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

We're glad to be joined today by the team at PayPal. On stage here, we have Jamie Miller, who is the CFO. But also joining us, we have Steve Winoker and Ryan Wallace from the IR team. I want to thank Jamie, Steve and Ryan for making the trip to Arizona. All right. We're going to get into -- we have lots of topics to get into just to give kind of a rundown on what we're going to attempt to cover. We're going to start with a little bit of a 1-year reflection on Jamie's first year at the company. Then we'll talk about sort of more recent or near-term trends, macro, what's happening with PayPal in Q4 and what they're seeing from a consumer spend. Then we'll get into in the spirit of making the most important thing. The most important thing, we'll hit on the branded checkout button. We'll then move on to Braintree, Fastlane, PayPal Everywhere, and we'll talk a little bit about the initial gross profit guidance for next year. So with that, Jamie, again, thank you to you and the team for making the trip. And if you could start by giving us an update on how things have gone in your first year, a little bit of reflection.

Thanks. Well, first, thanks, Tim, for having us. We're happy to be here. It's hard to believe it's been a year. But when you look back, I think that the one big thing I think most folks at PayPal would say, it just feels very different. The energy inside the company, we've changed the entire team at this point and really changed how we run. And the last year has been focused on just restructuring that and really reformulating back into investment and innovation and really getting our execution muscle around how we innovate, how we bring to market and how we really reinforce and reinvigorate some of our products. With respect to finance, it was super interesting when I got there because our finance organization was very much built for total PayPal. And almost every metric you looked at was a total PayPal metric. And so one of the first things we did was deconstruct the function and really push it into the business and push it into the product. And the amount of visibility and transparency we have now around unit economics, around market-based levers, around just our product performance and how we're really pushing into deal construct, deal pricing in totally different ways than we were a year ago, I think, is really significant. In addition to that, the company has re-architected all of its operating mechanisms. And so how we bring that together in terms of the market cohorts we serve with consumer, with small business, with large enterprise, how that intersects with the products and how that intersects with the geographies that we have to, all of that is a very structured review process with data, which we have all the business leaders going through every month in a very detailed way. And I think those things, coupled with just being very focused around our prioritization of engineering spend and marketing spend and how we're pushing that through, I think all of that is really what gets you back to just the different place. We're really excited about what we're investing in and really excited to see it start to have impact.

Thank you, Jamie. That was a great way to start things off. Let's get into more of the macro kind of Q4, how things are trending, what PayPal is seeing.

So 2024, we've seen continued consumer strength. When you look at branded checkout TPV as an example, just very healthy through this year for us. Q4 is a little unusual this year, just the timing of the Christmas holiday, the timing of the Cyber 5 being so much later than normal. We had a very nice Cyber 5 days here in branded. But it wasn't just branded either. It was Buy Now, Pay Later. It was Pay with Venmo. It was small business. So we feel really good about that. If I elevate back to the quarter, I would say we're very comfortable with the guidance we gave at the third quarter call of mid-single-digit growth and feel really good about that.

Okay. Excellent. Thank you. That's a good update. Let's move on to branded checkout, what you just alluded to. So recently, you've been talking about this business is seeing a lot of strength with enterprise platforms, marketplaces. You've also noted international in multiple earnings calls. Maybe you could dive into some of those areas where you're seeing strength and what the driver is there. And in terms of your growth versus industry, if you look closely in the U.S., it does appear that you've somewhat narrowed the gap versus government e-commerce data, which is an encouraging trend. And maybe you can touch on what's been supporting that.

So as I mentioned in the last couple of comments, so for us, branded checkout is our #1 priority. And when you look at what we're investing in, all of that really is in service of branded. And I can talk through each one of those things. In the U.S., we continue to see very strong PayPal engagement with our consumers. We've done a lot this year to really change the PayPal app, to really change the experience, to change how branded checkout, the experience flows, work for consumers and for merchants. And we're beginning to see just really better selection, better habituation around what we call the flywheel in terms of how those intersect and work together and see that momentum start to come through. I would say, internationally, we're very strong nationally. We're a very global company. And sometimes, I think, sitting in the U.S., folks tend to focus very narrowly on the U.S. But it's a very healthy, vibrant product outside the U.S. as well. And so when you look at that growth, it's interesting to me to see all of these same things as they go to -- go internationally next year. I think it's going to be a nice continued wave there for us. But when you look at branded itself, our primary focus this year for branded has been about changing the consumer experience and getting that experience up with our merchants. But the other pieces of it, bringing Buy Now, Pay Later to our pay sheets, really launching PayPal Everywhere so that we're increasing the number of debit card transactions that flows through our branded checkout in addition to the halo effect that brings. When somebody comes in with a debit card, they're also more likely to transact 2 or 3x that amount in a branded checkout transaction online. When you think about Pay with Venmo, where that's a branded checkout transaction, but it allows our Venmo users to use their Venmo debit or their Venmo balance, I should say, in a branded transaction online as well. And we now have Pay with Venmo up with very large merchants like StubHub and TikTok and others. So all of those things really come back to really branded checkout being our #1 priority and how we invest in this.

All right. Excellent. Let's get into some of this topic around the modern integrations and the modern experience. So you've talked about some of the stats on the earnings calls around the 30%, the 5%. So let's break it down. Generally speaking, the way the company has been communicating, it has been, within the U.S., of 30, 50 20, right? So 30% of merchants that are on the modern integration, 50% that it's on their road map and another 20% that might be kind of further down the road on the road map. For that first 30%, you've mentioned that 5% of that is at the intersection of the modern integration and the modern experience. And that's the sweet spot where the conversion uptake really happens. So maybe you could talk through, one, the benefits of being in that sweet spot; and number two, how quickly can we get that 30% to be fully realized and then start attacking the next 50%?

Yes. So first, let me take a minute and talk about what the latest experience really brings, which is, for the consumer, it is a much faster, cleaner experience. It is visually better. The integration with the merchant just happens in a much more seamless way. But more importantly, for the merchant, it provides conversion uplift of up to 400 basis points in terms of what we've seen so far. And importantly, it performs best in mobile, and is so even better in mobile than it does online, which, as you know, that's an area we've been really focused on investing in our experience there for our merchants. So it's really positive, and we're excited about it. 5% of our merchants had the latest experience -- I should say, 5% of our transaction flow had our latest experience in play as of the end of the third quarter. And when we talked about it at earnings, the 30% you talk about reflects the number of merchants who are on our latest integration. And what that means is, when you're on our latest integration, it means that it's actually pretty easy to get that new experience flow moving through the checkout process. And so it's pretty easy to get those flipped over and on the latest experience. When you get past that, we've got merchants who are on older integrations. And that is the body of work. You mentioned it that, that is the 50% that is going to take longer. And what I'm excited about there, though, is that when you look at our early experience, we've now begun modeling for that bucket of merchants, their specific conversion uplift when they go to this latest experience, and it's really compelling. And so as we go to market, that is already integrated into our go-to-market motions and how we're talking to these merchants about it to really have them work with us to get that on their road map. So when you think about 5% to 30%, that we're laser focused on that right now. And in the coming weeks and months, that is what we fully expect to be able to pull through relatively quickly. I would say that the next bucket is the one that will take a little bit longer, probably several quarters to work our way through that. But that is our big project for '25. And again, when you flip this conversion uplift through, it just pulls right through in terms of branded TPV.

All right. Great. Thank you, Jamie, for running through that. Let's move on to the next topic, which is Braintree repricing. So essentially, we think about this as talking with the merchant about the prices coming up, you accept lower wallet share, but that's more gross profit dollars netting back to PayPal, Inc. And it seems like that's been happening based on the disclosures around volume growth and gross profit growth contribution. So maybe just talk through those discussions and how far along you are in having those -- your largest Braintree customers?

So the last couple of years, PayPal -- and I would say, up to 2024, the last couple of years, PayPal had made, what I'd say, is significant investments in Braintree revenue growth. And one of the first things we did coming in is really pivoted the team to profitable growth. I mean we've been really focused on how we do that. And to your point, third quarter was the second quarter in a row where we've had Braintree contributing meaningfully to transaction margin dollar growth. So it's really good momentum, and we're really happy to see that. But what's really happening under the surfaces is, for these really large merchants where we have intentionally gone after very, very significant percentages of their revenue processing, we're going back to them and having just much more strategic and holistic conversations around this value exchange, really bringing more value to what they do as a merchant, whether it's value-added services, whether it's orchestration or payouts or Risk as a Service. But having a different kind of relationship with them and not needing to process all of their revenue, but being willing to pull back and taking lower percentages of revenue, so say, from 90% back down to, say, 75%, but in exchange for having a much healthier margin profile on the overall relationship. And we've been successful in working our way through some of those conversations already. And you see some of that already flowing through. But I think that, coupled with the value-added service growth and even international growth, are other components of how we expect Braintree to continue to move over the next couple of years.

Okay. Great. Jamie, I do want to talk about the repositioning of Braintree in the medium term. But before we move on, if you don't mind, just in terms of the near-term modeling on this, the way we've been thinking about it is we've got Braintree volumes kind of roughly flattish and maybe even turning negative in the near term. But with still that strong gross profit dollar growth, is that how investors should be thinking about near term? And then we'll get into the reset.

That's exactly right, actually. And what we expect to see beginning in the fourth quarter is PSP revenue growth and processing growth to come down to be potentially low single digits, potentially negative. But that will occur for the next couple of quarters, and then we'll have a reset baseline. It's sometime in late '25 from which we'll continue to grow from. Now you have to remember, I mean, these are deliberate actions we're undertaking. It's healthy for the business. It is the right thing for us to do. But we are going to see a little bit of a shifting there as we do it. And to your point about margin continuing to pull through, I used the example before about what I would say is a typical merchant renegotiation. That is exactly what we've been seeing step change through as we've gone through '24 and what we will continue to see ladder through as we go through the next couple of years as well.

Perfect. Thank you, Jamie, for clarifying that. And as we get into the Braintree in the medium term, so we appreciate everything we've been talking about here is very much temporary and a reset. And to your point, at some point later in '25 or in '26, we'll be back to the kind of steady-state growth of Braintree. When investors think about that growth, should they be thinking about it as e-commerce as a base plus a little based on the fact that you still have some advantages versus some of your competitors, meaning, the ability to cross-sell other products within PayPal, Inc.?

I think it's probably too early to really target what that growth rate would be. But one of the first things we did when we came in is we really did a competitive teardown of Braintree to really look at how do we feel about who we are, our service levels, what we bring to our merchants and really how do we think about how we price the value-added services we offer, which ones we charge for, how we charge for different fees throughout the process. And I think if I take a step back, what we really became very convicted about around Braintree and PSP in general is that we've got an excellent processing business. I mean really best-in-class in terms of uptime, so reliability, auth rates, all of that, and that we could do a better job with respect to more value-added services. We had some. We weren't charging nearly enough for them. But we had a lot of opportunity around the total business. And so when you start to look at growth, we think about it both in terms of taking on more processing volume. And I see that in the U.S. I also see it as a nice opportunity for us outside of the U.S., particularly in Europe. But I also see value-added services as a really nice growth vector for us, too. And I've mentioned a couple of times here, '25, '26, I really see this as a 3- to 4-year continuum as how we can nicely tranche this business over time. But how that plays out in terms of revenue growth, transaction margin dollar growth, candidly, I focus more on the margin side of it and the tranching of that as being durable and growthy. But the revenue side of it, we'll have more view on that, I would say, as we get into '25.

Excellent. Okay. Thank you, Jamie. Let's move on to PayPal Everywhere, so the debit card program. It offers 5% cash back on a category of the user's choice up to $1,000 per month. So it's a pretty attractive rewards program for debit card. Maybe you could talk about what PayPal is seeing with PayPal Everywhere.

Yes. I'm super excited about PayPal Everywhere, partially because I love Will Ferrell, but also because of what it brings to our business. And maybe I'll pause for a minute. PayPal, in September, we launched a marketing campaign with Will Ferrell to really launch PayPal Everywhere, which is bringing PayPal debit to Tap to Pay and having it be more ubiquitous as an omnichannel way to pay, in addition to just thinking about PayPal as a branded online way to pay. And it's been really exciting to see it launch. So you mentioned the rewards piece of it. We are giving a rewards program. It is capped, which means that the unit economics on the program is stand alone. Meaning, when you tap with your debit card, that transaction for us is, from a margin perspective, as good as a branded checkout transaction, which is great. But the better part about it is that when you do that, you are also more likely to then transact online, either with your balance or with a branded checkout transaction generally. And what that means for us is for every one time somebody taps to pay, we get 2x to 3x that in terms of halo effect with respect to the branded checkout business, which is fantastic. The other side of it is we saw really rapid growth. So in the first 4 to 6 weeks after launch, we saw more than 1 million debit card users come into the program. And so we've been really excited about the momentum there. And again, it gets back to all of this is in service of how we bring more habituation around selection, around conversion and consumers engaging with us. So that not only benefits us just with this particular product but really gets us back to where we started in the conversation, with branded being the most important thing we're really driving.

Right. Great. Well, also a good segue into Fastlane with the support of the branded checkout. So let's talk a little bit about Fastlane. So outside of Fastlane delivering volumes to Braintree, you've also made it available in a processor-agnostic map. You've announced partnerships with Fiserv, Adyen and Global Payments. Maybe just talk a little bit about what you're seeing early with Fastlane, whether it's on BigCommerce or other SMB type of settings. And also, when these distribution partnerships start to kick in for next year?

Fastlane is a product that's really designed to help merchants get conversion uplift when consumers opt in to guest checkout. It is up live with Adobe, with Salesforce, with BigCommerce, with Woo. We've got about 1,000 merchants -- or more than 1,000 merchants on Fastlane today. Importantly, it recognizes the 170 million consumers. And I think that is the real attraction for merchants who want to use Fastlane is that when a consumer comes in, it is an experience where once they put in their e-mail address, it very quickly recognizes them. It does the autofills. It's a seamless process. But it gives merchants about a 50-point conversion uplift, which is really significant. You mentioned Adyen and Fiserv and Global Payments. And what we're really doing there is making sure that we can bring this same experience to merchants beyond just those that use our own PSP services, so beyond Braintree, beyond PPCP. And it really makes it more ubiquitous around how people can process and latch that into what they're already doing. But when you look at Fastlane, what we're focused on right now is that scale and that distribution as we bring it up.

Okay, beautiful. So investors often ask about monetization with Fastlane. So our understanding is that, currently, you're more in a price discovery kind of mode, right, getting the product out there, gaining data and that we should start to expect maybe some degree of monetization deeper into 2025. Can you talk about how this package -- or this could be bundled with -- for some of your larger clients and/or priced on a discrete basis maybe with some of the SMB channels?

Yes. So as we brought this in, we do have a pricing construct that is in the contracts. But I'll start with where I ended on your last question, which is we're really focused right now on scale and distribution. So getting this up with merchants, getting this up with the distribution channel, if you will, and getting it scaled in '25. So we haven't turned pricing on yet, and we don't expect to, probably, for much of '25. Absolutely, when you get into conversations, it is bundled in different ways, in some cases, with some of the big players that we might be co-partnering with. It's more of a rev share arrangement. In other cases, it's actually priced individually per TPV that flows through it. But bottom line is we've got a really good view on the constructs of how we're doing it. We just haven't -- we've chosen not to do that yet because we think the network effects come from getting the scale and getting the distribution flow really going.

Excellent. Okay. Well, I think this is a great time to segue into gross profit growth for 2025. So on the earnings call, you gave an initial take, and you said we should look at gross profit on total gross profit ex the benefit from interest income earned on customer funds that sits within OVAS. And year-to-date, that metric has been up roughly 4%, and we should think about it next year being at, at least that level. So maybe just talk about some of the moving parts that arrived at that initial fiscal '25 gross profit guidance.

Yes. So through third quarter, we had transaction margin dollar growth of 7%. And when you back off the interest income benefit, it was about 4%. And the same dynamics, with a few changes, are really what we expect next year as well. Just to repeat it, though, we expect transaction margin dollar growth in '25 to be at least as much as that. And so I'll start with branded checkout. Branded checkout is a healthy transaction margin dollar growth contributor, and really, after interest income, the largest contributor to that. But we also see healthy contribution from Braintree and PSP, and the initiatives we talked about a few minutes ago also from Venmo. Venmo continues to be a nice grower in terms of monthly active users. The transaction volume flowing through Venmo is -- it just continues to be a very healthy product for us. The other piece that I would mention where we expect some shifting dynamic is we had a nice benefit this year from better transaction losses, and that rate bumped up by a couple of points. Now as we launch new product, we're taking a pretty pragmatic view towards what we think loss rates will be. And even in the fourth quarter, we're seeing that tick up a little bit with some of this new product launch we've had, and we expected, that's what happens. And then we go in and we fix, and we keep tuning the product. But as we get into '25, that tailwind we had in '24, we don't expect that to repeat. In fact, we can have a little bit of headwind there. But the momentum we're seeing across these products I've talked about before with branded, with payment processing, with Venmo, even the incremental around PayPal Everywhere and Buy Now, Pay Later and credit, we think will be nice adders also as we go into '25.

All right. Excellent. Thank you, Jamie. That was a great rundown. If we have time, we'll get to OpEx. But I think we should -- the time we have remaining, it definitely hit the tax rate topics also because investors are asking about this a lot in terms of the Singapore potential adoption of Pillar Two. So in your filings, it said that PayPal had roughly $441 million of savings in 2023, which is roughly $0.40 a share or so. We understand that there are certain mitigating actions, and investors shouldn't run out and expect that the tax rate will see this full impact. Can you talk about what investors should expect? And what are some of those mitigating actions that can help provide offsets?

Yes. So we're a very global company, as you know. And we deal with a lot of different complex tax rules really around the world. But our tax rate really is derived from 2 primary things. One is U.S. tax law and the other is our regional mix of earnings. So the one thing I would say is that the disclosure we have in our 10-K, you just can't look at that in isolation. There's lots of puts and takes. And the team has been working a lot of mitigating actions with respect to when Singapore brings up Pillar Two. And so right now, I would say, our best view is that we might see a couple of points of upward pressure in '25 with respect to our tax rate. But it's probably too soon to actually put that in ink and say that's our guide. I mean, we're still working through some of the offsets and some of the planning items. But when we guide at our February call, we'll bring that back through that.

Great. Thank you so much, Jamie. All right. I think we have time. We could work in operating expenses. So for next year, you also gave some initial thoughts on operating expense growth. So you mentioned sort of low single digit growth in non-transaction OpEx is a reasonable way to start thinking about the year. And we'll just note that in the first half of the year, the comps are a little bit easier, a little bit tougher in the second half given some of the deferred spending that was decided by the team this year. And maybe just talk a little bit about what went into that initial take on '25.

Yes. So 2024, as you mentioned, first, we've had a really good year of OpEx management. And I would say, we came in with 2 things in mind. Number one, we felt like we had a lot of opportunity to drive efficiency in terms of what we did and how we did it. And our headcount, as an example, today is 10% less than where we started the year. So we've done a really nice job of like taking cost out in areas where we didn't need to be spending as much, enabling functions. Some of our operational support, we've automated. And what we've done is we've reinvested those funds back into engineering, into marketing and into product. And that's really fueled the investment in innovation that we've had this year. And as we got through the year and really saw some of our progress there, we have greenlit more funds. Whether it's in product innovation, we greenlit more marketing dollars for the second half. And so that's one of the reasons as well as why you see first half this year was lower. Second half was very intentionally higher, but the second half also doesn't represent the '25 run rate. And so we talked before about '24, we expect to end with about a low single-digit year-over-year increase. That's roughly the same way you should think about it for '25 is low single-digit increase, but more balanced and level-loaded as we go through the year. So some of the comparisons to '24 will be a little bit different. But marketing continues to be a strong focus. It will be at least as much as we spent in '24 as does engineering. Engineering spend will go up as well, and we'll really fund that through some continued operational efficiency actions.

Okay. Thank you so much for clarifying that. I think we have time to work in 1 more. So there's been some reinvigorated growth and excitement within the company, new products, et cetera, all around Venmo. Maybe you could talk to us, kind of in closing here, around what's happening there.

Yes, Venmo is, I think, a super fun and exciting product. We have more than 60 million monthly active users, and they're very engaged in the product. It is the most popular P2P app in the United States, which is awesome. But more exciting is the consumers are engaged. And when you begin to think about what it can bring to merchants, these are highly affluent young consumers. And so it's a really great cohort for us, too. And as we've looked at Venmo this year, we've really been focused on monetizing that platform in just a very methodical way. It's just been something that hasn't been deeply invested in, in the past. And so what we've done is we've really refreshed the app. We've brought in new features, new product features, scheduled payments, Venmo Groups, which you -- if you haven't used, it's a really awesome fun way to split bills with your friends. Or if you go on a weekend trip, to make sure that you can track things, and it's very, very seamless and easy way for people to share spend. But it's product features like that, that have gotten people even more engaged. Our monthly active users are growing healthily, but importantly, our transaction growth has been very nice. But we've now started to bring it to merchants. And so Pay with Venmo, as an example, is something that's up more than 30% year-over-year. It's another way to pay when you go to a small business, when you go to even some of these big companies. So Pay with Venmo and also Pay with Venmo debit card is the other one that is up 20% year-over-year as well. So fun investments, but we just brought in a new Venmo leader a couple of months ago. She's really doubling down. And so I'm excited to see where we can take this in '25 as well.

That was a great place to end it. Thank you so much, Jamie. But first, I just want to say, again, thank you to Ryan, to Steve, to Jamie, to the whole PayPal team for being such a big part of our conference. So on behalf of our team and all of UBS, we really appreciate you being here.

Thanks for having us, Tim.