we learn from the branded experience to win within unbranded. And I heard you letting it clear that it's going to bring with it a lot of flywheel and opportunities to get to advanced checkout. Sure. But the opportunity to seize it, though, Dan. How real is that? It sounds like the partner plan will be important. Pricing will be important. But how do you see that maturing as you go after this because it is new.

Yes. There is massive pent-up demand for our unbranded offer through both our channel partners and through small and midsized businesses. It's a huge market. What do we have something like 35 million active accounts. Most of those are small and midsized businesses. It is our bread and butter. We have inside sales force and a sales force that approaches both channel partners and the upper end of small business, the lower end of midsize. We've had a legacy product there. None of you are recognized, it's called PayPal Pro that is like a 10-year-old product completely insufficient to addressing that market really and all the architecture that we are deprecating right now, which is always painful when you deprecate something, but those customers are not well served on that architecture and need to move to PPCP. PPCP is state-of-the-art, unbranded platform comes with all of our latest checkout integrations on top of it, value-added services, orchestration plays, it is the same thing that we've done upmarket, but much more kind of platform-oriented, upmarket is more customized with Braintree. We've got a lot of channel partners and large channel partners quite interested in it. We'll announce more of those as the year goes on. But I expect PPCP to be one of our most successful product launches that we had. We had a great product launch with Buy Now, Pay Later. I think we're one of the top 2 or 3 players in the world on that right now. But I think PPCP will be just as impactful as we go into the lower end of the marketplace. We've never really had a product to compete there. We now have a very competitive product to do that, and we have a lot of relationships to build on and a lot of demand to take advantage of. So we have very high hopes, and we have a very robust funnel of opportunity, and that will start to come through as the year goes on.

Okay. Good. No, look, there's a lot of irons in the fire, as I say, going on and PPCP is definitely one that we're interested in tracking. So you're balancing a lot of this with a narrower focus, and we've seen nontransaction expense come down quite a bit. I think you're now expecting that to be 10% down, if I remember correctly, Dan?