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

All right. Good morning, everyone. I'm Tim Chiodo, I'm the lead payments processors and fintech analyst here at UBS. We're very fortunate here to be having the team from PayPal with us in Arizona. Joining us on stage, we have Jamie Miller, the CFO. And also here, we have Ryan Wallace from the Investor Relations team. Thank you to Ryan and Jamie for being a big part of our conference and making the trip here to Arizona. Thank you.

Yes. Happy to be here. Thanks.

All right. We have a great list of topics here that we're going to run through. I'm just going to give a little bit of an agenda of what we're going to attempt to cover here. I don't know if we're going to get to all of that. We're going to do our best. We're going to start out with a little bit of a reflection on Jamie's first 2 years at the company. Then we're going to get into branded checkout TPV growth. We're going to talk a little bit about Q4, and then we're going to talk a little bit about some things to consider into 2026. We're going to hit on some of the transaction margin dollar investments, and we'll talk a little bit about button placement. So a lot of the upfront piece will be around branded checkout. We'll then move into what we consider to be two of the highlights from PayPal this year, some pretty positive developments. One will be the take rate stability within the branded checkout button this year and next will be the branded experiences growth. Then we'll get into some more financial topics. We'll talk about transaction margin dollars and OpEx growth and time permitting, we'll talk on some additional topics around the BNPL and the Agentic Commerce. So with that, Jamie, if you'd like to kick us off with a few comments reflecting on your first few years at PayPal.

Great. So first, thank you for having me here. PayPal has been a lot of fun in the first couple of years. When you look at 2 years ago to today, there's a lot that's changed. And a lot of it really revolves around just how we're running the company. We have put in a new operating structure, operating rhythms we are just much more focused today in terms of what we're going after, how we measure it, how we measure that in daily, monthly and quarterly increments. And I would say from a team perspective, across the board, the team has really not only gelled, but we've also brought in different elements of outside talent to combine with our in-house expertise. And I think it's helped us be just much more robust in not only tackling and defining our strategic initiatives, but really also in learning as we go and pivoting. And our results have shown that. Over the last couple of years, we've not only demonstrating today 6% to 7% transaction margin dollar growth and mid-teens earnings per share growth. But if you go below that, we've really diversified our revenue and margin sources. If you look beyond just branded checkout, you see really nice growth across Venmo, across buy now, pay later, across our debit card offering and across our processing business. And we've done that with a lot of operating discipline. So if you look at our OpEx management and how we have remixed and really shifted dollars to fund growth, I think that's been very disciplined. And we continue to perform with high free cash flow. So $6 billion to $7 billion of free cash flow the last couple of years. It's just been very strong. So if I pull up, what I am really excited about right now is I think we've got real confidence in our strategic initiatives and where we're going. We've got real momentum in important areas, and we've got a lot of work to do in other areas, too.

All right. Thanks for getting us started there, Jamie. Let's move into branded checkout. As I mentioned, we'll start with Q4 and then we'll talk -- we'll move into 2026. So to set the stage in terms of Q4, you had talked about at the earnings call a little bit of a slight deceleration expected in Q4. You had called out a little bit of macro you had mentioned lower AOV. At a recent conference, you talked about some of that persisting into a few more weeks into the quarter. Maybe you could, with that context, give us a little more thoughts on Q4 branded TPV growth.

Well, we just completed Cyber 5. And as you know, that plus the coming weeks, the rest of the quarter are really important weeks for our merchants and our consumers. And so we're really focused right now on just delivering for them. Having said that, to your point, we called out in our third quarter earnings call that we had seen some macro pressure in September that had persisted into October. And we are continuing to see that persist in our performance in November. When you look below the surface, we are a very middle income, lower income Main Street America sort of consumer base in our portfolio. We also skew retail and a little bit more discretionary. And when you look at that, that -- we continue to see consumers spending less trading down, average order values down and just a shifting in that space. And that has persisted. We also have tougher comps this quarter versus last year. Last year, we had real strength in things like gaming and travel verticals and things like that. But as you look at fourth quarter, what we're expecting at this point is that the fourth quarter branded checkout growth will grow at least a couple of points lower than what we saw in the third quarter. But when you pull up and look at the financial framework for the quarter, our guidance, we're well intact on that front.

All right. Great. Well, we appreciate that update. Let's talk a little bit more about 2026. So as you mentioned in Q4, yes, there are some tough comps. There was the gaming, the travel, the crypto that drove about a 300 basis point acceleration last year in Q4. But as we head into 2026, there's actually some easier compares because you'll be lapping some of the APAC-related tariff headwinds. You'll also start to get some of the benefits from the rollout of the modern checkout experience. So with that context, as we head into 2026, how should investors be thinking about branded checkout growth?

I think that branded checkout growth, what I'm excited about is that I feel like we really are understanding what levers are really moving the needle. And I think what we're very focused on is the fact that it's just taking longer to really see the momentum start to shift in the areas we're spending time on. We have spent a lot of time very focused on really, how do you habituate the consumer around the product? And how do we bring better experiences both for our merchants and our consumers to bear as we do it. And this is really very multipronged. I mean, it gets back to how do we bring up the new experiences with our merchants. How do we deepen consumers around not just checkout, but around debit and offline and buy now, pay later and other things that continue to have them intersect and interact with PayPal in ways that just keep bringing them back. And we've also been focused on things like rewards programs. And so all of that is very much underway. But if I'm candid, it's slower in terms of progress and in terms of the work effort than we had wanted and we had hoped. When you look across at things like buy now, pay later and Pay with Venmo, really nice momentum and movement there. And I'm sure we'll talk about that more in a bit. But buy now, pay later continuing to grow consistently at 20% quarter-over-quarter. Pay with Venmo at 40% quarter-over-quarter. But I think if you look at '26, what we're focused on is, again, propelling forward what's working but also continuing to double down and make sure that we are building durability into the spaces that I talked about upfront and making sure that we get the momentum there. And I'm -- what I am confident about is we are seeing good signs of progress across all of this. And as we get into '26, I think these investments we're making and the different focuses we have are really going to continue to build momentum there.

All right. Excellent. Well, that's a great segue into some of those investments. So on the last earnings call, you talked a little bit about some of the transaction margin dollar investments. So things like co-marketing and rewards that will help drive branded checkout growth. Those are all accounted for as a contra revenue. I was hoping you could talk a little bit about these investments and the expected return on them, right? So they should start to drive more engagement, more volume, et cetera. And then in terms of a financial follow-up there, I think the question we get from investors is, if the expectation is a roughly 1 to 2-point investment in transaction margin dollars in Q4. Is that the right jumping off point to think about the investment levels in 2026? Or would it be higher or lower or about the same?

Yes. So first, fourth quarter, we said we would invest 1 to 2 points of transaction margin dollars back into the space around product attachment and habituation. And that is really what we're focused on when we get into '26. '26 for us around investment in branded checkout is product attach and habituation and it's about Agentic Commerce and making sure that we can really lean in there and be a first mover to capture that shift. And if I focus on the first piece of this, product attach and habituation it really goes across several fronts. It is a lot of the co-marketing we talked about. And really making sure that with our merchants, we're bringing consumers to them. But with our consumers, we're really demonstrating value and giving them offers and things that will continue to bring them back to PayPal. When we structure that, those kinds of offers, it typically is a 12-month ROI. But depending on what we're trying to do, ranging from really driving growth all the way to really thinking much more holistically around bringing in real new users. It can range from 12 months to 24 to 36 months depending on what we're focused on doing there. And when you look at the agent a commerce side of it, clearly, that's an investment in the future. It is something where we're leaning in with a lot of different partners right now, both Perplexity, Open AI, Google and a few others, but really, again, focused around how do we enable agenda commerce through orchestration layer through really building out the Agentic Commerce platform side of this and bringing a very seamless and easy way for that to come to life. And being something that we start to see momentum in '26. But clearly, this is a longer-term sort of effort in terms of how that's likely going to evolve with our consumers. If you level up and look at sort of the '26 profile. A lot of people have asked us, okay, how should I think about this? How should I think about your financial profile? What I would say is that we expect that the investments we're going to make, mostly in transaction margin dollars, but some in OpEx, to bring slower growth to transaction margin dollar and earnings per share growth in '26 versus what we had in '25, still positive growth, but at a much slower rate.

Okay. Excellent. Thank you, Jamie. I appreciate that update. Let's talk about another branded checkout topic, which is button presentment. It came up a little bit on the last earnings call and also something that's been coming up in discussion with investors. So there's Shop Pay, Apple Pay, Stripe Link, multiple BNPL providers. How does PayPal compete for that positioning on the merchant website?

It really depends on a merchant-by-merchant discussion, if I'm honest. It depends on our performance and the experience we bring to merchants and to consumers, but it also oftentimes gets down to what the merchant wants to accomplish. It is clear that presentment matters, the more upstream it is, the more you capture. And that relates not only just to the button, the buy now at the point of click all the way through to how do merchants think about buy now, pay later. And whether that is offered right upfront or that's something that is offered further down in the stack and down in the flow. And so every conversation we have, really, this is an important part of it. There are places where the overall economics of what we bring to the table, we may give more to get better presentment and that's something that we're pretty selective about in terms of which merchants, the why, the what and when we do it. But I think if you pull back our new experiences are allowing us to perform better for our merchants around conversion and auth rates. And buy now, pay later is something that when you look at the overall holistic economics of it, is something that really allows you and candidly, gives you a huge platform and opportunity to lean into how do you do customer acquisition in a different way. And that is something that, while PayPal on one hand, has been in buy now, pay later for a handful of years now. And really, it's been a very good product for us. We've been more focused on helping our consumers in that regard. But when you really shift our strategy to one of customer acquisition, I think it's a really powerful strategy for us and one where we can compete in a big way.

All right. Excellent. Will you kind of hinted that this one is a little bit of a segue into some of the modern checkout experience. So you've given an update that about 25% of transactions are successfully migrated. However, only about half of that optimized, so call it, 12% to 13% or so. When you talked about the -- once this was fully ramped and optimized, it would be kind of a point or so, maybe a little bit more in terms of conversion uplift. Maybe just talk a little bit about the progress and also the end state result conversion uplift.

Yes. So we've been at this about a year. And when you look at progress, it's been really strong in the U.S., and we began scaling globally 4 months ago. And so 25% global penetration at this point, about half of which, as you mentioned, is optimized. We are seeing conversion uplift as we expected, about a point, a full point there. And that comes when the merchant is optimized. And the candid reality here is that. We've got merchants on many different types of integrations with us. And because we've been in this business for so long, some of those date back years and are very complex, all the way up to merchants who are on more of our latest integrations where it's a very simple and easy upgrade process for them. I think what we found is that there's a real mixed range in terms of how this process can work with our merchants. In many cases, it takes longer than we expected. And some of that's the complexity. Some of that's just the tuning you have to do to get it optimized once we're in and once we're working. What we're really excited about is when it's optimized, it works. And then when you start to combine that with biometric changes and other spaces where we're really investing against consumer experience. The whole experience together is bringing not just the conversion uplift but a better, more holistic and seamless way for consumers and merchants to interact across all of branded checkout. So I'd say it's something that just takes time. When you look at a network, a two-sided network this big, I mean, this is the kind of thing that just takes time to move the needle. And 25% going into '26 and '27, we're going to continue to be very methodical as we approach our execution going forward and move the needle.

Thank you. Jamie, all right, as mentioned, we were going to move into two topics that we consider to be highlights of 2025 for PayPal, two very positive developments. The first one being the branded checkout take rate. So for multiple quarters this year, you had mentioned that the take rate was very stable. And I think to some investors that, that was a surprising stat. One possible reason to explain that could be the SMB mix shift has kind of stabilized. In other words, for many, many quarters, for years and years, PayPal had talked about a mix shift to larger merchants and marketplaces that we're sort of driving this mix shift driven take rate reduction. It seems to have stabilized. Maybe you could elaborate on that topic and then more broadly, other potential drivers of this take rate stability?

So we're really proud of the work Michelle Gill has done in small business. She has really brought not only just a keen passion for small businesses, but really a very focused and tactical approach to how we've shifted the portfolio there. They have stabilized small business. In fact, it's growing really nicely at this point, which has been a faster growth rate than what we've seen in LE. LE continues to grow. But small business is sort of making up some space there. And to your point, small businesses bring with them higher branded checkout take rates. So that we've seen that mix shift happen in a positive way. We've seen a little bit of benefit from FX. But the other piece that has been a dynamic here that I've been watching all year this year, has been really around branded checkout pricing. And that's been something that, as you know, 2 years ago when we came in, we really looked across the company and wanted to shift ourselves sort of culturally and in our conversations with our merchants to one of just profitable growth and really making sure that we had a really good value exchange and bringing real value to merchants, but also having the right balance in our pricing discussions. And I think you're seeing a little bit of that pull through, too. So a little bit more stability there and a little bit more balance in the conversations and whether it's a reengagement or whether it's new wins, the kind of work we're doing there to balance those kinds of conversations.

Excellent. Thank you, Jamie. Let's move to another big highlight, which was branded experiences growth. So 8% globally and 10% in the U.S. Those were impressive numbers. the branded experience is definition. Just for context for everyone, extends the definition of branded checkout online. It also includes debit card transactions, including some of the NFC business that's starting up in Germany. So strong growth for branded experiences. Maybe you could talk a little bit more about this and the card contributions. .

Yes. So 10% growth in branded experiences in the third quarter, which was double the rate of the prior year. And this is another one that we started maybe September of last year when we launched the PayPal debit card and the introduction of that in the U.S., along with our welfare campaign and our marketing and our advertising. And if you look at the growth in debit, both for PayPal and for Venmo candidly, it's been really nice progression ever since then, not only year-over-year, but importantly, month-over-month and quarter-over-quarter. It's interesting because that debit growth is important for us in a couple of respects. One is when you've got users who routinely come back to us and do offline purchasing, it brings them back to online purchasing with a halo effect with branded checkout that is really important. I mean 20% to 30% lift there. The other piece of it is that the economics of the offline debit transactions are as good as branded checkout transaction margin profit margins when you look at just gross margin percent. So from that perspective, it's really positive as well. I look at it more holistically, too, though. When we do offline. When we really look at everything that is not the online piece of it, it really surrounds the consumer. And so us bringing it back to holistically, how do we grow, how do we move our brand, how do we bring more consumers to merchants. It's a really important part of our process. And it's a really important part of our progress. You talked about internationally. We launched in Germany earlier this year, and it's been a really good uptake. I mean, within the first 2 weeks, when we hadn't even formally done any campaigning, any launch, really any messaging, we had seen very strong uptake. So I'm really excited about what we can do there overseas as well.

Right. Excellent. And Jamie, you touched on this just naturally in the discussion here a little bit on the transaction margin dollars. You hit it on the percentage. One of the questions we sometimes get maybe just briefly elaborate on this is around the transaction margin dollars per unit of volume given the rewards component on the debit cards is accounted for as a contra revenue.

Yes, the rewards piece of it -- and candidly, that's an important part of this because not only do you get 5% cash back, but it's stackable with other rewards. And so it's really attractive to consumers. The flip side of it is we have structured those rewards offers to be capped. So once you pick a category, it's only applicable to a certain amount of TPV within the category, things like that. So that is baked into the economics that I talked about. And so the unit economics here are very positive and very healthy.

All right. Excellent. We also covered this a little bit earlier, but maybe we can just combine these next two questions in the interest of time. Just talking a little bit about 2026, you hit on some of the high-level factors. Maybe you could elaborate a little bit more on the transaction margin dollar puts and takes that investors should be considering? And also in terms of the operating expense growth. For context, in the past, we had been thinking about OpEx growth is roughly half the level of transaction margin dollar growth. And then the question from the investment community is, should we think about 2026 a little bit differently and maybe go back to that framework in '27 and beyond?

Yes. So transaction margin dollars first. I talked before about the fact that we've really diversified our sources of transaction margin dollars growth. And we've seen really nice consistency in the contribution across our different products to that. So we start with that going into '26. The second piece of it, which I talked about before as well, is really our intent to take some of those dollars and that growth and reinvest it back into our business. And again, reinvesting it along two lines, driving product attach and habituation and also really investing against the Agentic shift that we're seeing. And I mentioned before some of the forms that, that will take, but really focused on building for the future and driving durability for future over the next couple of years, but importantly, setting us up as well for the periods beyond that. When you look at the OpEx side of it, as a general rule, the framework you mentioned is exactly how we think about it, which is to grow OpEx at about half the rate of our transaction margin dollar growth. Having said that, when you get into 2026, given the investments that we plan to make, I would say the way to think about it for '26 right now or at least as we're still working through our planning is that the OpEx growth rate will probably be about the same as our transaction margin dollar growth rate. So we'll see some compression there. With, again, to your point, as we begin to return that and begin to grow over that over the next couple of years, that will create a nice algorithm of growth for us to continue to have momentum around.

All right. Thank you for that update, Jamie. We have -- with the time permitting, I think the next topic we should hit is Agentic Commerce. So plenty of great announcements from PayPal on this topic. Maybe you could elaborate a little bit on those the two main announcements that you made. But one more mechanical follow-up is a question we often get from investors is how does a merchant go about getting the PayPal button placed within, let's say, the ChatGPT user interface? And what is the, let's call it, opt-in process?

Yes. So with respect to Agentic, we're really excited about it. I mentioned before, we've got partnerships with a handful of different players at this point. And we're really focused on a couple of things. Number one, for the LLM, it's really about bringing them sort of merchants at scale very quickly. We can bring to them tens of millions of merchants very, very quickly to help them sort of launch Agentic Commerce very quickly. The other side of it is bringing hundreds of millions of consumers to them at the same time and doing it with real global scale around identity, around authorization, around fraud protection, both with respect to sellers and with respect to buyers. And that is really, really important to LLM because all of those capabilities and particularly all the global elements of it are something that they just don't have time nor do they want to build out. And so we're doing that in a couple of different ways. Number one is building an orchestration layer that allows merchants to opt in and allow their catalog presentment and allow their pricing, all of that to be presented very seamlessly with the LLMs. And the other side of it is building out the Agentic Commerce platform side of it, which allows -- once the consumer is in there, they can transact very seamlessly and very quickly. And so how we do that and how we scale that, that's what we're focused on building out over the next year and working very closely with a couple of big LLM as we do it. What's interesting and exciting, too, is because we already have contracts with all of these merchants in place, right? All of our branded checkout economics, those are already there. This doesn't require the LLMs to have to recontract with anybody. It's just pass-through, for us in terms of once a consumer comes in, they click on a specific brand. That brand flows right through our branded checkout performance and transaction just like it would under any other transaction if they had done it directly with the merchant. So from that perspective, things don't look much different from the economic side of things.

All right. Perfect. Appreciate that update. Let's go to BNPL, which is another topic that's somewhat related to those existing merchant relationships that you have. So we've seen some great observations around the Pay Later button being shown more upfront in the shopping process. You referenced this a little bit earlier. So maybe you could just talk a little bit about what PayPal is doing to help that Pay Later button show up earlier in the shopping journey.

Yes. So buy now, pay later has become a really important part of how consumers shop. And we've seen the growth, not just with us but just in the space, generally been very strong. When you look at buy now, pay later, we are a very global business. About 30% of our buy now, pay later product is in the U.S., the rest is rest of world. We are a very short duration, generally skewed towards paying for pay monthly. So our product averages about a 41-day cycle. And the AOV side of it is quite small compared to some of the others. We are generally more transactional, not the larger purchase in terms of how you look at it. And from an economic perspective, the unit economics on the product itself are on par or better than our competitors. And what we find, to your point about when we have it embedded in the stack, whether it's upfront or even when it's embedded later, it brings people back to PayPal because once they've gone through our onboarding process, they know when they click pay in for with PayPal that they can use it every time. And so it brings us back, they transact more, but we also get a proven halo effect in terms of transacting at higher levels as well. It's really positive in terms of how it contributes to us and it's a real opportunity for us. And one that candidly, up until a year or 2 ago, we had, had the product, but we hadn't focused on it as much as well. So think about this big consumer installed base that we have and a big opportunity to really lean in differently with our merchants and our consumers to capture it.

Okay. Excellent. Well, in the final few minutes that we have here, I think going to Venmo would be a great way to cap things off. If you could talk a little bit about some of the monetization progress that you've made. And then we have one more specific follow-up. In the past, the company had noted roughly about a 50% user overlap between Venmo users and PayPal users, and we're hoping you could give us a status update there.

Sure. So Venmo, and you know this because every time we talk, I get super excited when I talk about Venmo. It's a product that we've had for a long time. but we just hadn't invested in. It just sort of grew on its own. But I would say from a monetization perspective, it had been pretty static. And about 1.5 years ago, we really shifted the profile there. We brought in a new leader. We've shifted our investment profile. And Venmo is really growing at a very nice clip. We've got a very engaged, very attractive young user base there. What's different now is, A, we've made the app just better in terms of pulling people in. It's find your contacts easier Venmo groups. We've had other features in it, bill pay, split, just different things that people can come in and find and service very quickly. But important to that, we started combining that with real campaigns around the Venmo debit card and embedding that in wallet, so that it's easy to use. You can tap to pay with Venmo, which has been really fun and exciting for folks. And we've really just begun this journey around how do we build out a more habituated consumer. One of the big campaigns we launched a few months ago was around the Venmo college campaign, the Big TEN, Big 12, which is really fun because it not only on-campus sort of co-marketing to exactly our demographic that we want to capture. But it's around embedding the debit card as we do it, so in the onboarding process. And it's also about embedding Pay with Venmo and that experience in college bookstores, how we pay athletes mean all of these different things, which just brings different ways we can monetize. On top of that, it's just been a really, really fun way to get out there. I'm sure as you guys have seen some of the college game days, you've seen some of our advertising and some of the way we've really brought the brand there. And your last question was around the overlap piece of it. it's interesting because while we have said that in the past, so we have 50% overlap, I guess what I would think today is I really are much deeper on PayPal and Venmo, we go after different target demographics. PayPal SKUs, 30-plus, slightly more affluent and in terms of our target demographic and our general user base is much more Main Street America there. When you look at Venmo, it is a more young Gen Z, a little bit of millennial, but really embedding into being the way the next generation pays and how the money flows for them. So yes, some overlap. But again, we operate in a space where we think we can do all of that pretty well and complementary.

Excellent. Well, on behalf of my team and everyone here at UBS, we want to thank -- I mean the whole team at PayPal. So Steve and Allison, that weren't able to join us here, but also to Ryan and Jamie for being here in Arizona and being a big part of our conference for many years. So thank you so much.

Thanks for having us.