PayPal Holdings, Inc.
Q2 2021 Earnings Call Transcript

Published: 29 Jul 2021

[Operator:]

Good afternoon. My name is Brana, and I will be your conference operator today. At this time, I would like to welcome everyone to PayPal Holdings Earnings Conference Call for the Second Quarter 2021. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session Thank you. I would now like to introduce your host for today's call, Ms. Gabrielle Rabinovitch, Vice President, Corporate Finance and Investor Relations. Please go ahead.

[Gabrielle Rabinovitch:]

Thank you, Brana. Good afternoon, and thank you for joining us. Welcome to PayPal's earnings conference call for the second quarter of 2021. Joining me today on the call are Dan Schulman, our President and CEO; and John Rainey, our Chief Financial Officer and EVP, Global Customer Operations. We're providing a slide presentation to accompany our commentary. This conference call is also being webcast, and both the presentation and call are available on our Investor Relations website. In discussing our company's performance we will refer to some non-GAAP measures. You can find a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the presentation accompanying this conference call. Management will make forward-looking statements that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include our guidance for the third quarter and full year 2021. Our actual results may differ materially from these statements. You can find more information about risks, uncertainties and other factors that could affect our results in our most recent Annual Report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC and available on our Investor Relations website. You should not place undue reliance on any forward-looking statements. All information in this presentation is as of today's date, July 28, 2021. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

[Dan Schulman:]

Thanks, Gabrielle, and thanks everyone for joining us today. I'm pleased to say that on the heels of a record year our Q2 results once again reflect some of the best performance in our history, on both an absolute and a relative basis. It is now clear that customers around the world have embraced all forms of digital payments, even in regions where in-person activities are returning towards pre-pandemic levels. In this new normal PayPal serves as an essential and trusted platform for both consumers and merchants across all forms of commerce, payments, basic financial services As a result, we hit a new milestone in Q2, surpassing $300 billion of TPV for the first time in our history, growing 40% on a spot basis to $311 billion with an annualized run rate of approximately $1.25 trillion. This is even more notable given that eBay's TPV on our platform, declined by 37%. eBay exited the quarter at under 4% of our volume and we expect their TPV will approach 2.5% of our total volumes by year-end. Excluding eBay, our volumes grew by a remarkable 48% on a spot basis.

[John Rainey:]

Thanks, Dan. I'd like to start by thanking the entire PayPal team for their continued commitment to serve our customers and execute on our priorities. We are reporting another very strong quarter. Our results are indicative of the strength, diversification and breadth of our two-sided Global Payments Platform. PayPal sits at the intersection of digital transformation and e-commerce penetration. As the largest open platform for digital payments globally, we're uniquely positioned to address the opportunity that these secular tailwinds present. Over the past six quarters, our team's focus collaboration and resilience have allowed us to innovate at scale and deliver our best performance in company history. Globally the pace and shape of the recovery varies. As the environment continues to evolve, we are evolving with it to serve the changing needs of our consumers and merchants. During the second quarter restrictions started to relax across our core markets, and we saw the beginning of a return to normalcy in consumer behavior, Consumers are spending again in verticals that had been severely affected and have become more comfortable shopping in person and dining out

[Operator:]

Your first question is from Tien-Tsin Huang with JPMorgan. Your line is now open.

[Tien-Tsin Huang:]

Thank you. Thanks so much and thanks for all the details in the slides here. It's good. Just with the third quarter guidance being a little bit lighter than trend, but you're also reaffirming the year even with eBay expected to be one point worse. Can you just reconcile that thinking between the third quarter and holding the year and then also if you could just help us bridge third quarter to fourth quarter growth for us, given all the other moving pieces here? That will be great. Thanks.

[John Rainey:]

Sure. I'll start there. Look third quarter has always been - was going to be our toughest quarter from a year-over-year growth rate perspective for a lot of the reasons I outlined. There are a number of reasons that are contributing to the growth in the fourth quarter, but I think before I get into them. It's important to understand that if you look on a year-over-two year basis, the revenue growth actually is very consistent in each quarter of this year. And for the full year we will be growing in the neighborhood of 20%. But of the items that are contributing to the growth in the fourth quarter there is a few that I think are notable to call out. One is, there's certainly less pressure from eBay. That abates somewhat in the fourth quarter. We also have some benefit from the pricing changes that we announced that go into effect next month. And then we have a number of different initiatives that we're rolling out in the second half of the year in which we get most of the benefit or the full quarter's worth of benefit in the fourth quarter. And so all of those things tend to drive. I think some acceleration in what we're seeing in revenue from the third quarter to fourth quarter. And then as usual we always have some seasonality around the holiday shopping season which we again expect this year.

[Dan Schulman:]

Now if there's one thing I can add to John's comments is Q3 is the height of eBay pressure. And then, as John mentioned, as we go into Q2 those headwinds that have been growing against us on eBay turnaround and become tailwinds. So we have something like 850 basis points of pressure in Q3 as John mentioned that drops to 600 basis points of pressure as we go into Q4. So that's a natural lift of about 2.5 points of revenue growth, and as we go into 2022 that continues to help our results and I think if you look beyond the eBay impact and looked at our adjusted results, you can see that the core business and the strength of our franchise has really never been performing better. I think John mentioned one thing that I think is worth highlighting that the elevated spend around online is continuing even as we see economies reopen. I mean you can see that in our growth rates of our volumes, up 40%, 48% without eBay, but if you even look at things like our daily active users. Our daily active users versus pre-pandemic levels are up 43%. They were up substantially last year and they continue to grow as we go into this year. And so I think we have lot of strength in the core. Some of that's being matched by eBay, but eBay is all about timing. We always knew these revenues were moving away, it's just a matter of timing and now we've got kind of what we think is the right case, a 100% in third quarter and then from there on in, those pressures abate.

[Tien-Tsin Huang:]

Agreed, thing just better.

[Dan Schulman:]

Absolutely.

[Tien-Tsin Huang:]

Thank you both . Thanks.

[Dan Schulman:]

Thanks Tien-Tsin.

[Operator:]

Your next question is from Ashwin Shirvaikar of Citi. Your line is now open.

[Ashwin Shirvaikar:]

Thank you. Hi, Dan. Hi, John. I know you all - you both provided a lot of information on eBay throughout your prepared remarks, but I did want to drill down further into sort of the overall effect of eBay on your results. If you can kind of speak to the ongoing impacts to the back half of the year and into next year, and then the flip side, obviously you've mentioned the ex-eBay performance, the 32% growth and so on. Should one expect that to be coming out of that sort of growth rate to be sort of a more normal appearance of what you can do?

[John Rainey:]

Sure I'll start Ashwin. I'm sure Dan will want to jump in. Look, I think there's a couple of metrics that really highlights the true performance of our business. But to start with we've always known that 2021 was going to be the year where we have the most significant impact from eBay. And the fact that we're lapping what was tremendous growth last year, and still performing at the level that we are this year in the face of that impact on eBay is really just quite phenomenal. But I'll give you an example, I think really tells the picture here. So last year in the second quarter, we grew revenue 22%, and in that number there was a benefit of 5 percentage points of growth from eBay. So 22% revenue growth for 5 percentage points of benefit from eBay. This year in the second quarter, we grew revenue 19% and that number included 800 or 8 percentage points of headwind related to eBay's business. And so that really underscores the strength of the franchise and how well we're performing right now. And quite frankly it's something that we're very excited about, because this sets us up for, I think much cleaner performance going forward and an acceleration in some of our growth rates when eBay is a much slower growing and smaller part of our business going forward.

[Dan Schulman:]

And if I can maybe complement some of John's comments there, first of all, I do want to say this for eBay, obviously they remain a very close strategic partner for us. We still have about 60% share of checkout on eBay and obviously eBay merchants and consumers want and desire to use PayPal if you think about, just to give perspective - historic perspective, if you think about when we split from eBay, six years ago, eBay's revenues as a percent of our total were 26% of our total revenues. And we believe that they're going to end this year around 3% or so. And that their TPV is going to be under 3% as a percent of our overall volumes. And so this is, as I mentioned before, it's a timing issue. And frankly, the sooner eBay transitions, the better it is for our future revenue growth. I'd also say, just one other thing we are making a lot of progress with a lot of other marketplaces coming out of the eBay restrictions and we continue to see Ali Baba continue to ramp. Really pleased to watch the growth rates there and we are making a lot of progress with a lot of other marketplaces that we'll talk about as we get along further in the year. So eBay transition is behind us. At the end of this quarter, the headwinds dissipate and we're glad to start to move forward, as John said, we'll really be able to see the strength of the franchise start to shine as a result of that.

[Ashwin Shirvaikar:]

Thank you. Thank you for those comments.

[Dan Schulman:]

Yeah, you bet.

[Operator:]

Your next question is from James Faucette of Morgan Stanley. Your line is now open.

[James Faucette:]

Good afternoon, and thanks for all the commentary, Dan and John. I'm sure, there'll be additional questions on the quarterly cadence and eBay, but I wanted to touch on or for you to touch on something you mentioned earlier, and that is growing in store acceptance and QR codes. We've heard some positive things from industry sources recently on growing usage there. I'm wondering if you can give a little color on what you're seeing from PayPal's perspective, and how your acceptance works with the partnership with Clover from Fiserv and what you've done to enable that for merchants and consumers.

[Dan Schulman:]

Yeah, I think I'll start on this one. And then maybe John can kick in. So first of all, clearly, pretty much every merchant, whether it's small, mid-size or large is envisioning a seamless omnichannel feature. And that's where physical and online kind of blur together that they now start to use that to digitally interact with their customers to basically tie in their loyalty programs, customize deals and offers to individual consumers. And that is moving well beyond just checkout. Before we were thinking QR codes and other forms of contactless payments were great because was both fast and maybe more healthy in a pandemic environment. But all of our conversations now go beyond checkout. People are looking to drive loyalty and looking to drive rewards and coupons, more flexibility how consumers like, order, track pay for their services, customize incentives. And so that's really the conversations that we're having and that's where we're getting a ton of traction. By the way, I do think that this seamless omnichannel effort by us is key to us doing everyday usage. And if I look at not just multiple millions of consumers that are using our QR codes, but what's happening is they also are spending 19% more TPV on the PayPal platform and that halo effect is a big deal as we look forward, especially as we look towards the Super App which maybe somebody will talk about later, but the more and more services we put together the more and more of that halo impact that occurs. And so we obviously are up to now 1.3 million merchants, every 20 second, a merchant's signing up for more QR codes with us. We have a lot of momentum with large enterprises right now. But the conversations have moved to how do we fully integrate their loyalty programs into our app. How do we drive customize deals for them? And so those are taking a little longer to go live to site. But they are much more integrated than we've ever seen before. And we're seeing with customers like CVS, once you start to integrate that together, once you start to get a deterioration, we saw CVS transactions go up a 151% month-over-month. And so we're really beginning to see some traction in the marketplace around all of these things. We're very excited about it. It's going to be a multi-year journey for us, but we know that both merchants and customers expect us to be fully omni.

[James Faucette:]

Thanks a lot.

[Dan Schulman:]

You bet, James. Oh, yeah, by the way, James. One other thing. You talked about Fiserv and Clover, forgot about that. So that is rolling out this quarter. We are a default funding instrument on Clover, the very close partnership that we have with Fiserv and looking forward to reporting more on that as quarters go on.

[James Faucette:]

Thanks for clarifying that, Dan.

[Dan Schulman:]

Yeah, sorry about that. Yeah.

[Operator:]

Your next question is from Darrin Peller of Wolfe Research. Your line is open.

[Darrin Peller:]

All right. Hey, thanks guys. Look, it's great to hear that the Super App refresh is going well. If you could just give us a little more specifics on the timing of the rollout. And then what you're looking forward to meet in terms of engagement or impact on NNA levels? And I guess just quickly on NNA. Dan, you mentioned earlier, you're still confident in the high end of the $52 million to $55 million range which - that would require a bit of a step up from second quarter levels. So just any more color on the condition there.

[Dan Schulman:]

Yes, sure. I'll start right with that quickly. We always knew the second quarter was going to be the low point of the year because we did $21.3 million, or $23.4 million NNAs a year ago. And even though they are performing better than cohorts that we previously had historically, the churn is lower. It's still a ton of incremental churn versus traditional cohorts of on the second quarter. And we're clearly beginning to see that dissipate already this year as I look at NNAs coming in. And so I feel really good about that guidance right now. Q4 is always a high point of the year. And so you'll see it start to build from second quarter, up in to third quarter and then up again in to fourth quarter. Then maybe if I can just - if that answers your question on NNA, I'll go quickly into the Super App. We made a really substantial milestone by being code complete on this first iteration of the Super App. We're slowly ramping. It's the first change we've done to the app, first change since I've been here that we've done to the app. And so we want to kind of measure what the engagement levels are and the uptake of it, but this is going to be something where this isn't a big bang theory that this app in and of itself, this version is the be-all and end all. It obviously is going to look across payments, basic financial services and shopping tools. You're going to see releases and enhanced functionality come out pretty much every single quarter. But early on, that's going to include things like high yield savings, enhanced Bill Pay which will do improve search and better UX, more billers, aggregators. We're going to do two day early access to direct deposit budgeting tools, something we haven't talked about, QA messaging. So if P2P you $10 for whatever you're doing and you want to message me right back without sending me a P2P you can go do that. And we think that's going to drive a lot of engagement on the platform. You don't have to leave the platform to message back and forth. Obviously, the UX is being redesigned with that rewards and shopping. We've got a whole giving hub around crowdsourcing, giving to charities and then obviously Buy Now, Pay Later will be fully integrated into it. And by the way, as we go in to next year we're going to - like last time I counted was like 25 new capabilities that we going to put into the Super App. And so I don't want to dismiss at all. What we've done right now, but it just continues to improve going forward. And the way that I'm looking at success with the Super App is, what kind of engagement levels do we get, fully expect engagement to move up. What's happening to our average revenue per active account? By the way, even with the new services we've recently launched our average revenue per active account at eBay went up 13% this past quarter and that's a really good sign along with the 11% improvement in TPA which was really a record in the last four years or so. And so we've got a lot going on. I think our engagement, average revenue per active user and then we'll look clearly at all the halo effect as well. But we're excited to be on the journey right now and be underway. And again, you just see it continue to improve quarter-over-quarter.

[Darrin Peller:]

Yeah, you bet.

[Operator:]

Your next question is from Colin Sebastian of Baird. Your line is now open.

[Colin Sebastian:]

Great, thanks, good afternoon. I want to follow up on the Pay Later initiatives. There's clearly, you're gaining nice traction with the users. I wonder how much of that activity is incremental to volume if that's just a function of the higher conversion rate. And secondarily, we've heard from some merchants that return rates are little bit higher with Pay Later. So I'm just curious if that impacts merchant adoption at all. Thank you.

[Dan Schulman:]

Yeah, sure. So look it was another terrific quarter, I mean just in every way for Buy Now, Pay Later. As I mentioned, we give 1.5 billion of TPV in the quarter alone, aside of $3.5 billion . But this is amazing piece of a - stat on that $1.5 billion. That's up 50% from Q1, sequentially. So you can really see that even we had so much momentum in Q1, that momentum really accelerated in Q2. You've got a bunch more merchants using it now. 650,000 merchants, more and more of them are presenting it upstream on their product pages. That obviously gives us a disproportionate share of checkout when that occurs, and here you can tell by the 7 million customers, doing 20 million plus transactions and obviously our repeat rates are extremely high. There is a lot of satisfaction with the product. It's still something like 70% are repeating within six months and our halo effect is the same as it was last quarter. So 15% halo effect in TPV, still a substantial reduction in our TE cost, about a 16% reduction. We're still seeing 80% plus release funded through debit. And yeah, Australia we put in place just a couple of weeks ago and bam it's off to a really strong start right away. So - and part of the reason Colin, that we're getting such strong results is because we have 400 million customers. And when we put something in, it happens at scale and we know those customers. So the approval rates are much higher, returns are lower because we know the customer. And so a lot of the other Buy Now, Pay Later players don't necessarily know the consumer, the way that we know the consumer in this. And so, we're pretty pleased. We've got a ton on our roadmap ahead in terms of expanding internationally, more and more functionality that we want to put on the product itself.

[John Rainey:]

Colin, I just had a couple of points there, I think are really encouraging as we look at the early progress there. One is that where we have upstream presentment, we see a double-digit click-through rate from consumers, which is quite encouraging. And particularly when you think about what Dan mentioned and scaling that across all of our customer base. But the other, and it's a very important one. And it actually ties back into Darren's previous question around revenue per user and engagement. But we see a 15% lift in overall TPV among those customers that are using Buy Now, Pay Later. So we're early stages here, but as we've repeatedly said, we think that we've got a value proposition that is frankly second to none, and quite encouraged by some of the early results that we're seeing.

[Colin Sebastian:]

Great, thanks guys.

[Dan Schulman:]

Yeah.

[Operator:]

Your next question is from David Togut of Evercore ISI. Your line is now open.

[David Togut:]

Thanks so much, Dan and John. Given the new PayPal pricing model on branded and unbranded products effective August 2, can you gauge for us the expected annualized impact on revenue and non-GAAP EPS from these changes. And then as part of that, could you just elaborate on your physical point of sale payment strategy given the size of the price cut on physical credit and debit card transactions is quite substantial??

[John Rainey:]

Sure, I'll take the first part of the question, David. Look our pricing change included both price increases and price decreases. And it remains to be seen and sort of the volume changes that come from each of those. And so in the context of our $25 plus billion revenue base, I would say that for the year these are relatively immaterial on our results. But I think very importantly, this provides a lot more transparency and clarity to our customer base around how - pricing and really trying to price to the value that we provide for these customers, and we've demonstrated time and again where that value comes from and just survey data on customers' willingness to buy when PayPal is presented at checkout that is exponentially greater than when it's not. So this is probably overdue. It's been the first time in 20 years that we've made a change to our base pricing like this. But certainly think it puts us more in line with the market and really prices to the value that we're creating for our customer base.

[Dan Schulman:]

Yeah, I think that is a pretty comprehensive response from John. I mean we obviously carefully review every one of our pricing changes, up or down. We do extensive market research before we do any change. And as John said, we look at where we have value and we price in accordance with that. Clearly on the branded side, we think we had a tremendous amount of value, things that John talked about, buyer and seller protection, Buy Now, Pay Later at no incremental cost for our protection, highest checkout conversion, et cetera. But we took down rates for basic full stack processing that also was reduced somewhat substantially from $2.9 plus $0.30 to $2.59 plus $0.49 and that is going to enable us to aggressively compete for all of the payment processing of the merchants that do business with us. And you've heard us say time and time again David, that we are going to move into the in-store space and we are going to move, so aggressively in there. We rolled out Settle in the U.S., is a really beautiful full package. It doesn't just include card reader but inventory management, sales reach out and allows a merchant to seamlessly load inventory in both their online and in store locations, then across multiple channels as well. So we're obviously going to be very aggressive on moving into in-store and it's always been part of our strategy. And by the way, if a small merchant does all of their business with us, they can actually see the overall cost come down. And we want to encourage them to do all of their business with us because we are trusted platform, they do turn to us. And we price, we think the right way. We finally unbundled some of this branded and unbranded because that's how the market is playing and we know where we want to be aggressive, and we're going after that

[David Togut:]

Thanks so much, Dan and John

[Dan Schulman:]

Yeah, you bet, David. Thank you.

[Operator:]

Your next question is from Ramsey El Assal of Barclays. Your line is now open.

[Ramsey El Assal:]

Hi, Dan, John, thanks for taking my question this evening. Dan, I wanted to get your updated view on Crypto and Blockchain and see how you guys are planning and engaging with the ecosystem from a consumer product perspective, and I know you just mentioned new crypto capabilities in the new app, but also from like a balance sheet perspective and internal technology perspective, how will you kind of engage with the ecosystem in the quarters ahead.

[Dan Schulman:]

Well, we continue to be really pleased with the momentum we're seeing on crypto. And we're obviously adding incremental functionality into that whether we probably saw increased limits to 100,000 a week. We're right in the middle of some open banking integration, which will increase the ability to fully integrate into ACH and do faster payments. We're going to launch, hopefully, maybe even next month in the UK, open up trading there, we're working right now on transfers to third party wallets and we really want to make sure that we create a very seamless process for taxes and tax reporting and so, we're really looking at how do we integrate that into both the trading and the buy with crypto on our platform. But I will say this, all of that is interesting, but it is in the main course, in terms of what we are trying to do with our blockchain and digital currency business unit. We are clearly thinking about what the next generation of the financial system looks like how we can help shape that. We are working with regulatory agencies, central banks across the world. The number of countries that are looking at CBDC, Central Bank issued digital currencies is increasing rapidly. And you're like in 40 countries like six months a year ago, you almost up to 100 countries looking at it right now. And clearly there is an opportunity to think about a new infrastructure that can more efficiently, I believe that could be a lower cost to do transactions and also get money to people much faster than happens today. I mean, the other day I sent an EFT from one bank to another bank and that Bank told me we're taking three days to access that money in the EFT I sent. That's crazy. It needs to be instantaneous and there is a large desire by governments to really think how can you create a more efficient system using new technology to bring in more citizens more underbanked, underserved citizens into the financial system Because they disproportionately pay a higher take rate in those who are fully bank to our higher income levels. And there's a lot of connections between digital wallets and Central Bank issued digital currencies. Imagine not having to send out stimulus checks but sending those directly into digital wallet. We instantaneous receive it and you don't have to go in to check cashing location and exchange that and get charged for that exchange there's just so many benefits to that as well as just plain utility to payments. How can we use smart contracts more efficiently? How can we digitize assets and open those up to consumers that may not have had access to that before? There are some interesting defi applications as well. And so we are working really hard, and by the way, as you probably have seen we are trying to pick off the very best talent in the ecosystem to come work here at PayPal. We have a list of names and phone numbers and we are slowly but surely building a team that I think it's going to really shape the thought process around this and I'm really pleased with at least the early returns on that. Hopefully that helps you.

[Ramsey El Assal:]

It does, and very interesting. Thanks so much.

[Operator:]

And we have time for one last question from Jason Kupferberg of Bank of America. Your line is now open.

[Jason Kupferberg:]

Hey, thanks guys. Just wanted to ask a couple here on margin. And for starters, can you just reconcile for us the unchanged revenue and EPS guidance for the year with the lowered operating margin guidance and talk about how much of the guidance change on margin is from eBay versus perhaps elevated OpEx growth expectations? And then just as a quick follow on, give us a sense of how we should think about the margin potential of your business beyond this year as eBay conversion moves into the rear-view mirror. Thanks.

[John Rainey:]

Sure, Jason, I'll take this and it's great to speak with you. So starting with the first part on the change this year really two things to note, one that we talked about is eBay. eBay, we expect to have an $0.85 impact to our EPS this year. And the fact that we are performing and expect to perform for the back half of the year at this level and being able to whether that impact is I think really speaks to the strength of the overall business, but the second area and this sort of gets into the second part of your question as well, but we're also investing aggressively in our business. I would argue that there's never been a more important time in our business to invest right now, to invest for a future where we believe in the primacy of digital wallets, we believe in the permanent pull forward of e-commerce we believe in the ubiquity of digital payments and too, we want to help shape that outcome. We want to be a leader in that space. Now it happens that the structural nature of our business, our margins once they go up, and by the way they will, to be very clear about that. But at the same time, we don't want to be a prisoner to expanding operating margin one quarter to the next, because we want to be able to appropriately invest in our business to create the most shareholder value that we can over the long term, and become the company that we all believe that we can be. And so close out our margins will go up. We said this year that we expect to have flat, maybe some marginal improvement in our margins. But as we noted at our Investor Day earlier this year, our margins will go up over time, but we want to invest for growth and invest to be that leading digital company, payments company that we know we can be.

[Jason Kupferberg:]

Okay, thanks for the comment

[John Rainey:]

All right, thanks, Jason.

[Operator:]

I would now like to turn the call back to Dan Schulman for closing remarks.

[Dan Schulman:]

Thanks so much. Well, thanks everybody for those great questions. I want to thank everybody for your time. We hope that all of you and your families are staying healthy and I hope that you have a great summer as well, and we look forward to speaking to you soon. Take care and thanks again for your time.

[Operator:]

This concludes today's conference call. You may now disconnect.