James Chriss:

Thank you, Ryan, and thank you to everyone for joining us this morning. This quarter, we delivered a solid set of results, and the year is off to a good start. Our new leadership team is operating well together, and we are really starting to get our arms around the business. You will see in our numbers and the read-through that our efforts are beginning to make a difference. We also see substantial need for continued retooling of the company, how we work with our customers and how we execute. We are encouraged by the progress to date but remain realistic that we still have a lot of work to do and a lot of opportunity to drive profitable growth ahead of us.

Tien-Tsin Huang:

Just I wanted to ask on transaction margin dollars, if you don't mind, the acceleration there. Maybe can you give us a little bit more detail on the growth across the main businesses, branded checkout, unbranded and what we've been calling other? And of course, on the other side, love to hear if there's any change in thinking there on the strategy to reclaim growth or even divest some of those assets.

Jamie Miller:

I'll just walk you through the drivers for transaction margin growth during the quarter. We were happy with the positive growth progression. I mentioned in my prepared remarks, we've got a lot underway to really position the company for positive TM growth over time.

Operator:

Your next question comes from the line of Darrin Peller with Wolfe Research.

James Chriss:

Yes. Thank you, Darrin. So again, just to sort of paint the high picture on unbranded, this is an important segment for us, both on -- for enterprise and for small business. We have to nail the basics, right? So our customers are looking for the best auth rates, the best uptime, the best availability, the best reliability. And those are things that we are now providing.

Operator:

Your next question comes from the line of Timothy Chiodo with UBS.

Jamie Miller:

No, I think you've said it all. I really think Fastlane reinforces our holistic value prop, both for branded and for unbranded. And the focus on merchant checkout conversion, and that being at our core, I think, drives a strong value prop, and it will support strong pricing over time.

Ramsey El-Assal:

Alex, could you comment on the European Commission ruling to open up the iPhone NFC hardware on the handset, and whether you see that as a competitive opening for PayPal in Europe? I know there's some rumblings in the U.S. as well about that type of a move. I mean, how ready from a product perspective are you to take advantage of a more open NFC environment?

Jason Kupferberg:

I just had a 2-part question. The first, just following up on the transaction profit dollar growth. I know you're now expecting slightly positive for the year. I guess that would seem to imply maybe a little bit of deceleration from the Q1 levels, even though the second half comps are a little easier. So just wanted to get a sense of whether that's conservatism or just some normalization of things like transaction and loan loss that helped you in Q1.

Jamie Miller:

So just to walk through a little bit of the first half, second half dynamics on transaction margin dollars. As I talked about before and you noted, I mean, Q1 in particular benefited from a few tailwinds. And we do expect those will be less meaningful as we move throughout the year.

James Chriss:

And just to underline Jamie's point, we have not put -- or we have put limited upside to this innovation that we've talked about in these expectations. And so again, this is about us having the flexibility, us ensuring that we take the right time and do the right thing by the customers as well as building the long term. But those are not built in to the rest of the year.

Michael Ng:

Just 2 for me. First, I was just wondering if you could just talk a little bit more about the drags on the smaller part of -- from the smaller part of the portfolio and transaction margin dollars. When does that kind of work itself out of the system?

Jamie Miller:

Great. On the smaller parts of the portfolio, I guess what I'd say at a macro level, we had seen a pretty significant drag on that last year. It is coming through this year at a smaller rate. I mean, part of these are products we've deprecated. Some of these are, frankly, acquisitions that we just haven't invested in. And as Alex mentioned, we're going through a process of really looking hard at these.

James Chriss:

Yes. Let me talk about -- up-level and talk about Venmo for a minute and the opportunity there. So again, on the positive side, we have the leading P2P platform with incredible customer base with disposable income 22% higher than the U.S. average, 60 million monthly active users and 90 million 12-month actives. So this is an incredible platform for us to work at.

Bryan Keane:

Solid first quarter results here. My question is just still more on the big picture. The naysayers on PayPal would say the company is structurally challenged with the rise of payment methods like Apple Pay. Alex, I know you've been at PayPal now for a little over 6 months. What do you think the naysayers are missing on the competitive advantages PayPal still has in the market? In particular to grow branded?

Jamie Miller:

So first, while PayPal is not directly impacted by that regulation, we are indirectly impacted through our revenue share with our consumer credit partner. There's a lot of uncertainty right now around both timing and implementation of that. And as I mentioned before, our guide excludes the impact of that, just given the uncertainty.

Operator:

Your next question comes from the line of James Faucette with Morgan Stanley.

James Chriss:

Yes. Thanks, James. Here's the best way to think about it. First and foremost, we have to have the best innovation in the market. We -- it was important for us to get some early customers up and running and using it. And the data continues to hold and certainly delight these merchants.

James Chriss:

Yes. It is a combination. What I'd say is we're seeing Pay with Venmo really starting to take off. Obviously, it's -- in the U.S., it's an incredibly well-loved brand. And when people see that button, it's an opportunity for them to use those dollars that I mentioned earlier that are in their account. So that's an exciting piece online.

Operator:

That is all the time we have for questions. I will turn the call back to Alex Chriss for closing remarks.

Operator:

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

Ryan Wallace:

Good afternoon, and thank you for joining PayPal's Fourth Quarter 2023 Earnings Conference Call. Joining me today is Alex Chriss, our President and CEO; and Jamie Miller, CFO. We're providing a slide presentation to accompany our commentary. This conference call is also being webcast. 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 the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the presentation accompanying this conference call. Our remarks today will include forward-looking statements that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. 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 report on Form 10-Q filed with the SEC and available on our Investor Relations website. All information in this presentation is as of today's date, we expressly disclaim any obligation to update this information. And with that, let me turn the call over to Alex.

Jamie Miller:

Thanks, Alex. Good afternoon. First, let me say that I'm very excited to have joined PayPal. Our new leadership team is laser-focused on our customers, and I am incredibly energized to see our team come together to deliver PayPal's full potential. Before I discuss our financial results, you'll notice several things different in our materials today. First, we've redesigned our press release in a more standardized tabular format designed to allow ease of use and better consumption of information. We have also included additional supplemental metrics in our investor presentation intended to provide greater transparency into our business. We will continue to evaluate these and other changes over time. I'll start with a summary of our financial performance. In the fourth quarter, we reported 9% revenue growth on a spot and currency-neutral basis. For the full year, revenue grew 8% at spot and 9% on a currency-neutral basis. Transaction margin dollars were flat year-over-year in the fourth quarter and declined 1% for the full year. Non-GAAP earnings per share were $1.48 in the quarter, representing 19% year-over-year growth. Higher earnings per share in the quarter were driven by ongoing expense discipline and better-than-expected transaction margin dollars, which benefited from branded checkout, Braintree and interest on customer balances. We ended the full year with $5.10 of non-GAAP earnings per share, up 24%. Our full year results benefited from lower operating expenses, the higher interest rate environment and the impact of share buybacks. Now I'll walk you through some key operating metrics that support these results. We ended the year with 426 million active accounts and 224 million monthly active accounts. Throughout last year, we indicated that we expected ongoing churn of unengaged accounts in less developed markets, predominantly in Latin America and the Asia Pacific region. This was the primary driver of our year-over-year reduction in total active accounts. We had modest growth in monthly active accounts, up 1% for both the quarter and the full year, and our active base of engaged counts remain stable. More than 50% of our total active accounts were monthly actives over the course of 2023. Transactions per active account, which is a trailing 12-month number, was 58.7 in the fourth quarter, up 14%. If we exclude PSP processing, which is primarily Braintree from that figure, transactions per active account grew 7%. Part of this growth rate is driven by the churn of unengaged accounts that I just mentioned, but we were also encouraged by the higher activity levels we're seeing among our core base of accounts. Page 14 in our investor presentation includes additional information on our historical trends in monthly active accounts and transactions per active account, excluding PSP processing. On volume growth in the fourth quarter, we saw total payment volume, or TPV, of $409.8 billion, representing 15% growth at spot and 13% growth on a currency-neutral basis. This growth was driven primarily by Braintree as well as branded checkout and Venmo. U.S. TPV grew 11%, International TPV grew 17% on a currency-neutral basis, primarily driven by strength in Europe and improvement in Asia. For the full year, TPV was $1.5 trillion, increasing 13% at spot and 12% on a currency-neutral basis. PayPal's fourth quarter global branded checkout volumes grew by approximately 5% on a currency-neutral basis, bringing full year branded checkout volume growth to 6%. We have seen a solid start to the year with consistent global branded checkout growth through January. PSP processing volumes grew 29% in the quarter, driven by ongoing growth in Braintree. The team continues to make product and performance enhancements for merchants. We are also putting greater discipline into our go-to-market and renewal processes as we focus on overall profitable growth. With respect to revenue, as I noted earlier, revenue in the fourth quarter increased 9% on a spot and currency-neutral basis to $8 billion. Transaction revenue grew 9% on a spot basis to $7.3 billion, driven by Braintree and branded checkout. In the fourth quarter, U.S. revenue grew 8%. International revenue increased 10% at spot and 12% on a currency-neutral basis, accelerating from the third quarter. Similar to TPV, we saw ongoing strength in Europe and improvements in Asia. For the full year, U.S. revenue grew 9% and international revenue increased 7% at spot and 9% on a currency-neutral basis. Other value-added services revenue in the quarter grew 9% on a spot basis to $743 million. For the full year, other value-added services revenue grew 26% or by approximately $600 million. For both the quarter and the full year, this growth was driven almost entirely by increased interest income on customer stored balances. Transaction take rate declined 10 basis points to 1.78% in the fourth quarter. Approximately 7 bps of this decline was driven by 2 factors

Tien-Tsin Huang:

Appreciate all the details here. I wanted to dig in on the outlook for transaction margin dollars to be flat. Can you just give us a little bit more, maybe high-level thoughts on the key drivers there, and maybe some of the levers that are available to you to get the transaction margin dollar growth to accelerate beyond that in 2024. I get a lot of questions about it, obviously. So I'd love to hear the puts and takes that you would underline for us.

Jamie Miller:

Yes. And Tien-Tsin, I'll jump in on the '24 specific puts and takes on transaction margin dollars. And first, you heard us both say earlier that on the initiatives that Alex has been talking about, we have included limited impact on that in our guidance. But if I pull back, really, we're viewing largely steady trends to what you saw last year, maybe in slightly different proportions. So Branded Checkout being a healthy contributor to growth, improvement in our PSP margin profile. We expect some benefit in our interest income on customer balances, but really, that should be much smaller than what we saw last year. And we do expect some headwinds to our credit revenue, which as I think, as I mentioned in the script on the call, with loss rate normalization happening to pre-pandemic levels and that trend is starting to work. We'll just see lower rev share from our partnerships in that space. And then offsetting that, we really see also that some of our smaller product lines in the aggregate will be a drag on TM. This will be to a much lower extent than last year. But in areas where we do platform consolidation, there are times we deprecate products to really push customers to new platforms. Good example of that is PPCP, we do see some drop-off. And we've got a few other products that, as you know, we have not invested as heavily as perhaps we should have in the last couple of years. And as we work our way through that, there'll be some offset there.

Jason Kupferberg:

I wanted to hone in on branded TPV growth a bit. I think it slowed by 1 point in the fourth quarter to 5%. Was hoping you could maybe take us through some of the monthly intra-quarter trends there, any market share observations you might have had from holiday season. And then just some general comments on what you're planning for on branded TPV growth in the first quarter and full year '24?

Operator:

Your next question comes from the line of Darrin Peller with Wolfe Research.

James Chriss:

Yes. Well, thank you, Darrin. And look, let me be clear. We are not putting in the expectations into the guidance until we see execution. We just think it's prudent for us to put points on the board before we put it into the guidance. That said, the teams are grinding on this every single day. We are having conversations with our merchants and introducing them. As I mentioned on the call, the reaction has been quite encouraging from the innovations. There is demand in the market, and we are starting right now. And I will tell you, the conversations that we're having now that we're focused on both innovations that are driving demand as well as improvements for these merchants are different than we've had in the past. So I just want you to know, we are working now on this, and we will update you as we start to see points on the board and adjust our guidance as needed. Secondly, back to your first question around how I think about this. Look, the thing I want you to take away from all of this innovation that we rolled out in first look is this is really changing the way we engage with our customers and our merchants. We are now creating experiences across the entire customer life cycle, not just at checkout. So we are driving not only a checkout improvement, the 50% improvement in latency being able to improve Fastlane, but now we're starting to see a customer value proposition with CashPass, giving rewards back to our customers so that they have a reason to choose PayPal at every purchase. We're improving the onboarding and the reboarding as they come back into the app and start to now attach our Mastercard or debit experiences or Buy Now, Pay Later. We're improving the post-purchase experience where we now have smart receipts or package tracking so that we can improve the engagement between our merchants and our consumers, and we now have an ongoing active use engagement. And then we're leaning into demand generation and actually solving the biggest challenge that our merchants have, which is finding new customers as we think about our Advanced Offers Platform or creating shopper insights so that our merchants can start to engage and personalize their experience through our data and through the AI that we can lean through. So the way I think about it is we are looking at the entire end-to-end experience, and we'll measure our success through the metrics that you have. It's going to turn into what does transaction margin look like? What are -- what does active use look like from our ongoing users? So that's how we think about it.

Michael Ng:

I wanted to ask a question about PayPal's commitment to durable, high-quality profitable growth. How does that impact the pricing strategy in Braintree? What unprofitable is the system products will PayPal deemphasize? And how does that tie into your 2024 non-transaction OpEx outlook of flat?

Jamie Miller:

Yes. And Mike, on the other part of your question, I guess what I'd say is we are just doing too many things. And our biggest opportunity is that we have to make decisions to stop things and to really focus and that gets into market competitiveness. It gets into pricing, it gets into really leaning into market opportunity and really stopping doing things that prevent us from doing the right thing in those spaces. So we are knee deep in that right now. And so when we talk about a year of transformation and execution, that's exactly what we're talking about.

Ramsey El-Assal:

I wanted to ask about how much leeway or opportunity you have to continue kind of taking out expenses while simultaneously executing on the growth strategy? How are you thinking about striking that balance sort of cost control versus growth? And I guess, how confident are you that you have room to do both?

Operator:

Your next question comes from the line of James Faucette with Morgan Stanley.

Jamie Miller:

Yes, James, on your first question, you have it exactly right. So beginning in the first quarter, we'll start including stock-based compensation expense in our non-GAAP and closer to that time, we'll do the look back where we'll provide the retrospective data so that we've got everything on a comparable basis. But yes, you're thinking about that right.

Operator:

Your next question comes from the line of David Togut with Evercore ISI.

James Chriss:

Yes. Thanks for the question, David. We are tracking this closely. Apple is a great partner of ours. And our customers that love PayPal on the online e-commerce side are demanding -- being able to have an omnichannel and off-line solution as well. So we'll be working closely on this. And when it is available, we will be ready to be able to deliver for our customers, both online and off-line.

Sanjay Sakhrani:

Alex, one more on the initiatives. I'm just trying to think through the prioritization of these additional investments you'll be making. Of those 6 initiatives, which do you think will sort of yield the returns quickest? And maybe a little bit more on timing of them, maybe not 2024, but how early? And then, Jamie, just a quick question on the interest rates. I think you mentioned, you don't expect it to have a big impact or as big an impact in 2024, but is there an explicit rate forecast you have? Like do you have lower rates in 2024?

Jamie Miller:

Yes. And Sanjay, on the interest rate question, we do expect that the interest income on customer balances will have a strong growth this year, but really it will be more first half-focused. The second half, we do expect a series of rate cuts that is assumed in our macroeconomic scenario that underpins our guide, and that's why the second half should be much lighter on that front.

James Chriss:

Fantastic. Thank you, Sarah, and thank you all for joining us today. I want to reemphasize that 2024 is going to be a transition year focused on execution to position our business for long-term success. I'm excited with where we're positioned in the market, and I know that there is a real opportunity to grow our role in commerce. We're driving the foundational and transformative changes that will set the company up for the future. Thank you.

Ryan Wallace:

Thank you. Good afternoon, and thank you for joining us. Welcome to PayPal's earnings conference call for the third quarter of 2023. Joining me today on the call is Alex Chriss, our President and CEO; and Gabrielle Rabinovitch, SVP and Acting CFO. We're providing a slide presentation to accompany our commentary. This conference call is also being webcast. 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 the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the presentation accompanying this conference call. We will make forward-looking statements that are based on our current expectations, forecasts and assumptions, and involve risks and uncertainties. These statements include, without limitation, our guidance for the third quarter and full-year 2023, our planning assumptions for 2023, our comments related to anticipated foreign exchange rates, operating margin, impacts from our sale of loans to KKR and share repurchase activity. 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 report 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, November 1, 2023. We expressly disclaim any obligation to update this information. And with that, let me turn the call over to Alex.

A - Gabrielle Rabinovitch:

Thanks, Alex. It's great to have you on-board. The past few weeks have been incredibly inspiring and invigorating. There is renewed energy and excitement at PayPal, with you leading us forward. I look forward to welcoming Jamie and working with you as we enter this new chapter of growth for PayPal. I share Alex's enthusiasm for our increased pace of innovation and the outstanding opportunities we have given the power and scale of our global franchise. And I agree that with increased focus and improved prioritization, accelerating our growth and delivering operating leverage are mutually reinforcing. Importantly, we're committed to increase transparency and improve consistency in how we discuss our business and the ongoing enhancement of our disclosures. I would also like to thank the entire PayPal team for their steadfast focus on delivering for our customers and executing our priorities. First, several highlights from the quarter. We're reporting 9% revenue growth on a currency neutral basis and 20% growth in non-GAAP earnings per share, both of which are ahead of our guidance. In the third quarter, we again demonstrated strong expense discipline and our ability to operate our business with improved efficiencies. In addition, we continue to make progress in the quarter across our long-term strategic initiatives, which are focused on driving more profitable growth. Moving to our customers. We're encouraged by new cohorts coming in. Retention and active use based on product innovations are starting to pay off. That said, during the quarter, active accounts declined by 2.8 million as we continue to flush out low-quality customers, predominantly in Latin America and Southeast Asia. As a reminder, we said this would be a year where we churn off lower-quality actives and, in which, total accounts would decline. Year-to-date, churn has been lower than our expectations. Customer growth is a vital pillar of our growth agenda. We're an organization focused on serving our customers and improving our value proposition, and we're positioning ourselves for a return to growth in our customer base. Turning to volume growth. We're reporting total payment volume of $387.7 billion, representing 15% growth at spot and 13% growth on a currency neutral basis, with that growth primarily driven by Braintree. U.S. TPV grew 10%. International TPV grew 19% currency neutral, accelerating 5 points sequentially, primarily driven by strength in Europe as well as improvements in Asia. I would now like to comment on our branded checkout performance. PayPal's global branded checkout volumes grew approximately 6% in the quarter on a currency neutral basis, relative to 7.5% growth in Q3 last year. Growth accelerated in July to 8%, but moderated as we moved through the quarter. To date in Q4, branded trends have stabilized and are tracking in line with the first half of the year. As I mentioned, revenue increased 9% on a currency neutral basis and 8% at spot to $7.4 billion. Transaction revenue grew 7% to $6.7 billion, driven by Braintree and PayPal branded checkout. Hedge gains for the quarter were $7 million, $149 million lower than Q3 last year. In Q3 of last year, we also benefited from approximately $75 million in contractual compensation from merchants, which did not contribute to our revenue this year. In addition, as we discussed last quarter, migrating and consolidating legacy PayPal payment services was also a drag on the growth in transaction revenue. Other value-added services revenue grew 25% to $764 million, almost entirely driven by increased interest income on customer store balances. In the third quarter, U.S. revenue grew 7%. International revenue increased 10% at spot and 11% on a currency neutral basis, accelerating sequentially and year-over-year. As with TPV, we saw strengthening performance across Europe, which was most pronounced in the early to mid-summer, and in China, our seller business improved as well. Transaction take rate declined 13 basis points to 1.72%. Similar to our Q2 results, approximately 70% of this decline was driven by three factors

Tien-Tsin Huang:

Hey. Thanks so much. And Alex, appreciate your observations and priorities here. Can you maybe share a little bit more on your early impressions of the assets and the portfolio products at PayPal? I'm -- just love to hear what surprised to the upside and maybe what assets could require more work to turn around than what you thought? And if -- for example, Happy Returns being sold, as you called out last week, we see more sales, divestitures, replatforming, that kind of thing. Thank you.

Tien-Tsin Huang:

Great. Thanks, Alex. Thanks, Gabs.

Ramsey El-Assal:

Hi, Alex and Gabrielle. And I appreciate all the clarity you guys provided on your priorities. You gave us some great detail also on your approach to the SMB side of the business, such as some commentary on PPCP. I guess the question is, given your prior experience with SMBs, do you see SMB becoming a more important part of PayPal's strategy relative to the past? And I guess which areas of the product or innovation roadmap get you most charged up at this point?

Ramsey El-Assal:

Fantastic. Thank you so much.

Darrin Peller:

Hey. Thanks, guys. Alex, congrats again on the new role, and Gabrielle, thanks for everything. Obviously, we know you'll be missed by your investors. Guys, I know you lowered your outlook a bit for revenue in the fourth quarter, and I think you said you continue to see a decrease in gross profit for fourth quarter. Can you just give us a bit more color on what you're seeing in the environment on e-com, both U.S. and perhaps globally? And just if anything you're seeing in the trends is what led to a more cautious outlook either on the holidays or anything more broadly? Thanks, guys.

Darrin Peller:

Got it. Thanks, Gab.

Michael Ng:

Hey. Good afternoon, and thanks for the question. First, Alex, congratulations on the new role, and Gabrielle, thanks for everything. I appreciate your comments around managing the cost base and it being too high. Could you just talk a little bit about how you think about balancing the need for investment versus efficiency? The company previously talked about the opportunity for OpEx to keep declining in the years ahead. Is that how we should think -- still think about the future? Thanks.

Michael Ng:

Great. Thank you for the thoughts.

Jason Kupferberg:

Good afternoon, guys. Alex, welcome. Gabrielle, best of luck. And I wanted to actually ask about the transaction profit dollar growth. In Q4, will that year-over-year decline be more or less than it was in Q3? And then, how should we think about the potential for this metric to see improved growth into 2024? Maybe you can comment on which of the initiatives that are in place to offer more potential than others to move the needle on transaction profit dollar growth next year? Thank you.

Alex Chriss:

I just -- I want to underscore, I know I've -- I said it in the comments and I just want to underscore it again. We have every opportunity to drive profitable growth. It's just a focus that -- and a discipline that we will bring to the organization. And so, it will take time. There will be a sequential performance improvement over a number of quarters. But when we make it the focus of the organization, we have enough levers at our disposal to be able to deliver on that.

Operator:

We have time for one more question. James Faucette from Morgan Stanley, please go ahead. Your line is open.

Alex Chriss:

Yeah. Thank you, James, for the question. And it is pretty rare to be able to have an asset as powerful as Venmo. When something, again, becomes a verb in language is a tremendous demographic. And you saw with our launch of Venmo Teen, we continue to expand the opportunity set there. As you mentioned, we're in early stages with Amazon. That is going well and we expect that both from a customer demand perspective as well as a merchant demand perspective, we will continue to drive acceptance ubiquity for Venmo. I think that is very important for us as well as just driving additional services that our customers are demanding for the Venmo app. And so, again, we think about providing different services, expanding the opportunity for our customers to be delighted and use Venmo for all aspects of their spending and managing of money. I think we're just, again, scratching the surface of what's possible with an app that is clearly loved in the market and has created viral growth. So, very excited to accelerate investment there and see where we can take Venmo.

Operator:

Thank you. I will now turn the conference over to Alex Chriss for closing remarks.

Operator:

This concludes today's conference call. Thank you for your participation, and you may now disconnect.

Gabrielle Rabinovitch:

Thank you, Sarah. Good afternoon, and thank you for joining us. Welcome to PayPal's earnings conference call for the second quarter of 2023. Joining me today on the call is Dan Schulman, our President and CEO. 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 the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the presentation accompanying this conference call. We will make forward-looking statements that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include, without limitation, our guidance for the third quarter and full year 2023 are planning assumptions for 2023. Our comments related to anticipated foreign exchange rates, operating margin impact from our sale of loans to KKR and share repurchase activity. 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 report 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, August 2, 2023. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

Gabrielle Rabinovitch:

Thanks, Dan. I'd like to start by thanking the entire PayPal team for their continued commitment to serving our customers and executing our priorities. PayPal delivered another solid quarter in a dynamic environment. We're reporting revenue at the high end of our guidance range and earnings per share consistent with our expectations. Our results are tracking with the guidance we gave for the full year and reflect steady progress against our long-term growth aspirations. We continue to invest in our key initiatives, while demonstrating discipline in delivering on our operating expense commitments. In June, we were delighted to share more about our long-term strategic plan and product road maps at our investment community meeting. Importantly, the product launches we discussed are on track, and we continue to gain conviction in our ability to accelerate our branded checkout volumes and drive greater profitability across our PSP services. During the quarter, we were pleased to announce a multiyear agreement to sell both our existing European Buy now Pay Later receivables as well as future originations to KKR. During my remarks, I will discuss the impact of this externalization on our financial results. We have also included additional details in our investor update presentation. Before discussing our outlook for the remainder of the year, I'd like to highlight our second quarter performance. As Dan mentioned, revenue increased 8% on a currency-neutral basis and 7% at spot to $7.3 billion. Transaction revenue grew 5% to $6.6 billion, driven primarily by Braintree and PayPal branded checkout. Headwinds to growth in the quarter included the lapping of $75 million in contractual compensation from merchants last year, which was de minimis this year, $72 million less in hedge gains relative to Q2 last year and the impact from migrating and consolidating legacy PayPal payment services. Other value-added services revenue grew 37% to $731 million. This performance was predominantly due to increased interest income on customer store balances and to a lesser extent, revenue growth from consumer credit products. In the second quarter, U.S. revenue grew 9% and international revenue increased 5%. On a currency-neutral basis, international revenue increased 7%, accelerating sequentially and year-over-year. Transaction take rate declined 11 basis points to 1.74%. Approximately two thirds of this decline was driven by a decline in foreign exchange fees, in part driven by lower currency volatility, a decline in gains from foreign currency hedges, which are recorded as international transaction revenue and the headwind from lapping elevated contractual assessments from merchants last year. While merchant mix continued to pressure our branded checkout take rate, the second quarter was an improvement from Q1. Our total take rate declined 6 basis points to 1.94%, affected by the same factors as transaction take rate. Transaction expense as a rate of TPV came in at 94 basis points, 4 basis points higher than Q2 last year. This increase was primarily driven by growth in Braintree volumes, partially offset by rate benefits in core PayPal and Venmo. Overall, transaction expense dollars grew 16%. Transaction loss as a rate of TPV was 8 basis points for the quarter, a 3.6 basis point improvement versus last year. Transaction loss dollars declined 25%. The decrease this year was primarily due to an atypical merchandise solvency last year, which drove a sizable loss in the second quarter with no comparable exposure this year. Our ongoing risk mitigation activities and mix of volumes also contributed to this performance. Credit losses were $112 million or 3 basis points of the rate of TPV. On a dollar basis, credit losses increased 65%. Provisions in the quarter were driven by a build of $146 million, partially offset by a $33 million reserve release from the reclassification of our European Buy now Pay Later portfolio to held for sale from held for investment. The operating income benefit from this release of reserves was entirely offset by the fair value discount on the portfolio classified as held for sale. The increased provisioning resulted from increased expected losses in our PayPal business loans portfolio as well as growth in our U.S. Paylater portfolio. Like the broader industry, we're seeing a normalization of our credit portfolio to pre – COVID delinquency levels across our consumer and PayPal working capital portfolio. That said, we have seen some deterioration in our business loans portfolio. This portfolio represents less than 15% of our overall net credit receivables. And as we discussed last quarter, we have taken remedial actions to address this performance. We've tightened originations and have already seen improvement in new cohorts. We'll be managing the book with similar rigor as we move through the remainder of the year. As a result of designating $1.9 billion in pay later receivables to assets held for sale, we ended Q2 with $5.5 billion in net credit receivables, a 3.5% decline year-over-year and a 26% decline sequentially. The decline in receivables due to held for sale accounting also contributed to an increase in our reserve coverage ratio. This ratio increased to 10% from 7.8% in Q1. In the aggregate, volume-based expenses increased 13% in Q2 relative to an increase of 30% in the second quarter of 2022. Transaction margin dollars grew 1% to $3.3 billion, and transaction margin was 45.9%. While our transaction margin declined in the quarter, the rate of decline slowed considerably from both Q1 and the second quarter of last year, and we're executing on our strategy to grow transaction margin dollars. We're encouraged by the progress we're making against our longer-term initiatives that will support improved transaction margin performance over time. Q2 marked the third quarter in a row that we've delivered meaningful expansion in our operating margin on both a GAAP and non-GAAP basis. Ongoing discipline in managing our cost structure allowed us to more than offset transaction margin compression with operating expense leverage. On a non-GAAP basis, nontransaction-related operating expenses declined 11%, with reductions across each of our principal operating expense categories contributing significant leverage. Strong expense performance resulted in 20% growth in non-GAAP operating income to $1.6 billion. This is the highest growth in operating income that we've delivered in more than 2 years. Non-GAAP operating margin expanded 228 basis points to 21.4%, which was slightly below the guidance we gave for the quarter. This is principally attributable to our credit portfolio, where we earned less revenue than expected and increased loss provisions. For the second quarter, non-GAAP EPS increased 24% to $1.16, which was the midpoint of our guidance range. We ended the quarter with cash, cash equivalents and investments of $14.4 billion. The net cash outflows for originations of loans held for sale reduced cash flows from operations by $1.2 billion in the quarter, resulting in free cash flow for the quarter of negative $350 million. Later this year, when the sale of the European BNPL back book closes, the proceeds will be recognized in cash flows from operations and offset this decline. So while the timing of accounting treatment will affect the quarterly profile of our free cash flow, there is no change to our outlook for the year, and we continue to expect to generate approximately $5 billion in free cash flow. In the quarter, we completed $1.5 million in share repurchases. For the full year, we now expect to allocate approximately $5 billion to our buyback program. Our recently announced credit externalization will help optimize our balance sheet and improve our capital efficiency. Given our desire to return capital to shareholders and the confidence we have in our business, we've taken a more aggressive approach to share repurchases. Since the end of 2021, our diluted share count has declined 6%. I would now like to discuss our outlook for the remainder of 2023. As Dan shared, based on our results from the first half of the year, we're reaffirming our guidance for the year for non-GAAP operating margin expansion and earnings per share. In the aggregate, for the first and second quarters of 2023, we've delivered revenue growth of approximately 9% on a currency-neutral basis. We expect revenue growth in the back half of the year to be in line with this performance, if not slightly ahead, given the momentum we're seeing in the business. In addition, we're on track to meet our expense guidance for the year and are committed to delivering at least 100 basis points of non-GAAP operating margin improvement. We also continue to expect to deliver non-GAAP earnings per share of approximately $4.95, representing 20% growth from 2022. We're reiterating our full year guidance while absorbing incremental pressure from our credit portfolio, given strengthening business performance driven by checkout initiatives and our ongoing realization of productivity gains. For the third quarter, we expect revenue to grow approximately 8% on both a spot and currency-neutral basis to approximately $7.4 billion at current spot rates. In addition, we expect non-GAAP earnings per share to be in the range of $1.22 to $1.24, representing growth of approximately 13.5% at the midpoint of the range. In summary, we're proud of our solid operating results this quarter. PayPal's unique competitive advantages, including our portfolio of differentiated assets and our global scale and ubiquity continue to drive us forward. We're committed to investing in our core strengths and building PayPal for the future, and we're guided by our relentless focus on creating the best possible experiences for our customers. Our revenue momentum and customer engagement trends position us well to achieve our growth objectives this year and beyond. Given the uncertainties in the macroeconomic environment, we remain focused on managing the things we can control and allocating capital with discipline to ensure we optimize for long-term value creation and resiliency. And with that, Dan and I are happy to take your questions. Sarah, please go ahead.

Tien-Tsin Huang:

Hey, thanks a lot. I want to ask a question on e-commerce Health. And Dan, I know you talked about it upfront. We're just getting a lot of questions on the e-commerce industry in general. So you mentioned inflation easing should help. I'm curious about other trends like shift from services to goods like our economists are talking about, which I think would also be a tailwind for you versus an previously. Is this something you're seeing? Or maybe is that changing how you're thinking about the second half versus a quarter ago? It seems like there's some room for upsetting your outlook here given the exit growth rate and what you talked about for July? Thanks.

Tien-Tsin:

E-commerce is definitely one of those. We see e-commerce growth accelerating. We think it is at least in the mid-single digits right now. That's substantially above what we thought when we entered the year where we thought it might be flat year-over-year. And I would say I've got a slight bias that, that will continue to accelerate. You've got a range out there from low of zero to high 10%. We think it's probably right in the middle of that, and we think it is being driven by a shift from travel and services into goods and to fashion, where coming into retail pieces of that. And clearly, as inflation cools, we would expect to see more discretionary spend rebound, and that will help drive e-commerce. So one of the headwinds we faced was e-commerce growth slowing. Now it's accelerating again, and that clearly will be meaningful for us. We're also seeing improvements, as Gabi mentioned, in cross-border. That's beginning to accelerate again. That's obviously a very meaningful thing for us because, one, our value proposition is perfect for cross-border. It's consumers buying from merchants that they don't really know, but they trust PayPal and make sure that, that payment will be protected for them. It's obviously extremely high-margin business for us, and that seems to be accelerating nicely right now. PPCP, which was a really important introduction for us for numerous reasons, could not have a better reception in the market. We've got tremendous momentum there. Braintree continues to go from strength to strength, and we're seeing a lot of our value-added services now start to take hold. I can talk about some of that later in the call. Somebody wants to ask about that. And obviously, branded checkout is accelerating. That 8% is the highest we've seen since the end of the pandemic. And -- we continue to expect to see that strengthen as we go through the year as many of our initiatives are really taking hold in the last quarter. We've got another 200-plus experiments that are going to happen in Q3. And so that's all adding to momentum. And I guess at the end of the day, what that's adding up to when we look at our Net Promoter Score, we're now at a 7-year high in that. And so there's clearly a lot of momentum in the business right now, and we just want to double down on that. So we do obviously feel a lot better today than we did 90 days ago. But I think that's just going to continue when you ask that same question a quarter from now.

Darrin Peller:

Hey, Thanks, guys. Revenue growth was obviously sound, but we still saw transaction profit dollars a little less pronounced versus revenue. I think it actually may have decreased a bit year-over-year. And so Gabriel, I know you talked about some one-time grow-overs and hedging differences. And I'm sure the mix between branded and branded continues to have an impact given the growth of Greentree. But if you could just help us understand the moving parts in the quarter and the trends in the second half as far as gross profit or transaction profit growth goes, that would be great.

Darrin Peller:

That's really helpful. So it sounds like some of these initiatives are third, fourth quarter events, but they could move needle starting them.

Darrin Peller:

Okay. Very good. Thanks. Guys.

James Faucette:

I wanted to follow up on Darrin's question. I know that unbranded seems to be a drag or dilutive to margins right now overall, which is a little bit surprising given just kind of how margin structure tends to be throughout the industry. I know you've talked a little bit in the past about adding incremental services to unbranded that could improve that structural margin component in on branded. Can you talk a little bit about what that may look like, timing and if any of those initiatives are will play a role in improving the transaction margin that you're looking at for the latter part of this year? Thanks.

James Faucette:

Thanks.

Ramsey El Assal:

In terms of operating margin performance, were there any factors besides credit that had a bigger impact than you expected in Q2? And then separately, can you just talk about the overall health of the credit business? Give us more color on the steps you're taking to maybe manage it a little bit differently. It sounded like that was the plan.

Ramsey El Assal:

Thanks so much, VERY helpful. Appreciate it.

Jason Kupferberg:

I wanted to come back to branded TPV growth. So you had 6.5% in the month of June. You were over 8% in July, you're expecting further acceleration during the balance of the year. So can you just talk more specifically about the drivers of and the visibility on that ongoing improvement? Like how much of it is better macro? How much is traction with PayPal's own branded checkout initiatives and which among those branded checkout initiatives is moving the needle most materially here in 2023?

Operator:

Your next question comes from the line of David Togut with Evercore ISI.

A – Daniel Schulman:

Yes. Thanks, David. I'll start and then probably Jens will jump in on this. Look, we're going to continue to do surgical discipline in our cost structure. -- down 11% and in Q2 for the full year. We still expect that to decline consistent with what we talked about by 10%. And therefore, when we think about our operating margin expansion coming up by at least 100 basis points and some of that incremental pressure that we're absorbing on the credit side that as Gabi mentioned, we'll kind of move through our numbers by the end of the year. You're obviously seeing growing margin expansion driven by some of the top line enhancements we're doing not just the cost discipline that we've demonstrated. I would just say that this is not just about efficiencies, but this is about doing things faster and accelerating the velocity of our innovation. -- it's not about trade-offs. It's about lower cost, but higher performance. And you're seeing that because I look at our MBS being at 7-year highs. Look at the amount of innovation that we're now pumping through the system right now. We're getting more done more efficiently. There's no question that AI is going to impact every single company and every function just as it will inside of PayPal. And we've been experimenting with a couple of hundred of our developers using tools from both Google, Microsoft as well as Amazon. And we are seeing 20% to 40% increases in engineering productivity. Just imagine that in terms of how much more product we can get into the market and how efficiently we can do that. And I think we've always known and anticipated that AI will drive productivity improvements really for foreseeable future. But I think the exciting more unexpected result is that we think it's going to transform our value proposition as well. things like enabling us to look into all of our transactions, look at early fraud metrics to be able to feed that back to customers with early fraud alerts that assured them that we are protecting them, enabling them to add more and more financial instruments to us as well that we can protect this PayPal assistant that's going to -- that's really an AI chatbot. We've been using it internally inside our consumer app. It's pretty amazing what it can do. Obviously, our advanced checkout, things like customized rewards. So AI is going to be a thing that not only drives productivity improvements for us, but really importantly, value proposition improvements for us. And so we're surgical on our cost thing. We've been very disciplined in it. We're quite pleased with it, and I think we'll see productivity improvements over the years to come.

Operator:

Your next question comes from the line. Sorry, we have time for one last question, and it comes from the line of Bryan Keane with Deutsche Bank.

Daniel Schulman:

Yes, sure. Thanks for the question. I mean, obviously, increasing the number of consumers who use our digital wallet. It's one of our most important initiatives because we feel it's going to drive both engagement ARPA, monthly active users -- the app user today, the typical app user has a 35% greater ARPU, 60% greater TPV and 25% less churn. And so the more we can put on that, the better and about 55% of our base today uses the app, just to give you an idea of that. And the app to your point, is designed to -- it's designed to enable the full shopping experience from discovery, which is like the deals and offers that you just mentioned to flexible payments, the widest array of funding choices, things like biop later, split tender that enables you to utilize 2 different funding sources to buy your purchase to post purchase, which includes package tracking and returns management, refunds directly into your PayPal wallet. I won't go in again to all the experimentation we're doing, but you can see kind of the tremendous amount of velocity there. The new features that are coming into the wallet include this early fraud alert. We've scaled that now to 10% and that's really designed to protect our customers. We can see fraudulent signals well before others. We can let a consumer know that their card has been compromised. We can simultaneously let the FI know so that card can be reissued instantaneously. And so we're seeing early but really positive response to consumers from this, and it causes them to defend these alerts that come that causes them to open the app, the more they open the app, the more they do with us. I think I mentioned on the rewards cashback that will be something that we'll be putting some resource into because we're seeing a tremendous interest in it. These users are up 20% quarter-over-quarter and the is gigantic improvement. As I mentioned, about a 32% improvement on that. Package tracking, we're now 100% ramped across iOS and Android. It scrapes basically your Gmail account to look for any of your e-commerce orders. They don't even have to be through PayPal. We consolidate them all into one place into our PayPal app. We're seeing a 20% app engagement uplift for those who sign up for that, a 10% improvement in TPA. Things like savings, that's now at a 4.3% interest rate. When somebody does that, their ARPA goes up $26 and they're logging to the app is up 16x those who don't have a savings account with us. I mentioned by not later preapproval, that's $50 million more to come this quarter in the EU. And we'll start things like our advanced AI checkout with our first clients later this year and our PayPal system using AI technology as well. Those are just some of the things to come. There's a lot of innovation. And as I mentioned, my hats off to the team because I think they're just doing a great job hitting their schedule, doing constant experimentation and really making our experiences much improved and moving towards best-in-class -- so thanks, everyone, for your great questions. I really appreciate it. I want to thank everybody for your time, and we look forward to speaking to all of you later. So take care. Thank you.

Gabrielle Rabinovitch:

Thank you, Sarah. Good afternoon, and thank you for joining us. Welcome to PayPal's earnings conference call for the first quarter of 2023. Joining me today on the call is Dan Schulman, our President and CEO. 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'll refer to some non-GAAP measures. You can find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the presentation accompanying this conference call. We 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 second quarter and full year 2023, our planning assumptions for 2023 and our comments related to anticipated foreign exchange rates, operating margins and share repurchase activity. 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 the most recent annual report on Form 10-K and quarterly report 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, May 8, 2023. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

Gabrielle Rabinovitch:

Thanks, Dan. I'd like to start off by thanking our customers, partners and global team for helping us to deliver a great quarter. Our results demonstrate the relevance, diversification and strength of our payments platform. We are reporting healthy volume and revenue growth. This solid top line performance, in conjunction with expense management and efficiency gains, resulted in outstanding earnings growth. Notably, we accelerated our revenue and earnings growth on both a year-over-year and sequential basis. Relative to the first quarter targets we shared with you in February, both our revenue and EPS outperformed. The foundation we established last year for cost discipline and to realize productivity gains allowed us to expand operating margins and deliver profitable growth. Before discussing our outlook for the second quarter, I'd like to review our first quarter results. As Dan mentioned, revenue increased 10% on a currency-neutral basis and 9% at spot to $7.04 billion. This represents a three-year revenue CAGR of 15% and 20%, excluding eBay. Transaction revenue grew 6% to $6.4 billion driven primarily by our unbranded processing volume. Other value-added services revenue grew 39% to $676 million, predominantly due to higher interest income on customer store balances and, to a lesser extent, solid performance from consumer and merchant credit. In the first quarter, U.S. revenue grew 13%. International revenue grew 3% spot and 7% on a currency-neutral basis, accelerating both year-over-year and sequentially. Transaction expense as a rate of TPV came in at 93 basis points, 5 basis points higher than Q1 last year. This increase was primarily driven by 30% growth in our unbranded processing volumes. These volumes grew approximately 3x faster than our overall TPV growth. As a result, transaction expense dollars grew 17%. Transaction loss as a rate of TPV was 8 basis points for the quarter, a 2 basis point improvement versus last year. Transaction loss dollars declined 7%. Our ongoing risk mitigation activities and our mix of volumes drove this improved performance. Credit losses were $142 million or 4 basis points as a rate of TPV. We ended Q1 with $7.5 billion in net receivables, flat sequentially. Originations were primarily driven by the strength of our Buy Now, Pay Later franchise. As we have discussed, later this year, we plan to externalize a significant portion of this portfolio, reducing our balance sheet exposure as securing a long-term partner to support sustainable and healthy growth. Our reserve coverage ratio increased sequentially to 7.8% in Q1 from 7.4%, reflecting growth in the consumer receivables portfolio and some deterioration in our PayPal business loans portfolio. Relative to Q1 2022, our reserve coverage ratio improved 50 basis points. Similar to the broader industry, overall, we're seeing a normalization of our credit portfolio to pre-COVID delinquency levels. We continue to be pleased with the quality and diversification of our credit portfolio and are closely monitoring the macroeconomic environment while making appropriate adjustments to ensure we continue to perform within our internal risk appetite. Continuing the trend from 2022, growth of unbranded processing volume outpaced growth in branded volume, resulting in slower transaction margin dollar growth. Volume-based expenses in the aggregate increased 17%, and transaction margin dollars grew 1% to $3.3 billion. Transaction margin declined to 47.1% from 50.9% in Q1 last year. While we do anticipate ongoing mix shift, we believe that this performance will improve as we execute against the strategies that Dan outlined to drive increased profitability across our unbranded processing volume and accelerated growth of our branded franchise. Strong discipline across non-transaction-related operating expenses more than offset the contraction in transaction margin. On a non-GAAP basis, non-transaction-related operating expenses declined more than 12%, with reductions in sales and marketing, technology and development, and customer support and operations expenses contributing significant leverage. This expense performance resulted in 19% growth in non-GAAP operating income to $1.6 billion. This is the highest growth in operating income that we have experienced in eight quarters. Non-GAAP operating margin reached 22.7%, expanding 201 basis points from the first quarter of 2022. In addition, we're pleased to be reported $1.17 in non-GAAP earnings per share for Q1, representing 33% growth year-over-year. We continue to be in a very strong position from a balance sheet and liquidity perspective, ending the quarter with cash, cash equivalents and investments of $15.3 billion. During the quarter, we generated $1 billion in free cash flow. Cash taxes related to the intra-group transfer of intellectual property reduced operating cash flow by approximately $430 million. And in Q1, we allocated $1.4 billion to share repurchases. For the full year, we continue to expect to generate approximately $5 billion in free cash flow and to repurchase roughly $4 billion of our shares. I'd now like to discuss our guidance for the second quarter and update our outlook for the full year. For the second quarter, we expect revenue to grow approximately 7.5% to 8% on a currency-neutral basis and 6.5% to 7% at spot. In addition, we expect non-GAAP earnings per share to be in the range of $1.15 to $1.17, representing growth of approximately 25% at the midpoint of the range. For the full year, given our earnings outperformance in the first quarter, we are raising our outlook. We now expect non-GAAP earnings per share to grow 20% to approximately $4.95, an increase of 2 points of growth from the guidance we shared in February. At the start of the year, we indicated that our framework for 18% non-GAAP EPS growth in 2023, contemplated revenue growth coming in as low as mid-single digits. We also shared that our objective was to deliver revenue performance that exceeded this baseline. Our first quarter performance and the guidance for the second quarter are meaningful steps towards achieving this objective. As Dan indicated, assuming that current macro conditions continue, we now expect our back half revenue growth to be roughly in line with our performance in the first half of the year. Additionally, based on the expected contribution of unbranded processing volumes to our growth, we now expect at least 100 basis points of operating margin expansion in 2023. We are encouraged by our start to the year, and at the same time, mindful that the environment remains dynamic. We're focused on execution and will be agile and responsive to how the macroeconomic environment is playing out. And we plan to continue to guide revenue one quarter at a time. To wrap up, we entered the year as a more focused business with strong fundamentals. We're off to a great start in 2023 and believe we're well positioned to deliver revenue and earnings growth, expand margins and generate strong free cash flow. We're continuing to invest to accelerate our growth and capture the meaningful opportunity ahead of us. In addition, our expansive scale enables us to realize additional efficiencies and productivity gains. We believe our digital payments platform is unrivaled in breadth and depth, which creates a powerful competitive advantage for us. And we have conviction that our strategy to accelerate our branded checkout franchise, improve the margin profile of our unbranded processing platform and strengthen our digital wallet will result in significant and enduring value creation for our shareholders. We look forward to continuing to share our progress with you. With that, I'll turn it over to the operator for questions. Sarah, please go ahead.

Tien-Tsin Huang:

Hi, thanks a lot. Nice performance here on revenue. So I'll ask one question there. Looks like Q1 clearly had -- like you talked about the second quarter revenue growth is in line with what we have in the model. It's 3 points lower than what was just reported here. And then you're calling for second half in line with the first half, which is better than what we modeled and better than what you guys talked about before. So my question is, how much of this change is macro-related versus maybe some momentum with some of the new products and integrations that, Dan, you're talking about as well as curious on share gains, if your thinking is different there. And we've been curious if you've seen any sort of benefit from flight to quality with all the stresses in the banking system. Somewhere every work suggests that. So love to hear your thoughts on that, if you don't mind. Thanks.

Tien-Tsin Huang:

Yes. No, it's a lot. Sorry.

Gabrielle Rabinovitch:

No.

Daniel Schulman:

Yes. You bet.

Lisa Ellis:

Terrific. Thanks for taking my question and thanks for all the detail on the unbranded strategy. Just a couple of follow-up questions there, Dan, for you. One, can you elaborate a little bit on what's driving the 30% growth in unbranded TPV and how sustainable that is? Meaning, like, is it a couple of large clients that will eventually lap? Or is this more broad-based growth? And then second, can you just talk a little bit more about PayPal Complete Payments competitive positioning downmarket and where exactly you think that's going to win and what -- how quickly that will ramp? Thank you.

Lisa Ellis:

Thank you.

Operator:

Your next question comes from the line of Darrin Peller with Wolfe Research. Please go ahead.

Gabrielle Rabinovitch:

Yes, you bet. I'll start. You're right. So, we have some margin dynamics that are worth calling out, as it relates to first half versus second half performance, specifically as it relates to operating margin. Our Q1 operating margin performance was very, very strong with about 200 basis points operating margin expansion. In Q2, our expectation is actually that it would be ahead of that from an expansion standpoint. And so, we're really delivering the vast majority of the margin expansion on the year from an operating margin standpoint in the first half of the year. The back half, we actually have some lapping dynamics and some nuances that will result in much more modest operating margin expansion for 2H overall. Within that, I'd say it's worth highlighting that Q3, I'd expect to see some pressure on operating margin, maybe some slight pressure. And then in Q4, we'll see expansion again, but more modest expansion than you're seeing in the first half of the year, and really sort of what the drivers of that are, and Dan highlighted a few of them. We do have some lapping dynamics in the back half of the year. In Q3, specifically, there were some benefits on the TE side. We're also beginning to really lap, the benefit from increased interest rates. And the increased revenue that we earn on customer store balances, that really starts in Q3 continued in Q4. So as we lap that, don't expect to see as much operating margin expansion in the back half. In addition, we began to really lap a lot of the cost savings work that started in the back half of last year. And so, while we do expect to see a meaningful decline in non-transaction-related operating expenses in both Q3 and Q4, from a percentage decline standpoint, it will not be as great as what we're seeing in Q1 and Q2. And so, all that taken together will result in that differential between the first half and the back half op margin expansion for the full year. Again, we do expect to see at least 100 basis points of op margin expansion. That change that you called out between the 125 and at least 100, that is predominantly driven by the fact that when we're talking about our revenue being slightly ahead. A lot of the benefit that we're seeing is coming from the Braintree business and having a lot more visibility in that pipeline, and that's contributing to our top line, but also having some margin impact. Dan, do you want to talk a little bit about the strategies in unbranded?

Darrin Peller:

It's really helpful guys. Thank you both.

Operator:

Your next question comes from the line of Jason Kupferberg with Bank of America. Please go ahead.

Daniel Schulman:

Yes. Thanks, Jason. I think maybe I'll grab that one. So if I just take a step back for a second, like we're the market leader in online checkout, right? We've got 35 million merchants, except those 80% of the top 1,500 online retailers in the U.S., except as there's no other is wallet that comes close to that acceptance. Yes in general, our auth rates are about 600 basis points better than the industry average. It means every time a hundred things that a consumer does to buy from a merchant we approved six more of them. And we've got consumer trust and brand trust in that when a smaller midsized merchant puts PayPal on their website. They see a 44% conversion lift by doing that. So these are really strong advantages that we're going to leverage going forward. But obviously, there's a ton of stuff we can still do, right? We're optimizing presentment. We're making sure that our best-in-class integrations are out there, whether that comes through our branded checkout, whether that comes through the new SDKs and APIs that we have, whether that comes through PPCP, going into channel partners. So - because we know when we have our best-in-class integrations, we either have stable share or growing share of checkout. Our availability, as I mentioned, is closing in our 5 9s of latency, improved it by 40%. We'll improve it up to 50% better, makes a giant difference in conversion rates. Our passwordless login improved by 10 full points last year. We intend to grow that again this year, whether that be through pass keys or other ID or forms of biometrics. Buy Now, Pay Later, we're taking share there, and we are intending to continue to take share there. Our auth rates are higher, we think, than anyone else is because we know the customers coming in -- over 90% of the customers coming in to Buy Now, Pay Later are already PayPal, customers that's why we think we also have the lowest loss rates. And we know - somebody mentioned flight to quality - that people are coming to PayPal and our Buy Now, Pay Later services. And we are targeting all of the largest merchants. We know when our competitors contracts are up, and we are going after that business because we see a clear shift in market share as well as spend when we have Buy Now, Pay Later in our checkout flows. And obviously, we're now full GA on our mobile checkout with our SDKs and APIs. And we are now beginning to experiment with the first generation of what we call AI-powered checkout, which looks at the full checkout experience, not just the PayPal checkout experience, but the full checkout experience for our merchants. So we have a lot of things underway in our branded checkout. But I will just say this, the team is executing extremely well here. When they say they're going to get something done, they do. They have a road map that they are consistently executing. What they think will happen is happening in the market. And so I've got a lot of confidence that we'll continue to see branded share of checkout be strong. And we saw, by the way, in U.S., U.K. Germany, France, it'll expand most of the EU markets, Australia and improvement in our share position. Of course, there's odd one uniform measure of market share, but any way you look at it when you're a branded share or your growth goes up sequentially by 200 basis points, that's a lot of momentum.

Daniel Schulman:

Yes you bet.

David Togut:

How are you thinking about the opportunity for cost savings and OpEx reduction beyond 2023? And in particular, if you could maybe weigh that against potential transaction margin dynamics as well to the extent those will continue next year based on the trend we saw in Q1.

Gabrielle Rabinovitch:

Yes.

Gabrielle Rabinovitch:

Oh please go ahead, David.

Daniel Schulman:

Do you want to take that?

David Togut:

Thank you.

Operator:

Your next question comes from the line of James Faucette with Morgan Stanley. Please go ahead.

Daniel Schulman:

Sure. So first of all, as I mentioned, kind of we've got these three initiatives, they all tie together, and they all lead to driving more share and volume of branded checkout. So as we do more and more on our unbranded, we put out our latest integrations into the market. And when we put out our latest integrations in the market, we take away friction, we take away latency, and we see more engagement, and a lot more checkout go through our latest integrations. But one of the initiatives that we haven't really spent time talking about point is what we're doing on our digital wallets. So those are the three, right, drive engagement and monthly active users and ARPA through our digital wallets, drive our checkout, drive our own brand, and they're all linked together and then keep a tight envelope on our cost structure. Those are the four things that we're focused on. In the wallet, we're making good solid progress, whether that be on our Venmo wallet on the PayPal side of it. Look, the PayPal app is already one of the largest commerce and payments apps in the world. It's used by about 55% of our base right now. That's up about 600 basis points year-over-year. And our app users are predominantly our monthly active users and our power users. They've got 35% more ARPU. They've got 58% greater transactions for active on it. And their churn is at least 25% less than the rest of the base. And the thing that I'm really pleased to see what John Kim and his team are doing is that the velocity of experimentation in our wallets now is like nothing that we've seen in quite some time. We have constant champion challenger, hypotheses going out, replacing challengers that have been overcome by the champion, and that just starts to lead to more and more engagement going through. As I mentioned on the consumer side, we saw consumer transactions per user increase every single month in the quarter. In March, they are 400 basis points better than March a year ago. And the whole idea of the apps right now are three specific areas. One, upfront prepurchase, call that shopping, where it's really about discovery, saving and rewards. We introduced rewards recently. We have over 6 million monthly active users in our rewards right now. Those that are using it have an increase in the 6 million of 45% in their transactions per active. I mean these are huge numbers. We obviously need to go from 6 million to 10 million to 25 million, but that will happen over time. Then we have purchase, which is all about being the most flexible, easy way to purchase. Buy Now, Pay Later really plays into that. And there, we're clearly taking share. We clearly intend to drive that. And then we have post purchase, which is like things like how do I track my packages? How do I get refunds easily? How do I put that right into my wallet? And there, I talked about this in the last earnings call, on package tracking, we're now 100% ramped in iOS. We do all the package scraping now off of Gmail. So in one place, you can see all of your PayPal purchases and non-PayPal purchases. So you can track all of that in one place. And again, for those users that have started to do that, their app engagement is up 32%, and their transactions are up 20%. And so all of these things, James, when you think about what we're doing on just being better in checkout, driving unbranded so that we can drive better integrations going forward and what we're doing in the wallet, they all link together to really drive our MAUs, which are our most valuable customers by far and away, and they went up slightly in Q1. They are 20x, 30x more valuable than just an active user out there and to drive transactions and ARPA. So this is a flywheel. As you have said, it takes time to drive it. But a lot of the things we're seeing right now, the reason we are taking up our expectations for what we think our revenue growth will be, taking up kind of our EPS as well is because we're seeing distinct improvements take place in the market.

Daniel Schulman:

Yes, you bet. My pleasure.

Bryan Keane:

Hi, thanks for taking the question. I wanted to ask about credit. Are you managing to book any different on credit given the macro and exposure to BNPL and merchants and just thinking about maybe the impact of provisions for credit losses for the rest of fiscal year '23 maybe as a result of managing the book any different. Thanks.

Bryan Keane:

Got it. Thanks so much.

Daniel Schulman:

All right. Well, I think we're at the top of the hour. So I just want to thank everybody for your great questions. Thank you for your time, and we look forward to speaking with all of you again soon. So thanks, everybody. Take care. Bye-bye.

Gabrielle Rabinovitch :

Thank you, Julianne. Good afternoon. And thank you for joining us. Welcome to PayPal's earnings conference call for the fourth quarter and full year 2022. Joining me today on the call is Dan Schulman our president and CEO. 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, will refer to some non-GAAP measures. You could find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the presentation accompanying this conference call. We 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 first quarter and full year 2023, our planning assumptions for 2023 and our comments related to anticipated foreign exchange rate, cost savings, operating margin and share repurchase activity. Our actual results may differ materially from these statements. You can find more information about our about risks, uncertainties and other factors that could affect our results in our most recent annual report on Form 10-K and quarterly report 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, February 9, 2023. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

Gabrielle Rabinovitch :

Thanks, Dan. I'd like to start off by thanking our customers, partners and global team for helping us to deliver a solid quarter. The results we're reporting today demonstrate the strength, resilience and diversification of our business. We accelerated earnings growth on both a year-over-year and sequential basis despite ongoing pressure on e-commerce throughout our core markets. We continue to navigate this dynamic operating environment with strong discipline and a renewed focus on our key priorities. While the macroeconomic backdrop remains challenging, we're energized by the significant opportunity we have to advance our leadership in payments and better serve our customers. We believe this is an environment where the strong will get stronger and where our scale, profitability and stability make us a partner of choice and a formidable competitor in the payments ecosystem. Our results reflect our efforts to manage our business with greater discipline and deliver operating margin expansion. Our ongoing savings efforts are resulting in sustainable efficiencies for our business. In addition, we're investing in our high-conviction growth initiatives to ensure that we emerge stronger from this period of economic uncertainty. We're proud of the quarter we delivered. Relative to the fourth quarter targets we shared with you in November, our non-GAAP EPS outperformed, and our revenue was in line. Importantly, the sequential improvement in our earnings growth continued. The fourth quarter was an inflection point as our non-GAAP operating margin expanded for the first time since the first quarter of 2021, marking a return to profitable growth. We have now established a solid foundation to build on these results. And in 2023, we plan to deliver meaningful non-GAAP operating margin expansion and a significantly stronger non-GAAP earnings profile. Before discussing our 2023 outlook, I'd like to highlight our fourth quarter performance. As Dan mentioned, revenue increased 9% on a currency-neutral basis and 7% at spot to $7.38 billion. This represents a three-year revenue CAGR of 14% and 19%, excluding eBay. Transaction revenue grew 5% to $6.7 billion, driven primarily by Braintree and Venmo. Other value-added services revenue grew 26% to $681 million. Relative to last year, this performance resulted from higher interest income on customer store balances and positive contributions from both our merchant and consumer credit products. In the fourth quarter, U.S. revenue grew 10% and international revenue grew 2% at spot. On a currency neutral basis, international revenue grew 6%. We had solid take rate performance. Transaction take rate was 1.88%, flat to last year, and total take rate improved 3 basis points to 2.07%. eBay Marketplaces revenue declined 31%, and the take rate on these volumes decreased to 1.95% from 2.29% in Q4 2021. This was offset by a 4-basis point increase on the rest of our volume. Transaction expense came in at 93 basis points as a rate of TPV, relative to 87 basis points of the rate last year. The increase in transaction expense as a rate was primarily driven by higher growth in unbranded processing volumes relative to other contributors to our payment volume mix. Transaction loss as a rate of TPV improved to 6 basis points versus 9 basis points last year. Our loss rate in the quarter benefited from the release of a portion of reserves related to recoveries from a merchant insolvency proceeding. This reserve was originally taken in the second quarter of 2022 and was a drag on that quarter's transaction loss performance. In addition, Venmo loss performance improved relative to the fourth quarter last year. Credit losses were $174 million, or 5 basis points as a rate of TPV. We ended Q4 with $7.4 billion in net receivables, reflecting 24% sequential growth. The growth in Buy Now, Pay Later receivables was the largest driver of loan origination. In 2023, we plan to externalize a meaningful portion of our Pay Later receivables portfolio, reducing our balance sheet exposure and securing a sustainable long-term funding partner for this part of our business. The mix of shorter duration originations from our Pay Later products and solid performance of our overall portfolio resulted in a reserve coverage ratio of 7.4%, flat sequentially and 180 basis points lower than the fourth quarter last year. In the aggregate, volume-based expenses increased 12%. This increase was more than offset by a 6% decline in our non-transaction-related expenses. Cost savings initiatives and efficiency gains contributed to this performance across all major expense categories. As a result of this discipline, non-GAAP operating income grew 12% to $1.69 billion, and non-GAAP operating margin reached 22.9%, expanding 115 basis points from the fourth quarter of 2021. In addition, for the fourth quarter, non-GAAP EPS was $1.24, growing 11% from Q4 '21 and marking the first quarter in 2022 that earnings per share grew on a year-over-year basis. We ended the quarter with cash, cash equivalents and investments of $15.9 billion. During the quarter, we generated $1.4 billion in free cash flow, which resulted in $5.1 million of free cash flow generation in 2022. In the fourth quarter, we completed an additional $1 billion in share repurchase, which brings our capital return in 2022 to $4.2 billion, representing 82% of the free cash flow we generated. As noted last summer, we've taken a more aggressive approach to our capital return program over the past several quarters. We continue to believe that share repurchase remains an excellent use of capital for our shareholders. I would now like to discuss our outlook for 2023. For the first quarter, as Dan mentioned, we expect revenue to grow approximately 9% on a currency neutral basis and approximately 7.5% at spot to $6.97 billion. We also expect non-GAAP EPS to be in the range of $1.08 to $1.10, representing growth of approximately 24%. The first quarter is off to a great start and sets us up well for the year ahead. We are encouraged by what we're seeing, but remain vigilant as there continues to be potential for variability as we move through 2023. Since the beginning of the pandemic, forecasting four quarters ahead has been especially challenging. And while the direct impact from COVID is now largely behind us, the macroeconomic and geopolitical environment remains uncertain. The rate of e-commerce growth in our core markets has decelerated. Inflationary pressures have affected discretionary consumer spending and post-COVID spending patterns are still evolving. As a result, we're not providing guidance for full year revenue growth at this time. We will guide the quarter ahead and believe this is a responsible approach. As Dan indicated, for the full year, we now expect non-GAAP EPS to grow 18%. This is an increase from the outlook of 15% growth we discussed when we reported third quarter results. Relative to our prior expectations for the year, our forecasted tax rate increased, and we now expect the externalization of part of our Pay Later receivables portfolio to result in several cents of dilution. Offsetting these headwinds are benefits from additional cost savings, higher interest income, and from a shift from cash compensation to stock for a portion of our annual incentive plan, increasing share-based compensation. In putting together our financial architecture for the year and guiding 18% non-GAAP EPS growth, we have been prudent about our planning assumptions for our revenue performance and in establishing an efficient cost structure that enables us to deliver on this commitment. We believe we can deliver 18% earnings growth even with revenue growth in the mid-single digits on a currency-neutral basis. That said, our objective is to grow revenue ahead of this baseline. Our revenue growth is highly correlated to discretionary e-commerce spending in our core markets. We are optimistic that when e-commerce growth reaccelerates, we will fare better than most. In addition, our framework contemplates as much as a high single-digit decline in non-transaction-related expenses on a year-over-year basis. Over the past year, we significantly increased the operational rigor with which we run our business. We've sharpened our focus on strategic priorities, strengthened our planning process and increased our discipline with respect to capital allocation. We've also begun to realize benefits from cost savings initiatives. We are continuing our work removing complexity within our organization. We believe we are on track with streamlining and resetting our cost base and essentially putting ourselves back on a pre-pandemic trajectory with respect to our non-transaction-related expense profile relative to our growth. Accordingly, we believe we're well positioned to scale more profitably and sustainably going forward. I'd also like to share more on our expectations for foreign exchange. Our revenue guidance for the first quarter contemplates an approximate 150 basis point headwind from FX. Foreign exchange rates, we expect an approximate 1-point headwind to full year revenue growth. In addition, as we have discussed, we're prioritizing engagement. We have approximately 190 million monthly active unique users on our platform today. Increasing the activity and engagement level of these users, converting new ones and driving more daily use is one of our greatest opportunities. While we will continue to track and report on our active accounts each quarter, we will no longer guide net new active accounts. Given our strategic focus, we do not expect total active accounts to grow in 2023. That said, we have confidence that our monthly active unique user base will be stable to growing. Finally, in 2023, we expect to generate approximately $5 billion in free cash flow. We plan to continue our aggressive posture towards capital return and allocate approximately 75% of our free cash flow to share repurchase in 2023. In closing, we're pleased with the progress we're making across many fronts and with our momentum. Our team is working tirelessly to serve our customers, advance our strategic priorities and improve our cost structure. The cash flow generating power of our business is a competitive differentiator and gives us a high degree of flexibility as we allocate capital with discipline. Whatever macroeconomic conditions we face, we will continue to deepen our focus, invest in innovation in our people for the long term and strengthen our competitive advantages. We look forward to sustainably delivering long-term profitable growth and creating value for our shareholders. Before I pass it back to the operator to begin the Q&A portion of the call, I'd like to give an update on our plans for the year. Later this year, we will host a meeting for the investment community to provide an update on our strategic road map and introduce you to more of our leadership team. We're targeting the latter part of Q2, and we'll share more as we get closer. With that, I will turn the call back to the operator. Julianne, please go ahead.

Lisa Ellis :

Thank you. Dan, wow, big news. I'm sad already, and you're not leaving for another year. It has been such a journey over the last eight years. Can you just talk a little bit more about your thought process, your decision around choosing to retire now versus, say, a year ago or a year from now? And then also perhaps comments on, in your view, what sort of profile would make the ideal next CEO of PayPal? Thank you.

Lisa Ellis :

Thank you.

Operator:

Our next question comes from Darrin Peller from Wolfe Research. Please go ahead. Your line is open.

Daniel Schulman :

Yeah. So Darrin, I want to separate out two things that I was afraid might be conflated, which aren't linked. The first one is, when we were looking at our cost structure to deliver an 18% EPS growth and to make sure that we fully staffed our high conviction growth areas. We wanted to look at what we thought would be a worst-case revenue assumption, because we don't want to be chasing our cost structure for, we were like, okay, what's the worst case going to happen. We could do mid-single digits FXN growth. That would mean that you've got Europe going into recession, U.S. going into recession, inflation stays high, discretionary spend remains muted. And that's what we built our cost structure around to give us and to give you high confidence that the 18% that we're guiding to is something that we can deliver in pretty much any economic scenario that we could imagine. So that's kind of assumption set number one was around our cost structure and the revenue around it. Number two though, is our revenue expectations. And we clearly are expecting something very different than the worst-case scenario that we have in place for our cost structure. We're assuming, as we think about the year ahead that we hold or slightly grow our share globally. As Gabs said in her remarks, there's a lot of moving parts that could happen here, and we want to be responsible in our guidance for revenues. And we saw last year that revenue can move from quarter-to-quarter, but we're pretty darn accurate when we guide in the quarter ahead. And so we put out a 9% revenue guide in Q1. And frankly, Darrin, Q1 is off to a very strong start for us. We're seeing widespread acceleration both in January and February. We're seeing it in branded checkout, which has stepped up quite nicely from Q4. We're seeing it in our Braintree services as well. Buy Now Pay Later continues to accelerate for us. So much stronger than we expected. We wouldn't say 9% if we didn't feel confident in that number, as well as the 24% at the midpoint on our EPS guide. There's still a lot of the year ahead of us, right? We're five-six weeks into the first quarter, but it's clearly off to a very strong start, and we will have more as we report out Q1 earnings, as we look into Q2 that may inform how we're thinking about the full year. But we just didn't want to get ahead of ourselves. And also, we want to be really responsible in the guidance that we give. Anything you would to add to that, Gabs?

Darrin Peller :

That's very helpful. Thanks Dan and Gabrielle.

Operator:

Our next question comes from James Faucette from Morgan Stanley. Please go ahead. Your line is open.

Daniel Schulman :

Yeah. I think that's an incredibly question. You saw probably in our investor deck, James, that our branded checkout volumes grew by 5% for the year, that's lapping 23% in 2021 and 38% in 2020. And that really is following the shape of the e-commerce. Part of the reason why there's questions around this and some mix commentary is that there's no perfect data source for market share. Share obviously, for us, it varies by country, by channel, whether it's mobile, mobile web, desktop and by merchant size, whether you look at large enterprise or small or midsize. And we look at everything that we possibly can and look at e-commerce growth around the world. And we look at 2022 -- 2022 e-commerce growth is probably mid-single digits, maybe lower than that across the world. By the way, that 5% was roughly the same in the U.S. as well. And so overall, we feel like we, at a minimum, held share to global trends. And I think there's some interesting commentary out there. But one of the things that is important to realize is digital wallets, in general, including PayPal, have been growing share overall. We grew share over 100 basis points during the pandemic. We've held it since there, but we continue to take share from manual card entry. Manual card entry say, like three years ago, it's 50% of the market. It's still about 30% of the market today. And there's a lot of share to be taken from that by digital wallets. In addition, a lot of the Buy Now, Pay Later wallets are -- their growth is starting to slow quite meaningfully as they move from growth as their number one objective to making money as their number one objective. And if you look at our Buy Now, Pay Later results, we're clearly gaining share in that, it grew at 102% Buy Now, Pay Later $7 billion of TPV. So we're taking share from there. And if you look across the globe, across the globe, which is how we look at this, you can start with the U.S. And in the U.S., for the year, I think it's clear that we held share, growing at about 5%. And if I look at the fourth quarter, which is we're still digesting. It looks like we gained share in the first part of November coming into the holiday period. It looks like we lost somewhere like 2 to 4 basis points of share during the Cyber 5. And then we held in December. And as I've mentioned, we have accelerated meaningfully in terms of our branded share of checkout coming out of December into January and February. As we look at this, if you exclude Amazon in the U.S. in the fourth quarter, we held share. Again, all of these things are plus or minus 1 or 2 basis points. If you include Amazon, which had an extra Prime Day in the holidays, we might have lost 1 or 2 basis points. But that is the best view that we have for the U.S. right now. What's interesting is when you look at mobile checkout, it's clear that somebody like Apple has some inherent advantages in authentication, exclusive use of the NFC chip. But if you look at where we have implemented our most advanced checkout flows, and as I mentioned in the script, now about third of our top 100 of our most advanced checkout flows, there, even in mobile, we are gaining share. So the things that we are working on and deploying are making a big difference in the market. That's why I'm so proud of what the team has done in improving and really going after share of overall checkout with our latest integrations. Maybe we can talk more about that with another question. Across the rest of the world, there are some markets like the UK where we're holding share. In Q3, we lost a little bit of share. In Q4, Australia, we've been losing share due to Buy Now, Pay Later players in that market, and we're now starting to pull back on that. And across most of the major countries in Europe, we are either holding or gaining quite a bit of share. So as I look across the world, there are some places where we're gaining a lot of share, some places like the U.S., where we're probably holding in other countries where we're losing a little bit. But overall, steady in terms of our market share. And I really think the product teams and the sales teams have done an incredible job of looking at what we can do to improve our checkout experiences. We obviously have a lot we can still do. But year after year after year, we're either holding or gaining share.

Daniel Schulman :

Yeah, you bet.

Tien-Tsin Huang :

Hey, thanks. I'm just curious if your investment in the R&D budget at PayPal has changed given some of the incremental cost savings, the bigger margin expansion. And I think, because we're really focused on the product road map and you got checkout, and it sounds like you're extending unbranded to the SME space, which makes some sense. So just love your latest thinking on balancing the cost savings with investments in product development.

Tien-Tsin Huang :

Got it. Thank you, Dan. And my compliments to you on the succession news as well.

Operator:

Our next question comes from Jason Kupferberg from Bank of America. Please go ahead. Your line is open.

Daniel Schulman :

Yeah. So I think it's one of the things that we talked about, which is kind of a new piece of information for us is that nearly half of our base is a monthly active user and about 190 million or so. Those monthly active users, without Braintree in the number, because a lot of people are Braintree in that number, without Braintree in the number, use us 6 to 7 times a month. So they're transacting 72 to 90 times a year with us. That is up 40% from 2019. It's up 5% year-over-year. And that -- those characteristics of those MAUs is they have an extremely low churn rate. They are extremely engaged, highly satisfied with high and growing ARPU. Our biggest opportunity is to move our active accounts into our MAUs. We generate an enormous amount of organic active accounts. Enormous. Every single year, they come on to our platform. And they come on to our platform because we're so ubiquitous. We have coverage across 35 million merchant accounts, 80% of the top 1,500 accounts in the U.S. and Europe. And so they come. They make a transaction, or they get a P2P request, and they -- and they do kind of a one and done. And the way that I think about, probably the best analogy between MAUs, monthly active users, and the rest of our accounts is how the wireless industry thinks about postpaid and prepaid. Our MAUs are our postpaid accounts. Again, they're very satisfied. They have high ARPU, very, very low churn. And they're engaged in our mobile app. They're ready to try new services as we put them on. When we put on a new service, when they try on new service, their ARPU goes up by 25%. And so we are very focused on ensuring that we grow our MAUs and that we take those tremendous organic number of people that are coming on. By the way, with no cost per gross add on that, not CPGA. Like those organic things are coming in, just constantly at the top of our funnel. It's a bit of a two-edged sword. One, it kind of -- it adds to churn, obviously, but churn of a base that's not transacting at all. But our opportunity is with -- as we get a better value proposition, a more compelling proposition across our consumer side as we upgrade our merchants into the best possible checkout experiences that we take those active accounts and move them into MAUs. This whole thing about what's happening with your churn, what's happening, that's a false narrative actually. What's really happening is our MAUs are incredibly consistent, staying with us highly satisfied, acting quite a bit and growing. And that's really where our engagement is coming from. That's probably -- for instance, we have 35 million consumers that use us for subscription management. Every single month, we manage their subscriptions automatically for them, whether they be to Hulu or to other subscription management services. And so those are incredibly sticky high-value customers for us, and we have a ton of focus on moving people to that MAU base, which is why it's such a focus for us as opposed to net active accounts.

Daniel Schulman :

Yeah. You're welcome.

Timothy Chiodo :

Thanks a lot. I want to drill down a little bit on the core PayPal modern checkout migration progress. The numbers you gave were great to 20 going to one third, going to 50% for gold this year with the top 100. Two follow-ups on that. The first is, could you talk a little bit about the conversion uplift that you see when the new modern checkout experience is integrated there, and that would help us to kind of quantify what one third going to 50 in could mean? And the second one is, can you talk a little bit about and recap the actions that you're taking to help incentivize that? Clearly, it's a win-win for both you and the client. But what are some of the either financial or people resources that you could allocate to help speed things up?

Timothy Chiodo :

Excellent. And thank you for giving the numbers on the conversion. I appreciate that.

Operator:

Our next question will come from David Togut from Evercore ISI. Please go ahead. Your line is open.

Daniel Schulman :

I'll start off and maybe Gab can follow on that. And thank you for the question. So there are a number of high-margin businesses that we add on to Braintree. Braintree itself is a lower-margin business. And by the way, we're serving the highest end of the customers that always have a lower margin structure for us. But a lot of the higher-margin businesses that we had into PayPal or things like risk-as-a-service, we'll be introducing FX-as-a-service, payouts is a higher margin. We're expanding Braintree into both Europe and South America, which are higher margin for us. So we expect to see unbranded, as a whole, that margin structure move up. And then as we go into the small and midsized merchant with unbranded, that obviously is a much higher margin. PPCP, is more of a call it sort of a mass customization platform. Braintree really is a customized platform because each one of those merchants have unique needs that we need to customize for. Gab, is there anything else that you'd add?

David Togut :

Thanks for that. Congratulations, Dan.

Operator:

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

Gabrielle Rabinovitch:

Thank you, Briana. Good afternoon and thank you for joining us. Welcome to PayPal's earnings conference call for the third quarter of 2022. Joining me today on the call is Dan Schulman, our President and CEO. 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 the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the presentation accompanying this conference call. We 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 fourth quarter and full year 2022, our preliminary framework for 2023 and comments related to anticipated cost savings, operating margin and share repurchase activity. 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 report 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, November 3, 2022. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

Gabrielle Rabinovitch:

Thanks, Dan. I'd like to start off by thanking our customers, partners and global team for helping us to deliver a great quarter. The strong results we're reporting today demonstrate the continued execution of our strategy to deliver long-term sustainable growth. Our teams are proving our ability to navigate a dynamic operating environment, while also staying focused on our key priorities. We once again demonstrated our results, combining execution and focus with growth in our core business. Our results reflect our operating discipline, diversification and resilience. The power of PayPal is the scale of our global franchise. Our investments in innovation are making us stronger. And we're excited by what we see as we execute against our growth opportunities. I share Dan's enthusiasm for our growing relationship with Apple and the rollout of pay with Venmo on Amazon. We believe we will continue to extend and reinforce our leadership in payments. And we are confident that our competitive positioning with unparalleled scale across our two-sided network will allow us to emerge from this period of economic uncertainty stronger. We're proud of the quarter we delivered. We surpassed the third quarter financial targets we shared with you in early August and delivered on our commitment of sequential acceleration in our revenue and earnings growth. We're also on track to build upon our operating margin performance in Q3 to deliver a non-GAAP operating margin expansion in the fourth quarter on both a year-over-year and sequential basis. Our teams are energized by the progress we have made. And by the increased operational rigor we're bringing to running our business and investing in our priorities. At the same time, the macroeconomic backdrop continues to be complex and we're focused on taking an appropriately prudent approach to managing our business for profitable growth at scale. This year, we will process nearly $1.4 trillion of payment volume an increase from $1.25 trillion last year, and a 25% compound annual growth rate from $288 billion in 2015. At this massive scale, we are not immune to macro headwinds. As we close out 2022 and prepare for the year ahead, we're intensely focused on doing everything within our control to anticipate and mitigate ongoing macro risks and drive robust earnings growth. Given the breadth of our two sided platform, and our strong balance sheet and free cash flow generation, we believe we are well positioned and have the levers available to successfully navigate an economic cycle. We remain committed to meaningful non-GAAP operating margin expansion in 2023, and a significantly stronger non-GAAP earnings growth profile. Before discussing our outlook for the remainder of the year, I'd like to highlight our third quarter performance. As Dan mentioned, revenue increased 12.4% on a currency neutral basis, and 10.7% at spot to $6.85 billion. With each of these metrics exceeding our guidance. To dramatically strengthening dollar has been an increasing headwind as we move through the year, and we expect this condition to persist in the fourth quarter. Transaction revenue grew 11.2% to $6.23 billion, driven primarily by Braintree and Venmo. Other value-added services revenue grew 6.4% to $612 million. This performance relative to last year resulted from higher interest income on customer store balances, offset by lower credit revenue as we [levied] [ph] higher than normal loan servicing fees. In the third quarter U.S. revenue grew 14.4%, while international revenue increased 6% at spot. On a currency neutral basis International revenue increased 9.4% and excluding eBay 11.7%. Additionally, eBay marketplaces revenue declined 38% to $145 million and represented 2% of our total revenue. Our take rate performance was very strong with both transaction and total take rate improving approximately four basis points. Transaction take rate was 1.85% and total take rate was 2.03%. Both transaction and total take rate benefited from gains from foreign currency hedges recorded as international transaction revenue as well as Venmo monetization. Interest income also benefited our total take rate. Transaction expense came in at 89 basis points at the rate of TPV relative to 83 basis points at a rate last year. This result was largely driven by the increase in the contribution of Braintree volume, which are predominantly card funded to our overall mix of payment volume. To a lesser extent funding mix also contributed to higher transaction expenses from more normalized debit card usage relative to 2021. Transaction loss as a rate of TPV was 8 basis points versus 9 basis points in Q3 last year. In addition, credit losses were $113 million or 3 basis points as a rate of TPV. As a reminder, in the third quarter of 2021, we released $63 million of credit reserves, which benefited transaction margin and operating margin performance in the prior period by 100 basis points. We ended Q3 with $6.5 billion in gross receivables, reflecting sequential growth of 4%. The growth in global pay later receivables was the largest driver of loan origination. The mix of shorter duration originations from our pay later products and strong performance of our loan receivables portfolio resulted in a reserve coverage ratio of 7.4% compared to 7.3% last quarter, and 11.6% in third quarter last year. Transaction margin dollars was 4%, a reversal from year-over-year declines in the first and second quarter of 2022. Excluding the benefit from the reserve released last year transaction margin dollars increased 6%. This quarter, we began seeing benefits to our transaction expense from leveraging our scale across the network ecosystem. We expect this trend to continue in Q4 and into 2023. In addition, we're making progress in rationalizing non-transaction related expense growth. In the third quarter on a non-GAAP basis, these expenses grew 4% year-over-year relative to 17% growth last year, driving 180 basis points of operating leverage. Non-GAAP operating income also grew 4% year-over-year to $1.53 billion. Importantly, this is the first quarter since Q2 '21, in which we delivered operating income growth. Our operating margin was 22.4% which was approximately two points better than our outlook provided at Q2 earnings. We are particularly pleased by this operating margin outperformance and look forward to building on this track record of cost prudence as we enter 2023 and beyond. For the third quarter non-GAAP EPS was $1.08 nearly 15% stronger than our outlook. Pre-tax benefits in Q3 '21 of approximately $0.10 per share created a headwind to EPS growth. Our outperformance relative to our expectations was predominantly driven by the actions we took to increase efficiencies within non-transaction related operating expenses and improved transaction loss performance. We ended the quarter with cash, cash equivalents and investments of $16.1 billion. During the quarter we generated $1.8 billion in free cash flow, bringing year-to-date free cash flow to $4.1 billion. Relative to last year, Q3 free cash flow grew 37%. We consider our balance sheet and cash flow to be competitive differentiators, which provide us with significant optionality for value creation. In the third quarter, we completed an additional $939 million in share repurchases. Year-to-date, we have now returned $3.2 billion to shareholders representing 78% of the free cash flow we have generated. Given our conviction in our business relative to its valuation today, and its long-term competitive advantages and ability to deliver sustainable value creation, we have taken a more aggressive approach to our capital return program this year. We believe that share repurchase remains an optimal use of capital for our shareholders, while allowing us to retain the flexibility to continue investing opportunistically in our business. We now expect to complete an additional $1 billion in share repurchases in the fourth quarter. As I discussed during our earnings call last quarter, we've been assessing opportunities for additional credit externalization. We have made progress on this initiative and are committed to secure an off-balance sheet funding for a portion of our global pay later portfolio next year. Before I cover our guidance, I'd like to discuss the incremental disclosure that we are sharing this quarter to disaggregate our TPV. In our investor update, we're providing additional information related to our volume mix, and how it has evolved over time. We believe sharing this detail is helpful for investors to better understand our business trends. I would now like to discuss our outlook for the remainder of the year, and our preliminary thoughts for 2023. First, some context on the trends we're seeing and how these are shaping our outlook. As Dan mentioned, overall, we saw U.S. ecommerce growing in the low single digits in Q3 with deceleration into the close of the quarter. This trend persisted in October on our platform as well as in third party data, we have not seen the early start to the U.S. online holiday season that we saw in 2021. Our guidance contemplates holiday ecommerce ramping through November. Overall, our expectations for holiday ecommerce are consistent with the recent spending forecasts from Adobe, MasterCard and Salesforce with growth in the low single digits. We are also closely monitoring channel mix between in-store and online as well as the mix of services and good spending. From a market perspective the U.S. continues to outperform international and we are seeing weaker performance in the U.K., our second largest market. These factors combined with a broader macro trends have been incorporated into our revised outlook. We are lowering our full year currency neutral revenue expectations by 1-point and at the midpoint raising our non-GAAP EPS expectations by $0.16. Given the current uncertainty in the global macro environment, we believe this is an appropriately sensible and prudent approach to our revenue outlook. That said, our earnings guidance reflects the resilience and power of our franchise. In raising our EPS outlook again, we're demonstrating our control over operating expenses, the diversification of our business and the benefits from scale to our operating model. We believe that our ability to raise our earnings guidance in this environment is especially distinguishing relative to other public company guidance we've seen for Q4. For the full year, we now expect revenue to grow approximately 10% on a currency neutral basis, and approximately 8.5% at spots. For the fourth quarter, we expect revenue growth of approximately 9% on a currency neutral basis, and approximately 7% at spot. We believe our Q4 and full year revenue growth guidance is strong given our scale and the macro backdrop. We also expect to deliver non-GAAP operating margin of at least 21% this year. For the first three quarters of 2022, our operating margin has declined year-over-year. Importantly in the fourth quarter, we expect this trend to inflect and to deliver non-GAAP operating margin expansion. Our guidance contemplates Q4 operating margin of approximately 22.5%. In addition, we're raising non-GAAP EPS to $4.07 to $4.09 for the year. As we noted entering the year, discrete tax benefits and reserve releases last year in the aggregate benefited 2021 non-GAAP EPS by approximately $0.54 and are a headwind to our EPS growth profile this year. Based on our expectations for revenue and operating margin in the fourth quarter, we expect non-GAAP EPS of approximately $1.18 to $1.20. We expect to finish 2022 in a stronger position than we started it, with greater operating discipline and focus. Dan and I are pleased with our improving execution and we're confident there'll be room for continued improvement. However, with our most important weeks in the holiday season ahead of us, as well as ongoing macroeconomic uncertainty, we believe it is too early to provide a detailed outlook for 2023 on this call. That said, as we're planning for the year ahead, our framework currently includes the following assumptions. First, that our overall volumes will continue to grow faster than ecommerce across our core markets, and that we will continue to take market share. At the same time, we expect inflationary pressures, alongside slowing global growth to weigh on discretionary ecommerce spending, which could continue to be pressured in 2023. Second, that we will deliver at least 100 basis points of non-GAAP operating margin expansion next year an improvement from our 50-basis point commitment when we report our results last quarter. And third, our commitment to drive solid growth and earnings per share. Taken together, we believe that our cost savings initiatives and benefits from higher interest rates will enable us to deliver non-GAAP earnings growth of at least 15% next year. We believe this outlook for next year contemplate a sufficiently wide range of revenue outcome. We are firmly committed to executing on the operational initiatives we discussed last quarter and are highly confident that we will deliver on our 2023 framework. Finally, from a capital allocation standpoint, we plan to take a similarly aggressive approach to share repurchases in 2023 as we have this year. In closing, despite the many challenges of today's environment, we believe that we are well positioned to navigate the road ahead. We cannot have more confidence in our people and in the priorities we're executing against. We are just beginning to scale several of our newer consumer and merchant experiences and work with several important strategic partners in the ecosystem. For our shareholders, we continue to achieve significant growth while returning capital in the form of share repurchases. And we're confident that our earnings power and strong free cash flow generation will allow us to continue to invest in our business and extend our leadership position. We are completely focused on delivering for all of our stakeholders and look forward to updating you on our progress. With that I'd like to turn the call back to the operator for questions. Brianna, please go ahead.

James Fossett:

Great, thanks. Exciting announcements for sure with Apple, et cetera. Just wondering, on the margins, though, can you talk a little bit about how you're approaching next year, obviously, there's -- as you indicated, Gabrielle, there's a big range of potential scenarios, especially around revenue, but you seem fairly confident in your ability to deliver that 100 basis points of margin expansion, which is a little more than we had modeled. So you can talk about, like, what's going into that, like, what levers you can pull to make sure you can deliver that and how that translates into that 15% EPS growth. Thanks.

Operator:

Yes. Your next question comes from Jason Kupferberg with Bank of America. Your line is now open.

Gabrielle Rabinovitch:

Yes. You bet, Jason. So you're right. We took down our full year revenue guidance by about a point and at the same time, of course, raised our EPS at the midpoint by $0.16. We had a strong Q3, and obviously, we delivered on all of our commitments. But at the end of the quarter, we started to see some slowing and that came right at the at the very end. In October, in addition, we didn't see the early start to the holiday season that we've seen in 2021. And so we brought down our internal forecast for U.S. ecommerce growth, commensurately with that. And so, in the middle of the year, we were thinking about U.S. ecommerce growth for the fourth quarter and the mid-single digits, that's now come down to low singles. That's pretty consistent with what we see from other third parties. And that really is the predominant driver of the change in our guidance. Now, in conjunction with that similar to earlier this year, when we took down some of our expectations around initiatives in conjunction with a lower growth environment, we've done the same. And so that's also contributing to the 9% FX neutral expectation on Q4. But of course, we're raising EPS overall. And in the quarter, we expect to deliver about 75 basis point of Op margin expansion. So we continue to deliver on our efficiencies, despite the slower growth environment.

Jason Kupferberg:

All makes sense. Thanks, guys.

Operator:

Your next question comes from Colin Sebastian with Baird. Your line is open.

Daniel Schulman:

So let me start off and Gabs can come in. So first of all, Colin, I think it's a little bit too soon to have strong visibility into what 2023 will look like. Typically in a quarter, when you're a third of the way through it, you have pretty good visibility into what's going to happen in the quarter. But in the fourth quarter, that's not the case. It's really all about the holiday season. And what happens in five- or six-week, period, that's still ahead of us. But based on what we're seeing right now, based on external reports, based on our conversations with other ecommerce players you saw, another very large ecommerce player take down their revenues in the fourth quarter that we think that ecommerce is going to be pretty muted in the fourth quarter. And right now, we are not planning that that comes back for any reason, as we look into 2023. I think baseline ecommerce growth will be subdued. But I fully expect that we will outpace it. We've got quite a number of Braintree live to site with very large merchants coming up. Our checkout and digital wallet improvements are quite strong right now. And I'm really pleased with the indications from those initiatives. Obviously, Amazon, we'll see what happens with that but we have a lot of hope for that. And our deal with Apple will certainly be meaningful over at least the medium term on that. So still too early to call, we're going to be very conservative on our top-line assumptions, but we're going to build a ton of resilience into our model. We will adjust to potential lower growth environments, we can keep our OpEx very well controlled. We've demonstrated that now and will continue to enable operating margin expansion next year so. And if the macro picture gets better, these numbers can improve dramatically, but we're anticipating a difficult economic cycle and preparing for that so that we can invest and deliver robust EPS growth at the same time.

Daniel Schulman:

Yep.

Darrin Peller:

Hey, thanks, guys. Look, it's really helpful to have the volume breakdown by PayPal Braintree more, I know you said I think you said 4% core PayPal growth. And you're saying you're expecting that it'll be in line with the market. If you could just touch on the assumptions and drivers of PayPal core engagement growth and what you can do there. It obviously looks like you're making progress around initiatives like passkey or the Venmo, Amazon partnership or obviously Apple. All that should help I assume on the checkout experience, but maybe we can have some more color on how much room there is to improve that experience and what that can mean.

Darrin Peller:

Understood. Thanks, Dan.

Operator:

Your next question comes from Lisa Ellis with MoffettNathanson. Your line is now open.

Daniel Schulman:

Yes. Well, first of all, I think the agreement is quite important, strategically, and our two companies have been working on that together for quite some time. I think there are three areas that this really helps to unlock. I mean, first of all, enabling our merchants to use their iPhone without any incremental dongle or point of sale terminal around that all they need to do if they have a business profile on Venmo, or PayPal has given us three pieces of information, their mobile phone number, their birth date, and either their social security number or their tax ID, that's it, and then they're set up to receive payments in the offline world. And our payment rate there is 2.29% plus $0.09, that is a really competitive rate versus others in the market. And we think this can be really especially significant for the millions of customers that have Venmo business profiles and allow us to compete aggressively in an omnichannel world. And so I think there's a big unlock on that. Second, adding Apple to our unbranded flows. As you know, Apple's already on Braintree in our unbranded flows, but that's just going to make us well more competitive. As we go out and sell PayPal commerce platform further down into middle market and smaller businesses. It enables us to sell PayPal commerce platform more completely it enables us to offer more choice to our merchants, which is something we've been focused on for years and years now. And it also enables the very best integration of our PayPal branded and Venmo branded checkout buttons. And then, finally, the ability for our consumers to add their PayPal and Venmo credit and debit card into Apple Pay in the U.S., for the use that anywhere Apple Pay is accepted, is probably a bigger deal than most people realize. We've been doing this with Google Pay for quite some time. And we've seen, for instance, that Google Pay users in Germany, when they add their PayPal credentials there, there's a 20% increase in their branded checkout transactions. And so they also have the ability to create temporary digital cards that can even allow us to bring our Buy Now, Pay Later from branded checkout online, to everywhere consumer shops. So I think there's a lot of really nice unlocks. Apple and PayPal. I've been working closely on this. We're both excited to put these into the market, and dedicate resources to ensuring that they're successful, and just create a better value proposition for our mutual customers.

Daniel Schulman:

Yep.

Tien-Tsin Huang:

Thanks, Dan and Gabs. Just any more clarity on the -- at least part of the 1.3 billion in cost efficiency next year is, I'm just curious if that's more likely to come from cost cutting or maybe less investing? How quickly also, can you pull the levers to deliver on the 15%? Thanks.

Tien-Tsin Huang:

Understood. Now that's all useful and thanks, got to you say thank you for Slide six, including the CAGR stuff. That's great to have. Is that a one timer and I'll jump off? Thanks, in terms of disclosure.

Operator:

We have time for one last question from David Togut with Evercore ISI. Your line is now open.

Daniel Schulman:

Yes. I'll start on that, David. So BNPL is an integral part of our checkout strategy. We know if we go into upfront presentment, Buy Now, Pay Later, somebody puts us on their product pages, as opposed to check out that our share of checkout goes up quite dramatically. And as you saw, and as you heard, from me, it's growing by leaps and bounds. We're approaching 300,000, upstream presentment. And we're one of the top players in any market two years after launch 150 million different loans. At over, by the way 2.2 million unique merchants. And what I didn't say in my script is, it drives a halo spend of greater than 20%. And 90 plus of that is incremental to us. And so not only do we have, a great value proposition, but we have a real competitive advantage in knowing our customers, 90% of the people that use Buy Now, Pay Later, we have history on. And so our loss rates remain low and stable. And today we're live in 8 markets. As I mentioned, when Lisa asked her question, we think that the ability to take Buy Now, Pay Later, anywhere you want to shop, whether that be online or in store, is a really exciting part, the evolution of Buy Now, Pay Later, as part of being able to put a branded debit or credit card, PayPal, or Venmo branded debit card into Apple Pay. We can also provision a digital, Buy Now, Pay Later, for somebody going in stores, they can pay in-store using one of our Buy Now, Pay Later solutions. And we are also now linking our card strategy, which is a very important part of our in-store. We are moving away from going heavy into QR and doing much more with cards. But imagine paying for something in store and then coming back into your PayPal app and deciding okay, I paid for that. But now I want to pay for that in four installments or split that payment with rewards or fiat currency. And so we're really trying to imagine Buy Now, Pay Later as being fully omni as a capability. And we think that will unlock quite a bit for us as we look forward.

Daniel Schulman:

I think thank you, David for that. And I want to thank everybody for the time, for your great questions. We look forward to speaking with all of you soon. And again, thanks for your time. Take care and bye-bye.

Gabrielle Rabinovitch:

Thank you, Savannah. Good afternoon, and thank you for joining us. Welcome to PayPal's earnings conference call for the second quarter of 2022. Joining me today on the call is Dan Schulman, our President and CEO. 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 the 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 2022 and comments related to anticipated cost savings, operating margin and share repurchase activity. 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 report 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 statement. All information in this presentation is as of today's date, August 2, 2022. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

Gabrielle Rabinovitch:

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. PayPal delivered another solid quarter, meeting or surpassing the second quarter non-GAAP financial targets we shared with you in April. We delivered on our commitment of sequential acceleration in our revenue growth and slowed our nontransaction-related operating expense growth. Our results are indicative of the strength, diversification and breadth of our 2-sided global payments platform. Our team remains focused on what we can control. And more importantly, we're committed to accelerating our core strengths and building PayPal for the future. We are guided by our relentless focus on creating the best possible experiences for our customers and value for our stakeholders. Over the past 2 quarters, we have seen even stronger opportunities to advance our leadership position in payments and add to our momentum, with our digital wallet, checkout and unbranded processing strategies. Of course, unlike everyone, we're closely monitoring the impact of high inflation on economic growth, consumer demand and sentiment as well as broader global macroeconomic indicators. The backdrop continues to be complex, and we're taking an appropriately prudent approach to managing our business. PayPal's unique competitive advantages continue to drive us forward. Today, we believe we are better positioned to deliver sustainable long-term growth than we were before the pandemic. At the same time, we're increasing our rigor in managing our cost structure and prioritizing higher-return strategic initiatives. We are focused on improving our operating margin profile while investing in our key priorities. Over the years, PayPal has experienced serious business and macro challenges and has emerged stronger every time. As we look ahead, we're confident in our long-term strategy and our growth outlook. We believe we are operating in an environment in which strong and enduring platforms like ours get stronger. That has never been more apparent than it is today. Before discussing our outlook for the remainder of the year, I'd like to highlight our second quarter performance. As Dan mentioned, revenue increased 10% on an FX-neutral basis, more than 0.5 point ahead of our guidance and 9% at spot to $6.8 billion. At the time we provided guidance, there was an approximately 30 basis point difference between our spot and FX-neutral growth rates, which essentially doubled during the quarter, given dollar strength. We expect FX to continue to be a headwind as we move through the back half of 2022. Transaction revenue grew 8% to $6.3 billion, driven primarily by Braintree and Venmo. Other value-added services revenue grew 21% to $534 million. This performance resulted from solid growth of our credit products as well as increased interest income on customer stored balances. In the second quarter, U.S. revenue grew 18% while international revenue declined 1%. In addition, on a currency-neutral basis, international revenue increased 1% and, excluding eBay, 8%. On both a spot and currency-neutral basis, international revenue growth accelerated 5 points sequentially. Additionally, eBay Marketplaces' revenue declined 60% to $166 million and represented less than 2.5% of our total revenue. Our revenue, excluding eBay, grew 14% at spot. Transaction take rate was 1.85% and total take rate was 2%, both essentially flat to last year and to Q1 of this year. The blended take rate on eBay volumes declined to 2.13% from 3.22% in Q2 last year. This was offset by an approximately 5 basis point increase in the take rate on non-eBay volumes, resulting from gains from foreign currency hedges recorded as international transaction revenue, Venmo and lower P2P volumes. Transaction expense came in at 90 basis points as a rate of TPV relative to 81 basis points as a rate last year. This result was largely driven by the increase in contribution of Braintree, which is predominantly card-funded, to our overall mix of payment volume. To a lesser extent, funding mix also contributed to higher transaction expenses as a result of more normalized debit card usage relative to 2021. Transaction loss as a rate of TPV was 11 basis points versus 9 basis points in Q2 last year. In addition, credit losses were $68 million or 2 basis points of the rate of TPV. In the second quarter of 2021, we released $156 million of credit reserves, which benefited transaction margin and operating margin performance in the prior period by 250 basis points. In the quarter, loan originations increased and we ended Q2 with $6.2 billion in gross receivables, reflecting sequential growth of 9%. The growth in global Pay Later receivables was the largest driver of originations. The mix of shorter-duration originations from our Pay Later products and strong performance of our loan receivables portfolio resulted in our reserve coverage ratio declining to 7.3% from 8.3% at the end of the first quarter. Overall, our volume-based expenses grew 30%, which in conjunction with 9% revenue growth resulted in a transaction margin of 48.7%. This was 814 basis points lower than last year and represents a 7% decline in transaction margin dollars. Excluding the benefit from reserve release last year, transaction margin dollars declined 2% or 564 basis points as a rate, which was primarily driven by TPV mix. Starting in the back half of this year, we expect to begin seeing benefits to our transaction expense from leveraging our scale across the network ecosystem. In addition, we have directed our focus on rationalizing nontransaction-related expense growth. In the second quarter, overall, these expenses grew 6% year-over-year, relative to growth of 27% in the second quarter of 2021. Nontransaction-related expenses represented 29.6% of revenue, an improvement of approximately 80 basis points from the second quarter of 2021. The growth rates for customer support and operations, sales and marketing and technology and development expenses were meaningfully lower than last year. Notably, sales and marketing spend declined 7% year-over-year in the second quarter, following a 68% increase in Q2 last year. On a non-GAAP basis, operating income was $1.3 billion. Our operating margin was 19.1%, which is nearly 1 point better than our outlook going into the quarter. For the second quarter, non-GAAP EPS was $0.93, $0.07 stronger than our expectations. In the quarter, we faced an approximate $0.11 per share headwind from the release of credit reserves last year. Our outperformance was predominantly driven by lower nontransaction-related operating expenses and a lower effective tax rate. We ended the quarter with cash, cash equivalents and investments of $15.6 billion, which includes approximately $6 billion of cash we estimate is needed to satisfy operational and regulatory requirements. Our cash position is inclusive of $3 billion in proceeds from debt we issued in May. Approximately half of the proceeds from this offering were used to refinance upcoming maturities coming due in September 2022 and June 2023. Importantly, through this transaction, we were able to extend our weighted average maturity by approximately 5 years while increasing our average bond coupon by only 70 basis points. During the quarter, we generated $1.3 billion in free cash flow, bringing year-to-date free cash flow to $2.3 billion. In the second quarter, we also completed an additional $750 million in share repurchases, bringing 2022 year-to-date repurchase activity to $2.25 billion, representing approximately 95% of free cash flow generated so far this year. We have taken a more aggressive approach to our capital return program over the past several quarters. We continue to believe that share repurchase remains an excellent use of capital for our shareholders. And as Dan mentioned, our Board recently approved a new $15 billion share repurchase authorization. Combined with the $2.8 billion remaining on our 2018 repurchase authorization, this brings our aggregate outstanding authorization to nearly $18 billion. Given our desire to return capital to shareholders and the confidence we have in our business, we will continue to be opportunistic with the pace and quantum of our share repurchases. Overall, this year, we plan to return 75% to 80% of free cash flow to shareholders in the form of share repurchases. In addition, as we look to optimize our capital allocation and increase our flexibility, we are renewing our focus on credit externalization opportunities. Our last significant credit externalization event occurred in July 2018, when we closed the sale of our U.S. consumer revolving credit portfolio to Synchrony. Since that time, the composition of our on-balance sheet credit portfolio has changed meaningfully. While today, credit receivables represent about 7% of overall assets versus 17% at the time of the Synchrony transaction, funding our credit products continues to require an increasing amount of our free cash flow. Our credit products are an important driver of customer lifetime value and engagement. In addition, we believe they represent best-in-class products in each of the key credit categories in which we compete. That said, to optimize the use of our balance sheet and remain maximally capital efficient, we're assessing opportunities for additional strategic credit externalization. And we'll update you on our progress as we move through the back half of the year. I would now like to discuss our outlook for the remainder of 2022. When we provided guidance last quarter, we contemplated that there would be a challenging macro environment for the balance of the year. As everyone has seen across the market, macro conditions remain highly dynamic. We guided last quarter to a range of 11% to 13% revenue growth, and given today's environment, we think it's important to be conservative. Accordingly, I would point you to the lower end of that range on a currency-neutral basis. While the macro remains uncertain, I also want to underscore that we have strong momentum across the business with accelerating revenue growth from April to May to June and now through July, and the team is focused on achieving our targets for the year. We expect third quarter revenue growth to accelerate 2 points to 12% on a currency-neutral basis and that we will exit the year with revenue growth of approximately 14% in the fourth quarter. It is important to note that we [indiscernible] a 150 basis point headwind in the third quarter related to revenue we recognized from the PPP lending program in the third quarter last year. Excluding this impact, we expect our third quarter revenue growth to reach nearly 14%, which results in relatively consistent growth in both the third and fourth quarters. The vast majority of the expected acceleration in our top line performance from the first half of 2022 relates to finally having the tougher eBay compares behind us. In addition, we expect the diversification of our platform and the contribution from new initiatives and our merchant pipeline to allow us to exit the year with our business in a stronger position than how we entered 2022. We are also raising our non-GAAP EPS guidance and now expect to deliver non-GAAP EPS in the range of $3.87 to $3.97. Our cost discipline in conjunction with our efficiency and prioritization initiatives, are enabling us to drive this improved earnings performance. We also expect that this progress will allow us to deliver non-GAAP operating margin expansion in the fourth quarter and into 2023. In addition, we remain on track to generate more than $5 billion in free cash flow this year. In closing, we're pleased with the progress we're making across many fronts. We're advancing our strategic priorities and, at the same time, sustainably improving our cost structure. The cash flow generating power of our business is a strategic competitive advantage and continues to give us a high degree of flexibility as we allocate capital with discipline. We are focused on creating value for our shareholders and strengthening our position as the world's leading digital payments platform for our customers. And while we are not immune to economic headwinds, we will continue to deepen our focus, invest for the long term and strengthen our competitive advantages. Finally, I'd like to welcome Blake to PayPal. I'm absolutely thrilled that he'll be meeting our finance organization and I look forward to supporting him. With that, I'll turn it back over to Dan.

Operator:

[Operator Instructions]. And our first question will come from Tien-Tsin Huang with JPMorgan.

Daniel Schulman:

Yes, it's a great question. So we're executing on the game plan that we started laying out at the beginning of the year. We knew we had a lot to get done. And we knew we had to, one, narrow our focus on growth opportunities in which we had high conviction of their ability to make an impact. Does it -- make no mistake, we are in the business of strengthening our value proposition, growing going forward and gaining share. That is our #1 priority. And we know the 3 things that we really need to invest in there, and there's no debate around that whatsoever. It is Checkout because that is the bread and butter of our business. We have a lot of advantages there. We continue to gain share, but there are a lot of places where we can make incremental improvements and, in some cases, some pretty radical improvements to improve our value proposition and competitive position. Number 2 is in our digital wallets. Both Venmo and PayPal, we are seeing very encouraging green shoots. We've talked about some of those. I'll probably talk about more of it in future questions, I'm sure. But that is the future. Digital wallets are the future, a combination of both payments and commerce and financial services coming together. And we are seeing some really -- some quite a bit of adoption, quite a bit of churn reduction for those who come in. So we'll continue to invest there. And finally, Braintree. My hat goes off to that Braintree team. They have done some Herculean tasks this year. We have tremendous momentum in our full stack processing in the marketplace. As I mentioned, there is a flight to quality in the market. We are clearly seeing that. And that platform, we're just going to continue to invest in, both on the pay-in side and the payout side on things like orchestration and a multi-PSP environment. And so those are the 3 areas that we are going to double down on and they're nonnegotiable. We are, by the way, pulling back on other areas like you mentioned because if you're going to narrow your focus by definition, there are places where you're pulling back. For instance, we were going to focus on invest this year, like stock trading and that kind of thing. We're not going to do that. We have reallocated those headcount into checkout. We've also been able to reduce headcount. We don't have the same regulatory footprint that we thought we might have. In store, we're really moving into card as opposed to a focus exclusively on QR. That is kind of where the market is right now. It is much more impactful for us and much less expensive as we go into card being off-line tied fully into the app in a fully integrated way. And so you've got certain things long-tail international that we're just going to have cross-border come on that. We're not going to go into those domestically because they've got high beta and cost a lot, and it just takes a lot of time and effort to go and do those things. So we are focused on the things we think will make the largest impact. We see the impact of that already. I'm quite pleased with our ability to consistently take share. We saw that, I think, accelerate in this quarter and do all of that while being efficient and productive. And those are things that we started quite a bit. We're making really good progress and they are beginning to show up in our results. And I think as Gab mentioned and I mentioned, by the time we get to the fourth quarter, we'll start to see operating margin expansion.

Darrin Peller:

Look, we had expected some cost saves, and it makes sense, just given the growth of expense lines over the last couple of years. But the magnitude you're talking about is definitely more than we anticipated. So if you can just touch on how we should think about the sources of the expense saves. Maybe, if any, will be reinvested into areas versus pass through to the bottom line, and really what we can expect in terms of investment levels into the wallet and Checkout and kind of operating leverage this would be to.

Gabrielle Rabinovitch:

Yes. Maybe I would just add, in terms of the $900 million of identified savings this year and the $1.3 billion next year, nearly 50% of that really comes from transaction-related expenses. And as Dan mentioned, really sort of benefiting from the scale we have and the ecosystem. So I wouldn't think about that as cuts to the way we do business, more really benefiting from the scale that we have and the large platform that we have. In addition, I'd say even with those savings, we would expect transaction expense to grow next year. And that's really just from the strong growth of Braintree that continues to impact our mix. And so we don't expect year-on-year for TD to come down. The other point I would mention is some of the savings are really not an insignificant amount, as Dan mentioned, really do relate to headcount. And we recalibrated our headcount plans to really be balanced with our growth plans on the year. So some of our expectations around the top line have come in. The way we thought about growing [indiscernible] has really adjusted. And so that's an important driver of the savings as well.

Operator:

Our next question will come from the line of Lisa Ellis with MoffettNathanson.

Gabrielle Rabinovitch:

Yes, absolutely. Thanks, Lisa. So I think as a starting point, I mentioned, sure, on the Braintree side, yes, mix is important. And certainly, there is a different profitability sort of dynamic to Braintree. At the same time, I would mention that, that really is limited to the LE side of Braintree. And to the extent that we continue to grow our Braintree franchise in the SMB space. And to the extent we continue to grow it in Europe, really, the profitability characteristics of it are quite attractive and will continue to support the business. But in addition to that, we do have a long track record of profitable growth. And so as both Dan and I have mentioned, we do expect to begin showing operating margin expansion in the fourth quarter. If we think about next year, a little early right now to provide full guidance on the year. But to start right now, we're targeting at least 50 basis points of operating margin expansion. And importantly, sort of initiatives that Dan has mentioned and the efficiencies that we're realizing the work that we're doing will allow us to grow profitably and sustainably improve the margin profile over time.

Jason Kupferberg:

I wanted to ask a little bit about Venmo. I saw the overall volume there grew 6%. I think it slowed a bit against an easier comparison. So just curious how it came in versus your expectations. Maybe what we should expect for the second half there? It sounds like the Venmo revenue growth was robust again, so I'm assuming you're still on track for the 50% revenue growth in Venmo for this year. But just curious to get your take on what's happening with volume growth.

Operator:

Our next question will come from David Togut with Evercore ISI.

Daniel Schulman:

Yes. Well, first of all, I think on the revenue guide, as Gab talked about in her remarks, I mean, our guide for Q3 normalized is about 14% if you removed the sale of the PPP onetime thing we did last year. So just this quarter, we're going to -- and then the jump-off into fourth quarter is basically flat to hit the guidance that we put out there, and July came in north of 14%. So I think we're feeling as good as you can be in an environment that is unpredictable and anything can happen. But we're feeling really good about the revenue guidance that we gave. In terms of the engagement in TPA, I think you're going to continue to see TPA increase as the year unfolds. And you can hold me to that next quarter. But some of the proof points are, if you look at people who are in the digital wallet and we now have over 50% of our base in our digital wallet. They've got 2x higher the ARPA than those not in the digital wallet. They do 25% more checkout. Churn is now -- our best view of it now is churn is reduced by 33%. We thought that was about 25% last quarter so that's gotten slightly better. And they do 2x the transactions per active for those who aren't in the wallet. And so one, the more we can enhance and move people to the digital wallet, the more engagement and TPA growth we'll have. The other thing is we actually have a lot room to improve in terms of just usage of PayPal. If you look at the Fed came out with how many financial transactions does a typical consumer do in a year? And it's a little over 800. About 25% of those are online, so about 200 of those are online transactions. We only capture about 25% of those. And so there's a huge opportunity as more and more moves online, as we expand the digital wallet, as people see all they can do with that. We just launched our high-yield savings at 1.65% interest rate. That's about 16x the national average. We're putting on thousands of people a day on to that. There's a lot we can do as we look forward. And I think the more we can put on to the digital wallet and the more compelling those services can be, the more you'll see TPA and ARPA grow. And we'll see it as we go through the rest of the year.

Rayna Kumar:

Congratulations, Gabrielle. You have a very unique strategy in Buy Now, Pay Later, so I just want to dig into that. If you can discuss the progress of Pay in 4 and Pay in 3 and how it may evolve if we were to enter a global downturn. And secondly, have you been able to get better placement as a result of your BNPL strategy?

Gabrielle Rabinovitch:

I'd also just add, we're continuing to see better upstream presentment in part because of how we're continuing to grow the product characteristics. So introducing longer duration, more options with monthly payments gives merchants more ways to allow their consumers to spend. And so that also helps drive that upstream presentment. It's been a really great product for us. We continue to see very strong performance, very low loss rates as well.

Gabrielle Rabinovitch:

I'd also add as we think about potentially an environment where we can see some contraction in the economy, the new late fee dynamic to what we do is just exceptionally consumer-friendly. So we don't charge transaction fees for consumers on Pay in 4, Pay in 3, no interest fees, no late fees. And so overall, it's an incredibly attractive product for our customers.

Operator:

And we have time for one last question, and that will come from the line of Mike Ng with Goldman Sachs.

Daniel Schulman:

Yes, sure. First of all on e-commerce growth rates. It's tricky and people have different opinions on it. As best we can tell, in the second quarter, e-commerce growth was relatively flat. If you take out travel out of that, it might have actually been slightly down, probably negative if you remove travel from it. And if you look at our Branded Checkout, which is sort of ex eBay, P2P and Venmo, we had positive growth and we likely gained a bit of share, if not a little bit, more than a little bit of share on that. We obviously want to continue to do better on that. And as we come into this quarter in July, we're beginning to see that turn in Branded Checkout is actually growing again, which is obviously also really helpful as we look at margin dynamics and that kind of thing as well. For the full year, people were talking about 10% early on. That has kind of dropped into about the 8% for the full year. It's kind of where we're hearing as we look at a number of estimates out there. But BofA is down at 5% for the year. JPM is at 7% for the year. All of them accelerating in the back half, by the way. But it's still a little hazy, Mike, honestly, to understand what normalized e-commerce will look like. We clearly did not see the bump-up of 5 years that everybody had seen during the pandemic. But we are along the traditional historic e-commerce penetration rates and I'd expect that to continue but we'll see how that normalizes. But we'll continue to expect to grow significantly faster than the rate of e-commerce going forward, both on branded by the way and unbranded as well. And just really quickly on the Checkout side of this. I mentioned this on our last call. There are certain ways that we want to modernize the merchant experience. There's kind of the basics of this because checkout and payments are a hard business. They're like the lifeblood of a merchant. Scale matters, trust matters. Reliability is crucial on that. Conversion rates are crucial like, for instance, the average conversion rate for a merchant outside of PayPal is between 50% and 60%. For PayPal, it's between 80% and 90%. So we've got big advantages but there are also a lot of things we can do better. Latency is one of them. Our goal is to get to 3 seconds of latency. We've already cut, this year alone, 5 seconds out of our latency. That's huge when every second really matters. The other thing that we're really focused on is removing clicks and scrolls. Right now, too often, clicked on PayPal, especially in a mobile and you go into a pop-up window. It takes you out of context and then back into the merchant app. We are just rolling out a beta on a new mobile SDK and API that offers a consistent user experience across form factors and gives full control to a merchant of their native app. So no bouncing out, eliminating friction, increasing speed and for consumers who are using it, it's fast, simple, there are no redirects. You can sign up, log in, stay vaulted, change get rewards, use rewards all inside the merchant app, all native. And for merchants, it's sort of a minimal integration. It's lightweight, and it improves, obviously, conversion and card abandonment. We're just putting that out into the market and into a beta, into our small businesses. We are working with larger businesses to do that later this year. But that -- we've got a lot of legacy checkout out there, making something simple and easy to integrate and lightweight that offers sort of like a no-password account for consumers, 1-click checkout across our network that can be extremely powerful. And we are beginning to deliver on that as we speak into the market. It will take time for it to roll out through the base, but I'm really pleased with what the team is putting out there right now.

Daniel Schulman:

Okay. I'm glad, Mike. Well, operator, that's going to be the end of the call. I do want to thank everybody for the great questions, for your time, and we obviously look forward to speaking to all of you again soon. Thanks again. Bye, bye.

Gabrielle Rabinovitch:

Thank you, Chris. Good afternoon, and thank you for joining us. Welcome to PayPal's earnings conference call for the first quarter of 2022. 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 the 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 second quarter and full year 2022 and our medium-term outlook. 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 report 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, April 27, 2022. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

Operator:

[Operator Instructions]. Your first question comes from the line of Lisa Ellis of MoffettNathanson.

Daniel Schulman:

Yes. It's good to hear your voice as well, Lisa. I feel the same way about John. So look, it's been a difficult several quarters for us in accurately forecasting on what our business would look like. I will say that, over the past 5 years, we very consistently gained market share as true also in Q1, if you look across the different products and capabilities we offer. And so I think we need to, one, kind of rethink, and we've tried to start to do this year, our philosophy and methodology around forecasting. And we'll talk probably about that later. I'm sure there will be conversations about that. Second, I think there are less things we need to do extremely well. And so we are really going to be focusing on checkout, and we can talk about that in more detail later in the call, but we have a number of initiatives on advancing our position in checkout and also thinking about next-generation checkout as well. And we also need to double-down on the digital wallet. We clearly believe that's where the future of the industry is going. It's the future of PayPal. It is the heart of what we are trying to do from an engagement perspective. And so those are the 2 things that we really need to double-down on. I would say the third thing is we need to go back to where we were before we came into the pandemic, with a real focus on our operating model, making sure we simplify and streamline, putting more and more accountability into the hands of our product managers and driving really end-to-end accountability and ownership across the whole business. And so there are clearly a lot of things we need to do. I feel like we're beginning to make good progress on some of the execution. Q1 was a piece of that and some of the metrics are -- we're seeing green shoots on that. But we've just got to stay focused and keep driving simplification and operating leverage in our model.

Tien-Tsin Huang:

And may I also start by saying thank you to John and absolutely wish you nothing but the best. I'll ask on the outlook. I know Lisa asked a good question on what's going to change, but I'm just trying to better understand the full year vision to revenue and EPS and where you're landing now versus 90 days ago. So it looks like the eBay assumption is the same. So how much of the change is due to macro factors versus maybe you know a little bit more about the impacts of your strategy shift? And of course, how much did conservatism play a role, recognizing, as you said, visibility is tough and you have a CFO seat to fill, et cetera?

Gabrielle Rabinovitch:

Yes, sure. Thanks, John. So Tien-Tsin, in terms of sort of lowering the revenue outlook, in addition to what John mentioned around just the macro worsening and what that means for our overall growth expectations in our core markets, we also, to John's point, sort of took a look at what we're seeing on our own platform. And that really relates to sort of e-commerce and consumer behavior. It does have that sort of macro intersection, but for us, because we have more of a discretionary platform, we do see a greater impact on the spend. And so relative to how we started the year, e-commerce globally is slower than what we thought, and we're seeing that come through on our platform. And so we're reflecting that, and that's both in terms of just the spending patterns as well as off-line/online mix. So that's sort of how we're thinking about starting the year. It's really not about our overall conviction in the secular tailwinds that support the business, but we want to be realistic about what we're seeing in-year and adjust that outlook for that. The final contributor to it on the revenue side is really that we've recalibrated our expectations on some of our initiatives at PayPal based upon those lower global growth expectations. And so we wanted to have a consistency in that conservatism around what we think are sort of newer initiatives can deliver in-year given some of those macro impacts. On the EPS side, it's really a flow-through of some of these things, but maybe just something I would call out is from a volume standpoint. We are seeing outsized performance from Braintree. So that unbranded processing mix does play a role in the overall profitability of the business. And so we're taking down EPS, in part, for that. In addition to that, we're continuing to invest heavily in the areas that we think are important to drive that long-term profitable growth. And so that's what you're seeing sort of in terms of the overall impact to EPS. One other call-out would just be suspending transaction services in Russia does have an EPS impact as well, and so we have adjusted our outlook for that.

Darrin Peller:

John, I also want to wish you the best. And guys, when we look at -- yes, when we look at the guidance that you guys gave, and I know you withdrew the medium term, which I think a lot of investors expected at this point, but the exit year, if you could just help us understand the cadence of the year and then the exit growth rate implied by the new guide range and maybe a little more on the assumptions behind that exit rate.

John Rainey:

I'll just add too, Darrin, that, look, no company wants to be in the position of pulling their medium-term guidance. But when you step back and you look at the set of assumptions on which we base that medium-term guidance, they're very, very different today. That said, and perhaps I'm in a unique position to say this, that doesn't take away our conviction and the long-term value and the prospects for this business at all. This -- there are a few companies of our size and scale in digital payments that have some of the unique attributes that we have around our cash flow generation, our revenue growth and the margin profile that we do. And so we're not immune to some of these economic vagaries that we're going through right now. But we've got to respond to that. And -- but that should not take away from how you think about our business longer-term. And again, we are perhaps the purest play in digital payments, and we're going to continue to invest appropriately to make sure that we stay that way and stay a leader in digital payments going forward.

Operator:

Your next question comes from the line of Ramsey El-Assal of Barclays.

Daniel Schulman:

Yes. It's at such a fast-moving environment that we operate in, with constant innovation, that we're never in a place where we're not going to need to continue to innovate and invest in the business. I think we've made some really important strides in the past year or so with the advent of our digital wallet. We clearly think that the world is continuing to digitize. Yes, there's some normalization between online and off-line right now. But going forward, the world continues to digitize. And disparate parts of the economy are coming together, whether that be shopping, payments, basic financial services. And so the wallet is going to be one of the key elements of how we drive customer engagement. And we're going to continue to evolve the wallet. It is v 1.0 right now. And there's going to be v 2.0 and v 3.0, and we've got a number of things on our road map that we really want to execute against this year. But we're already beginning to see uptick in our engagement. For the second quarter in a row, we had 11% TPA. Ex eBay, actually, engagement went up 19% in the quarter. That's a pretty big move in terms of engagement. And you heard the stats that I talked about in my script in terms of the increases in ARPA, the decreases in churn. And as you think about kind of our growth going forward, 30% of our customers generate 80% of the volume on our platform. We're clearly not a subscription business, we're a transaction-based business. And growing those transactions is a huge opportunity for us. We probably, today, have like 25% of the online financial transactions that a consumer does. And so there's a ton of room for us to grow in that area. I would also say the surest way for us to grow net new actives going forward is to increase engagement. Like when you're at 429 million active accounts, even with a consistent churn rate year-over-year, and by the way, we know, this year, our churn rate will be somewhat higher because we're letting these low engaged consumers churn off the platform because the ROI to keep them isn't worth it. But the more we can keep people on the platform engaged, the more we'll grow our NNAs going forward. And so the 2 big things we're focused on, improving checkout, improving digital wallet, are the things that we'll probably be talking about for years to come actually. Anything you would add?

Jason Kupferberg:

I wanted to shift over to Venmo for a minute, if I could. I know that volume growth started the year at 12%. Clearly, there was a tough comp there. I'm just wondering whether or not any of the new IRS rules around reporting of these transactions is having any impact there, how you expect Venmo volume growth to evolve during the course of the year. I know you started really strong on the revenue side, with Venmo at 60% in Q1. So fair to assume you still expect 50%-plus revenue growth from Venmo this year?

Daniel Schulman:

I would just say they've got a strong road map ahead of them, putting in business profiles, transitioning that almost into storefronts, enabling charities to be a part -- listed on Venmo, the full debit card refreshed, revamping P2P, even improving searchability and other things around that. So they've got a -- and then, of course, launching Amazon in the back half of the year. So they've got a pretty full road map. And I think Gab summarized all the other points perfectly.

Bryan Keane:

I wanted to ask about TPV. When I look at total payment volume in the quarter, I see the dichotomy between U.S. growth, up 21%, and international, only up 5%. So clearly, international is growing slower than the U.S. So wondering, when I look at the international market, what are some of the factors there that are influencing the growth rates. Is it inflation? Is the Ukraine situation bleeding into other parts of Europe? Is there any share loss? Any color on that would be great.

Bryan Keane:

Got it. And good luck, John.

Operator:

Your next question comes from Mike Ng of Goldman Sachs.

Daniel Schulman:

Yes. Well, as you point out, look, checkout is our business. I mean you've got to be able to scale it. And it's got to be perfect. As you noted, retailers depend completely on a checkout provider. And if it doesn't go right, they can lose a tremendous amount of sales. And so like the brand trust we have and our track record over time, our availability, our fraud and risk capabilities, have been honed over the last 10 or 15 years. Like on average, a retailer that does 100 transactions with PayPal, we approve 6 more than somebody else -- another checkout methodology. These make huge differences. I would say, the other thing, of course, is that it is a network effects business. The larger the scale, the more attractive the network is. And when you do consumer surveys, 60% of consumers pick PayPal as their #1 choice to do an online transaction. The next closest digital wallet is 8%. So it's not even close. PayPal customers are 2x more likely to shop when they see a PayPal button. And for smaller merchants, having the PayPal brand is essential because in today's age, you're seeing much more e-commerce sales that are outside of local territories. It's across state. It's across the country. It's across countries. And seeing that PayPal brand enables the consumer to feel confident that they've got protection and for a business to feel comfortable because we give them seller protections as well. And so we have a ton of scale advantages and a ton of experience in high auth rates and low loss rates, which typically don't work hand in hand, but they do work that way with us. And look, we are not resting on any of those laurels by any stretch of imagination. We are driving to improve basic hygiene, increased uptime and availability at 99.999% level, taking latency down to low single-digit seconds, simplifying our UX right now. Too often, there's a pop-up that occurs, and it takes you out of the web or the native app. And you don't want to go out and then back into that app. So we want to drive in-context or in-line checkout. We know we can even make our integrations easier and simpler by moving more and more towards industry standard integrations. And we're going to optimize log-on through new identity techniques. And by the way, we are also thinking about the next generation of checkout. The real issue for retailers is not so much can you make conversion better when a consumer gets to the product page or the checkout page, which, by the way, is important because every little bit actually matters to merchants, and we clearly lead in that area. But the real issue is less than 5 out of 100 people who go to a merchant's website actually check out. So there's a ton of drop-off before a consumer gets to the product pages or to the checkout. And basically, nobody has the amount of data and information we have on customers. We vault over 1 billion financial instruments on our platform, well more than that. And being able to work with retailers and consumers, to surface who that consumer is, obviously with consent and all of that, so that a retailer can customize kind of to every customer coming on that have offers or deals or with a homepage they come to is a huge potential next-generation of checkout with a lot of interest from merchants. And nobody can really do that better than we can because of our scale and the data we have. And so I think we got a lot of good advantages right now, but we are really thinking about how do we take it to the next level and how do we even reimagine checkout.

David Togut:

All the best to you, John.

David Togut:

At the beginning of the pandemic, Dan, you clearly articulated a focus on unified commerce, in particular, a major rollout of QR codes at some of the biggest retailers in the country. And more recently, we've seen consumers return to the physical point-of-sale with increased vaccination rates. Can you update us on how PayPal is positioned in unified commerce, and in particular, where you stand with the QR code rollout?

John Rainey:

Thank you. I will miss you all as well, too.

Operator:

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

Gabrielle Rabinovitch:

Thank you, Donna. Good afternoon and thank you for joining us. Welcome to PayPal’s earnings conference call for the fourth 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 are 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 the 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 first quarter and full year 2022 and our medium-term outlook. 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, February 1, 2022. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

John Rainey:

Thanks, Dan. I’d like to start off by thanking our customers, partners and employees for helping us deliver an outstanding year following our record-breaking performance in 2020. There are several important points that I want to discuss today. I am going to discuss a pivot in our strategy to focus more on engagement and what that means for our net new actives going forward. I also want to discuss why we are taking a more conservative outlook for 2022 for both revenue and earnings. And lastly, that we don’t believe either of these items will prevent us from achieving the revenue and earnings growth rates, along with our free cash flow objectives in the out years of the period contemplated in our medium-term guidance. But first, I want to spend a moment discussing our Q4 performance. 2021 certainly had its ups and downs, but when one steps back and looks at our overall performance, it was really an amazing year. TPV grew 33%. Revenue grew 18%. And we generated $5.4 billion in free cash flow. We also added 49 million customer accounts, ending the year with 426 million. And our engagement metric, transactions per active account, grew 11%, an acceleration of approximately 10 percentage points from 2020. Remarkably, in 2021, growth on our platform, excluding eBay, accelerated meaningfully on top of extraordinary performance in 2020. TPV growth accelerated more than 500 basis points to 38% and revenue growth accelerated more than 600 basis points to 29%. Since 2019, our volumes ex-eBay, have nearly doubled. And overall, we have consistently grown volumes well ahead of industry growth rates. We also advanced our leadership position in checkout. Since the start of the pandemic, on average, our share of checkout among the largest publicly traded merchants has increased by nearly 200 basis points. Further, in the U.S., consumer adoption of our digital wallets is several times higher than the next nearest wallet. And our merchant acceptance leads all other checkout buttons by an even more sizable margin. By any measure, we are a leader in digital payments. There are only a handful of companies that generate the amount of revenue and free cash flow growth that we do annually. And we are confident that our long-term market opportunity is greater than ever. In the fourth quarter, total payment volume grew 23% to $340 billion. eBay volumes in the quarter declined 45% and represented 2.7% of total volumes versus 6% last year. And excluding eBay, volumes grew 28% on a currency neutral basis. Revenue in the quarter increased 13% to $6.9 billion. Revenue ex-eBay grew 22%, which is 2 points ahead of our medium-term growth outlook. This strong performance was broad-based across Braintree, Venmo, core PayPal and our credit products. Relative to the fourth quarter of 2020, U.S. revenue grew 27% and international revenue decreased 1%. Supply chain shortages and eBay’s transition adversely impacted cross-border volumes and foreign exchange fees. Ex-eBay, international revenue grew 11%. Importantly, on a currency neutral basis, the 2-year compounded growth rate for revenue in the quarter remained consistent with the fourth quarter of 2020 underscoring the strength and consistency of our business. In the fourth quarter, total take rate was 2.04% and transaction take rate was 1.88%. Notably, both increased sequentially, reversing an approximately 2-year trend of sequential take rate declines. Both product mix and pricing benefited our performance. In the fourth quarter, our volume-based expense performance was strong. Transaction expense increased 3 basis points as a rate of TPV to 87 basis points driven by volume mix, particularly our growth in Braintree volumes and Q4 seasonality, which increases credit card mix relative to other funding instruments. Transaction losses improved 1 basis point to 9 basis points, which matches the best performance we’ve reported in our history. Credit losses were 1 basis point as a rate of TPV versus 3 basis points last year, driven by our mix of originations, portfolio performance and $9 million in reserve releases. At the end of the quarter, our credit loss reserve coverage ratio was approximately 9%. In total, we released $312 million of reserves in 2021. Transaction margin dollars increased 6% to $3.6 billion and ex-eBay grew 18%. Transaction margin as a rate declined 365 basis points to 52.3%. And our non-transaction-related expenses grew 10% in the quarter. On a non-GAAP basis, operating income was flat in comparison to last year and operating margin declined 291 basis points to 21.8%. Non-GAAP earnings per share were $1.11. We ended the year with cash, cash equivalents and investments of $16.3 billion. In addition, free cash flow increased 38% in the fourth quarter to $1.6 billion and we repurchased $1.5 billion of stock in the quarter. I’d now like to discuss our net new accounts and provide more context for our performance and our expectations for 2022. For the quarter, our guidance contemplated generating about 12.9 million net new actives on an organic basis. We had a slower than expected finish to the year and came in below our target. There are three factors that contributed to this, which I will discuss in increasing order of magnitude. First, the more muted into the year for e-commerce growth, driven by both supply chain challenges as well as pullback in spending by lower income consumers affected consumer growth. Second, in the back half of the quarter, we also changed course on some of our customer acquisition strategies, including incentive-led campaigns. And lastly and most impactful to the quarter, there were certain accounts that we disqualified or excluded from our net new active number. For context, we regularly assess our active account base to ensure the accounts are legitimate. This is particularly important during incentive campaigns that can be targets for bad actors attempting to reap the benefit from these offers without ever having an intent to be a legitimate customer on our platform. In the fourth quarter, in connection with the increased use of incentive campaigns throughout 2021, we identified 4.5 million accounts that we believe were legitimately created. This number is immaterial to our overall base of 426 million customer accounts, but it affected our ability to achieve our guidance in the quarter. Now I want to shift to how we’re thinking about net new active accounts in 2022, which is separate and apart from the factors impacting Q4. I’m going to start with the headline here and then provide some explanation. We are evolving our customer acquisition and engagement strategy, and we now expect to add 15 million to 20 million net new customer accounts this year. In addition, we no longer believe that the 750 million medium-term account aspiration we set last year is appropriate. I’ll explain. Over the past 2 years, we’ve added more than 120 million customer accounts to our platform. This is, without question, remarkable growth and a complete step change from our trajectory prior to the pandemic. Our strategy for this has been twofold

Tien-Tsin Huang:

Hi, thanks so much. I wanted to drill in on the NNAs again, if you don’t mind. Just what drove the decision here to focus on engagement focusing on quality instead of growth in NNAs? Just trying to gauge your confidence and expanding ARPU as implied in the guidance both this year and I suppose in the mid-term now that the $750 million is off the table? Thanks so much.

Dan Schulman:

Maybe I’ll just add a couple of things onto John’s response. First of all, we did put on 122 million NNAs over the last 2 years, which is obviously substantially more than what our pre pandemic levels were. And within that, there are always a number that are low engaged or have done one transaction and nothing else. And we drove some programs, incentive-based programs to see if they would reengage and then engage back with the base. And what we found is that they were due one transaction and then fall dormant again. And so our view is spending money on lower-value NNAs that are not engaged in the base becomes an increasingly expensive proposition over time and does nothing for our revenue growth. In fact, this year, when we’re saying that we’re going to do $15 million to $20 million, it’s probably going to be about $20 million incremental one-and-done customers that roll off. That does nothing to our revenue that is actually just people coming out of the base that were never engaged. Over time, we feel like our NNAs are that revert more back to pre pandemic, which was in the $30 million to $40 million a year range. And could that change slightly? Could that be more as we go into more international penetration we’re seeing some very encouraging signs, as John said, with a digital wallet, where if somebody adds one more service to the digital wallet, their average revenue per active goes up by 25%. The average revenue per active of the digital wallet user is 2x that of a checkout only. And so we really feel like we are going to invest our dollars in the best way to drive our revenues and our earnings and in the most efficient way. So we have great confidence in the medium-term outlook. And this shift is one that doesn’t mean that we won’t bring on tens of millions of NNAs every quarter. It just means that we’re not going to throw marketing dollars at low-value subscribers coming in. And that, as John mentioned in his remarks, is a conscientious choice that we’re making.

Dan Schulman:

Yes.

Darrin Peller:

Hi, thanks, guys. Can you just – can you touch on the assumptions for your revenue guidance? I know your 15% to 17% is obviously lower than the prior 18% as of expected as of a few months ago. So maybe John or Dan, if you could just touch on the magnitude of ARPU expansion or consider and perhaps any color on the take rate or other factors? And just maybe any assumptions that might be conservative here and also, John, just the cadence and trajectory, I know you talked about exiting the year at 20% plus growth rates. Obviously, it’s great to hear just we need a good ramp as the year progresses. So anyway, thanks guys. Any color that will be all.

Dan Schulman:

Darrin, I think also if you uncouple the headline revenue numbers from our revenue numbers ex-eBay and look at it whether it would be in the fourth quarter 22% revenue growth ex-eBay, growing over 27% revenue growth ex-eBay from a year ago. And you look at that 2-year CAGR, it’s about 25% CAGR. You look in the first quarter, which is our low quarter of the year. And ex-eBay, we are growing revenues 13% on top of 38% revenue growth ex-eBay a year ago. Add the two up, you have got a 2-year CAGR of about 25% again. So, what I was saying in my remarks is that our business ex-eBay is remarkably consistent and our 2-year CAGRs are also remarkably consistent. And so we are lapping eBay, which goes away by the end of June as we go into the back half of the year, and we are also lapping our two strongest quarters of growth in the first and second quarter. And just as we look at the math of that and then on top of that, obviously, all the initiatives that we are doing, we see growth rates exceeding 20% plus as we exit the year. And I think if you look behind the headline numbers, you can see those numbers have maintained their strength quarter-over-quarter.

Operator:

Thank you. Your next question comes from the line of Bryan Keane from Deutsche Bank. Your line is now open.

John Rainey:

Sure. Well, we were pleased to see the sequential increase in take rate in the quarter versus the third quarter. And I do think it sort of underscores some of the strength in our business, particularly around pricing and also, as Dan noted, Venmo, quite excited to see that Venmo having achieved it’s roughly $900 million in revenue last year that’s starting to be a contributor to take rate. And we have been saying this for some time. We are glad to actually show the results. I don’t think it’s fair to assume, though, that Brian, that every quarter, we are going to see a sequential increase going forward. But it’s a step in the right direction. I think maybe a better way to think about take rate for this year is really looking at the factors that drove the year-over-year change. And of course, year-over-year take rate declined. But if you look at that decline of 17 basis points, roughly half of that was related to eBay. And certainly, that goes away as we get into the back half of the year. The other next largest contributor, which was about 4 basis points or 5 basis points related to that decline was a decrease in foreign exchange fees that we monetize on cross-border transactions. And so that sometimes goes up. So, if you look at like the core business, there is actually a very small change in what’s happening with take rate and so quite pleased about that. And I think it really – like when you also overlay on that, the pricing change that we made that contributed to that I think it underscores the value proposition and how that resonates with our customer base. We are seeing users becoming more loyal to brand ecosystems like ours. And look, when side-by-side given the choice to choose PayPal or other wallets, more than 50% of the time, people are choosing PayPal. And so this shows the strength of our business, the ubiquity, the network effect of it, and that’s translating into the effect on our take rate. And frankly, we are just pleased to see that we don’t have some of the noise that’s been persisting in that comparison over the last couple of years, and we will get into much cleaner compares in the back half of next year.

Bryan Keane:

Great. Thank you very much.

Operator:

Thank you. Next question comes from the line of Lisa Ellis from MoffettNathanson. Your line is now open.

Dan Schulman:

Lisa, there is sort of a little bit of inflation between end of pandemic and us entering into the eye of the eBay transition, which happened concurrently. So, coming out of that, you are lapping very strong growth quarters for us, and we are going into eBay and the pandemic is beginning to end. If people are conflating a lot of that, which is why I was trying to point out that the core business ex-eBay, has been pretty consistent as we have looked over the last several quarters. And clearly, the lapping is going to have an impact, although a lessening impact in the first half of this year until we move into the back half. I would say though the other big thing, Lisa, that we have talked about quite a number of times is sort of the ascendancy of digital wallets, of financial super apps in the – in checkout. There have been numerous studies. JPM just put out one payments, just put one out, where you are seeing digital wallets take increasing share at checkout. And clearly, there is no other digital wallet close to us in terms of scale, and there is overwhelming consumer preference for PayPal in those wallets. And our super app is showing extraordinarily promising early results. Now, we only rolled that out fully in the middle of October across all of iOS and Android, so we are three months or four months into it. But what are we seeing, we are seeing double the average revenue per active account when somebody uses our app versus just checkout. When somebody uses the app their propensity to churn is 25% less. The discoverability and first-time users of people coming into the app, crypto is up 40%, in-app donations are up 300%, people coming into our shopping tab is up 35%, people going from the shopping tab to merchants to shop is up over 700%. And so we are really encouraged by what we are seeing on the app. And by the way, the app, only about 50% of our base has the app right now. So, it still has quite a bit of ways to go to penetrate and we want to spend marketing dollars on moving people into that app. And inside the app, like things like bill pay, like you and I have talked about many times, we are seeing a 200% increase in first-time users there. We want to make sure that people can discover the services because every time they add another service, it grows ARPA by 25%. And so we are going to focus heavily on digital wallet. We are going to continue to focus on checkout because that checking out is the bread and butter of PayPal, and we have a best-in-class experience, and we feel there are numerous ways. We continue to improve that. We are going to increase buy now, pay later capabilities, which is on a tremendous role. And also move into a focused set of international markets from leveraging the LISC extension we just got in China for an incremental 5 years, leveraging off the Paidy acquisition in Japan and really looking at markets like Mexico and potentially Brazil to accelerate. So, a number of things that we are very focused on. And the final thing that I would say that John mentioned in his script and I did in mine as well is that we think that there is the opportunity for significant increased operating leverage, utilizing our scale and having our OpEx growth move back more towards normalized growth that we had pre-pandemic, which we think will help expand margins as we go forward. And that scale is clearly going to enable us to leverage improved unit economics going forward. And so those are kind of the operational changes where we are focused and why we have such confidence that as we go through the year, you will see acceleration of revenues and earnings improving at 20%.

Dan Schulman:

You bet.

Jason Kupferberg:

Thank you, guys. Appreciate it. So, I know you have said that you are positioned to achieve the medium-term revenue and EPS targets over the last 3 years of the 5-year guidance period. So, are we to assume that you expect to be below those levels when we look at the 5-year CAGR basis in its entirety? And I guess, if not, if you still think you can achieve these targets on the 5-year basis, what would really drive the necessary increase in engagement? Thank you.

Jason Kupferberg:

Okay. Appreciate the clarification.

David Togut:

Thanks so much. This was touched on a bit earlier, but given the 2022 headwinds you have discussed, what are some of the structural changes you see sustaining as we enter 2023, for example, you have called out 20% plus expected revenue growth as you exit 2022. And then related to that, with the pivot to increase focus on growing engagement? What’s the timeline of new applications we should watch for in the expansion of the PayPal super apps?

Dan Schulman:

Just add to it a couple of things. One, obviously, we feel like supply chain issues will work their way through. This actually is impacting quite profitable revenue streams for us like cross-border. When we look at export out of China, that’s double-digit negative, and it’s typically double-digit positive for us, and that will turn its way around going forward. So, we know some of these things are temporal and will change over time. But we wanted to be measured in the guidance that we put out for this year. And on the digital wallet, we put out a ton of new functionality out there. We are just started to ramp the high-yield savings product that we are introducing with Synchrony. That started at the end of January. We are aiming to be 100% ramped with that by the end of Q1, early Q2. We are – have quite a number of people on the waiting list for that. And we want to really spend a lot of our efforts this year, enhancing each of those various products and services to create best-in-class value propositions around every single one of them. I think we have a really comprehensive, good first step of our digital wallet. I think each of these areas can be linked better to each other. The value propositions can improve, we will add incremental features over time, but really our opportunity this year is expand our app penetration because we see what happens when that occurs. And then when people are in the app, introducing to more and more services because that has a tremendous amount of leverage in the business model.

Dan Schulman:

You bet.

Timothy Chiodo:

Great. Thank you for taking the question. When we think about your revenue growth, we like to think about what Venmo could contribute? And then we like to think about what the onus is on sort of the rest of the business, if you will. I know you mentioned that Venmo did roughly $250 million in Q4, and I think it was around that $900 million for the full year. Dan, you alluded to this earlier in terms of growth for next year, what could you tell us in terms of what is implied for next year’s or for fiscal 2022 in terms of Venmo growth and revenue monetization? And how that might look into 2023 and beyond as well?

Operator:

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

Gabrielle Rabinovitch:

Thank you, Mel. Good afternoon and thank you for joining us. Welcome to PayPal's earnings conference call for the third 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 the 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 fourth quarter and full-year 2021 and our outlook for 2022. 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 report 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, November 8, 2021. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

John Rainey:

Thanks, Dan. I'd like to start by thanking our customers, partners, and employees for helping us deliver a solid quarter. We're now reporting our results for the 7th quarter since the pandemic began, and it's remarkable to take a step back and reflect on everything that we've accomplished during this dynamic and unprecedented time. There's been a profound and enduring shift in global commerce and consumer behavior, which has significantly expanded our addressable opportunity. The powerful and accelerating secular tailwinds of increasing e-commerce penetration and cash displacement have helped to advance our leadership position in payments. To give you a better sense of the scale of growth we've experienced, it took 20 years for PayPal to reach $600 [billion] (ph) in annual payment volume, which occurred in 2019. Only 2 years later, we crossed $1.2 trillion. Relative to 2019, we've seen significant growth across our key performance indicators, including active accounts, engagement, TPV, revenue, EPS, and free cash flow. At the same time, we're operating in a complex environment. The macroeconomic landscape is currently characterized by varying rates of reopening activity globally and influenced by short-term supply chain challenges, inflationary pressures, and concerns related to consumer sentiment. These factors contribute to a backdrop that continues to make forecasting more challenging. Our third quarter performance demonstrates the strength of our diversified platform, our global reach, and the scalability of our business. Notably, we delivered these results against tough year-over-year comparisons and in the quarter where we faced the most acute pressure from eBay's payments transition. For the quarter, we are reporting revenue of $6.2 billion representing growth of 13% on both a spot and currency neutral basis. eBay Marketplace's revenue declined 67% to $235 million and contributed less than 4% of total revenue, versus approximately 13% last year. Excluding eBay, revenue grew 25% year-over-year, and 26% on average for the last 2 years. This 2-year compound annual growth rate, is particularly notable. Throughout 2021, this growth rate has been consistently strong at 25% and 26% in the first and second quarters respectively. I would also like to provide some context for our performance relative to our expectations when we provided third quarter guidance in late July. First, travel volumes strengthened in June and July. This trend then reversed in August and September due to concerns related to the Delta Variant. Second, back-to-school spending was somewhat softer than we had expected. While our overall performance was well within our guidance, we saw moderation towards the tail end of the quarter and exited at a lower growth rate than we had predicted. In the third quarter, transaction revenue grew 10% to $5.6 billion. This growth rate reflects the steep decline in eBay revenue in the quarter. Excluding eBay, transaction revenue grew 23%. Other value-added services revenue grew 50% to $575 million. This performance was driven by increased revenue from Synchrony, and accelerated recognition of loan servicing fees from the PPP program. In the third quarter, total take rates, was 1.99% consistent with the second quarter and a decline of 22 basis points from last year. The mix effect of eBay contributed to approximately 55% of this decline. The blended take rate on eBay volumes this quarter was 2.43% compared to 4% in Q3 last year. The remainder of the decline was primarily driven by reduced currency volatility in the quarter, which resulted in a lower growth rate in foreign exchange fees, as well as merchant mix and growth and bill payment volumes. The 25-basis point decline in transaction take rate was driven by these same factors. The third quarter was another strong quarter for volume-based expense performance. Transaction expense as a rate of TPV was 83 basis points, an increase of 1 basis point versus last year. Transaction losses improved 4 basis points and represented 9 basis points as the rate of TPV. This level of loss performance is consistent with last quarter, matching the lowest transaction loss rate in our history. In the quarter, loan origination activity increased and we ended Q3 with $3.7 billion in net receivables representing sequential growth of 13%, and 43% growth relative to last year. Growth in our short-term installment pay portfolio was the primary driver of this increase. Strong performance of our loan portfolio, more stability in macroeconomic trends, and the mix of shorter duration originations from our installment pay products, resulted in our reserve coverage ratio declining to 11.6% from 14.9% at the end of the second quarter. The net effect of credit provisioning on credit losses in the quarter, inclusive of originations and reserve releases, resulted in a benefit of $25 million, and year-to-date, we released $300 million in reserves. Overall, volume based expenses grew 20% and represented 46% of revenue, resulting in a transaction margin of 54.2%. I'd now like to cover our non-transaction related operating expenses. These expenses increased 17%, representing 30% of revenue. In the third quarter, our rapid pace of innovation continued. We had an exciting cadence of product introductions, including our new digital wallet apps for both PayPal and Venmo, the launch of Crypto buy, hold, sell in the UK, our goods and services P2P experience in Venmo, and cash back to Crypto with the Venmo credit card. To support and advance our key initiatives, we continue to invest aggressively in technology and development, and sales and marketing, including increased spending on customer acquisition and engagement strategies. These expense buckets drove 70% of the increase in non transaction related operating expenses. On a non-GAAP basis, operating income was essentially flat to last year and our operating margin was 23.8%, and on a 2-year basis, the compound annual growth rate for operating income was 20%. For the quarter non-GAAP EPS grew 4% to $1.11. This includes an approximate $0.29 per share headwind from the decline in eBay Marketplaces, transaction margin dollars. We ended the quarter with cash, cash equivalents and investments of $20 billion. In addition, free cash flow grew 20% to $1.3 billion, representing 21% of revenue. I'd now like to discuss our outlook for the remainder of 2021, as well as our preliminary thoughts for 2022. For 2021, we now expect revenue to be in the range of $25.3 to $25.4 billion, an increase of approximately 18% from last year. This represents a 2-year compound annual growth rate of 19%, and excluding eBay, we now expect 2021 revenue to grow 28%. We expect our operating margin to be in line to last year, which was the highest in our history. This performance reflects our strategic investment spend throughout the year, as well as the negative transaction margin dynamics resulting from eBay, offset by the benefit from the release of reserves. We now expect non-GAAP EPS for the year to be approximately $4.60, a 19% increase on top of the 31% growth last year. In our 2-year basis, this is 25% growth. In addition, we expect to generate approximately $5.2 billion in free cash flow, representing $0.21 of free cash flow for every dollar of revenue we earn. As a result of this update to our full-year guidance, we expect fourth quarter revenue to be in the range of $6.85 billion to $6.95 billion. This represents approximately 13% growth at the midpoint. We also expect a $1.12 in non-GAAP EPS, representing 4% growth. While the impact from eBay's payments migration came in consistent with our expectations for the quarter, relative to the beginning of the year, the headwind increased significantly. Until recently, we believe we could absorb this additional pressure and still deliver on our prior guidance, and while we came within our revenue expectations for the third quarter, the contributors to our revenue growth were somewhat different than what we had expected going into the quarter. Towards the end of the quarter, we also began to see growth rates coming a little lower than planned. We're off to a solid start in the fourth quarter, but growth rate still remains slightly below our prior expectations. In addition, retail supply chain and labor market concerns which may impact the important holiday season have led us to adopt a more cautious stance for the fourth quarter. That said, in recent days, we've seen improvement. At this point in time it's difficult to say definitively whether the stronger turns will persist throughout the quarter, or if this improvement is a pull-forward of consumer holiday activity. Relative to the guidance provided at the start of 2021, we now expect revenue to be about 0.5% lower for the year, despite much more pressure from eBay than we had initially expected. Adjusting for the additional pressure to revenue growth from eBay, our revised 2021 guidance is actually ahead of the outlook we provided at the start of the year. In providing quarterly and annual guidance since July of last year, our goal has been to responsibly balance transparency with reliability and certainty. At the same time, we've also tried to emphasize the complexity of forecasting in this environment. We are taking what we view to be a prudent step in adjusting our outlook. But let me be very clear, our key strategic initiatives are on track and performing very well. The initial response to our new digital wallet experiences has been very strong, and the implementation of our new headline pricing in the U.S. has been successful with no discernible impact to merchant activity. The underlying strength, diversification, and resilience of our business on an absolute level, and relative to pre-pandemic are unassailable and position us to remain on offense regardless of short-term headwinds. Our ability to sustainably deliver strong growth at our scale is indicative of the network effects of our business and our competitive positioning as a global leader in digital payments at the intersection of the powerful secular tailwinds of e-commerce penetration and cash displacement has never been stronger. As it relates to our expectations for 2022, we'd like to share some of our initial thoughts and the assumptions we're making for internal planning purposes. We are currently in the midst of our budget resource, and investment planning process for next year. In addition, how we exit the year, as well as the status of some of the exogenous factors that Dan and I have already discussed, are also important inputs for the year ahead. On a preliminary basis for 2022, we expect revenue growth in the high teens. If we had to put a point on it today, we'd likely anchor it at about 18%. It's also important to appreciate our expected trajectory of revenue growth. Due to the cadence of eBay's payments migration, as well as the stimulus measures earlier this year, we expect the first quarter next year to have more difficult comps and be our lowest growth quarter. Our plans are for revenue growth to then accelerate through the year, and to exit 2022 at a revenue growth rate in line with or ahead of our medium-term guidance. Similar to 2021, we expect that our growth rates will exceed industry growth rates by a healthy margin. Given the ongoing planning that we're still doing, we will guide EPS growth when we report Q4 results early next year. That said I'd like to provide some color on how we're thinking about it. We see significant investment opportunities across our key priorities. In the past few years we've accelerated our pace of product innovation to better serve our growing network of more than 400 million consumer and merchant accounts. We are investing to advance our product roadmap, increase our relevance for customers, and drive daily engagement, and to support these initiatives, we expect our non transaction-related expenses to grow in the high single digits in 2022 on a base that will grow 20% this year. It's also important to note 2 factors that will have an impact on our EPS growth next year. First, we will lap the benefit we realized from the release of the credit reserve this year, and second, we expect our effective tax rate to increase from the lapping of one time favorable tax adjustments. We expect these 2 items to result in an approximate 10-point headwind to non-GAAP earnings growth in 2022. That said, we remain very confident in the medium-term guidance we provided at our Investor Day earlier this year. We're witnessing the pull forward at e-commerce and displacement of cash continuing at an undiminished pace, even as reopening occurs, it's also true that the most difficult year in the transition away from eBay will be largely behind us as we move into 2022 and we expect our revenue and TPV growth rates to accelerate. We believe that investing in our business is more important than ever before, given the opportunities we see in front of us, and while we certainly expect our margins to increase over the long-term, we don't want to be so overly focused on that for one quarter, or one year to the next, that we don't invest appropriately. We're playing in this space to win. We are well-positioned to capture the immense opportunity ahead and see a clear path to achieving our financial and strategic objectives. Our powerful 2-sided platform focused on execution and mission-driven culture, backed by the tailwinds of digital commerce, set us up for success now, and in the years to come. Before I turn it back over to the Operator for Q&A, I would like to spend a moment discussing our approach to capital allocation. Our business is characterized by its very powerful cash flow generation. Since separation, we generated approximately $22 billion in free cash flow. We've returned nearly $10.5 billion in cash to shareholders in the form of share repurchases, and allocated approximately $13 billion in cash to acquisitions and investments. We remain committed to both a disciplined capital allocation and to balancing organic and inorganic growth investing to drive shareholder value creation. Inorganic opportunities are accelerant to our growth plans and to achieving our long-term aspirations. It's important to note that our medium-term outlook does not rely on acquisitions. At the same time, we will continue to be opportunistic in executing our strategic priorities, shaping the future of payments, and advancing our leadership position. With that, I will turn it back to the operator. Operator, please go ahead.

Tien-Tsin Huang:

Thanks so much. Real exciting to hear about the Amazon news. I noticed a lot to talk about here, but I wanted to ask on the market rumors on Pinterest if you don't mind and I know you are not pursuing a deal at this time, But just wanted to ask if your appetite to do a large deal is still there? If your longer-term outlook hinges on adding any assets like that with different revenue sources like advertising? I know, John, you said you're not counting on M&A for mid-term, just thinking a longer-term here. Thank you.

John Rainey:

I think you covered a lot of it, Dan. I just would add, Tien-Tsin, that we laid out what we believe to be a very compelling case at our Investor Day around value-creation over the next 5 years. That was entirely an organic plan and remain so. But that said, we don't want to sit here on our hands and think that that's good enough. If there are opportunities that are out there that create even more value creation, it's our responsibility to look at those, and so that's where deals of this size may come in sometimes, but we take capital allocation as a very serious activity for us, and then arguably one of the most important, and so as they have said we have a lot of rigor around that, and thus far nothing has matched those rigorous hurdles for us. But I think and the management team shares a belief that we have the same opportunity over the next 5 years to create value that we just realized over the last 5 years. But if we can do more than that, then we should do more than that, and so that's why we explore every opportunity, but the growth plans that we laid out in the early part of this year at our Investor Day are entirely organic.

Colin Sebastian:

Good afternoon everybody. So pretty big news here with Amazon on the Venmo integration, especially given how protective Amazon is over their checkout flow, so congrats there and it might be helpful to expand a bit on what you talked about Dan around the agreement such as are the economics with Amazon similar to other marketplace deals that you have in place, are there opportunities to expand the relationships to other PayPal brands and services and maybe when in 2022 we can expect that to show up on the site. Thanks very much.

John Rainey:

Colin, I'll just add real quickly that Dan and I both appreciate that the investor community probably is getting tired of us talking about eBay and eBay results, but arguably not more so than we are, but this is the other side of that coin. It's as simple as that. I mean this would not be allowed had we not taken the steps that we had, and so we're quite excited about this and what it bodes for the future.

Lisa Ellis:

Thanks. Good afternoon. I'm going to focus on the roll out of the new PayPal and Venmo apps. I know you made some comments in the prepared remarks, but can you elaborate a bit further, give a little more color on the early impact you're seeing maybe on user growth, engagement growth, etc., including maybe some aspects so far that have surprised you? Thank you.

Operator:

Thank you. Next question comes from the line of David Togut of Evercore ISI

Dan Schulman :

Okay. David, let me talk very quickly about Q3 and then I'm going to have John talk about our Q4 guidance and our confidence in 2022. So you're right, actually, if you look at Q3, and let me just talk about revenue, TPV, and maybe engagement, as 3 metrics on that. The way that I think about our business right now is what's happening on our MS business. Because eBay is a temporal thing, it's just going through the system right now. It's less than 3% of our TPV, it’s less than 4% of our revenues, and dropped, and so really our business is our MS Business going forward. And if I look at revenue, revenue growth. I think this is really interesting because I examined this quite carefully. If I go back 5 years and look at our MS revenue growth, in Q3 of 2017, it was 24%. In 2018 in Q3, it was 17%; 2019 was 23% then it jumps up to 26% in the middle of the pandemic, Q3 2020 and Q3 2021, this quarter it is 25%, and so like people talk about reopening stuff, like that is enough. Our MS business is going from strength to strength. We have seen a leap forward in digital, and that is continuing, if you look at it in our MS and John will talk about it in Q4, and as we look next year. Same thing on TPV. TPV in Q3 of 2018. MS, I'm talking about MS, was 27%, it jumped up to 29%. Then in Q3, 2020 it jumped to 40% and over that 40%, we're growing this quarter at 31%, and so these are all really, really strong numbers, and if I look at even like transactions, which I think it's really interesting, we did 4.9 billion transactions in Q3 this last quarter. If you go back a year ago, we did about 4 billion, we're almost up a billion transactions in a year in the quarter, and our transactions ex-eBay are up 31% year-over-year. Our TPA transactions were active, double-digit growth for the second quarter in a row. Again, ex-eBay in the third quarter, our TPA was up 18%, and so these are, yes, of course, we get hit by some of these exogenous things that go on. But if I look at the strength of the core business every single metric is way above, even our forecast is way above our medium-term guidance, and that's kind of like what gives us just a ton of confidence, and we are obviously being, I think appropriately cautious and conservative as we look forward at this time, but I feel like if I look at the what the real part of our business is every metric is trending pretty strongly right now.

Operator:

Thank you. Next question comes from the line of Darrin Peller with Wolfe Research. Your line is open.

Dan Schulman :

Sure, so let me talk a little bit about NNAs. So $13.3 million in the quarter up about $2 million from last quarter, growing 15% year-over-year unlike a lot of companies that experienced growth during the COVID time, and then unwinding our growth remains incredibly strong on the NNA side. I mean, think about it, in the minute that we have been talking, so far Derrin, we put on about 100 consumers and 9 new merchants. We're putting on 1.5 consumers every second of the quarter, every 6 seconds we've put on another merchant, so really unbelievable. And if I look 5 years ago, you remember this, 5 years ago we put on 13 million Net New Actives for the year we just had this quarter alone we've put on a 110 million Net New Active since January of 2020, and as we said, I think in our press release we expect to end the year in north of 430 million actives on the platform. So you know obviously continued strong growth, but as you look forward to that 750 million, there are 2 places that our Net New Actives come from. One is top of the funnel, and top of the funnel is actually pretty strong right now and remain so. It's just kind of a must have platform for merchants and consumers and scale begets scale in this business. But as you get bigger and bigger, the bottom of the funnel becomes equally, if not even more, important, and so reduction in churn becomes a really important element of our ability to get to the $750 million. That's why we're so excited about what we're seeing in terms of our TPA numbers again normalize it, ex-eBay up 18%. Last quarter, I think it was up 17% double-digit growth even with eBay and 2 quarters in a row, some of the things I was talking to Lisa about in terms of the engagement on the app, those are things that the more people engage, the more people get cash cards and start utilizing that service offline, we see halo effects inside the business, Buy Now, Pay Later all of that that actually effects churn rate, and if we can keep a consistent top of the funnel, maybe even improve that a little bit, but reduce our churn rate, you'll start to see Net New Actives actually accelerate going forward and so we remain so quite confident in the 750, but that's what the drivers are of that Derrin.

James Faucette:

Thank you very much and thanks for all the color and detail of things that you're going through. John, I know you kind of touched around this in your commentary, but if we think about all the irons and initiatives that you have in the fire right now, how should we think about kind of the medium-term progression of your operating margins? I know you also highlighted that you want to make investments, but just trying to make sure that we try to align our own expectations with how you're thinking about your planning purposes going forward. Thanks.

Operator:

Thank you. We have time for one last question, comes from Jason Kupferberg of Bank of America. Your line is open.

Dan Schulman :

Yeah, great question Jason. Thank you for that. If you remember we started the year at 50 million then we raised it 52 to 55 and then we thought we'd be towards the higher end of the 52 to 55. At this point, we're just being consistent with our revenue guide as well. We're going into the heart of the holiday, you're exactly right. If holiday season shapes up like it did last year, then we'll have more than 52 million organic because there would be a lot more of shopping, and if it doesn't, then we'll have a little bit less. So it's very consistent with us just being, I think prudent and cautious given some of the trends that we're seeing and others are talking about. Again, supply chain shortages, people can’t shop if consumer confidence is down, people do more in store, we’ll get less M&As than we typically might, . If the holiday season goes as it did last year, we'll get more than we are talking about right now. So I just think it's just very consistent with the guide that we gave, and again, as John mentioned, we had a good start to the quarter, we’ve had a pretty strong last week report too, but we're early on right now and so we don't like it when we are at the mid-point of our guidance or any of that kind of thing. We are used to being a Company that puts out things and then beach what it puts out, and we want to assure that what we say is appropriate and an appropriately conservative on it. So that's how I think I would answer that question, Jason.

Dan Schulman :

All right. Operator, thank you, Jason for that last question, really look forward to talking to all of you over the course of the next couple of days and weeks and at a number of different conferences, and thank you for all your support and your time today.

Gabrielle Rabinovitch:

Thank you, Wena. 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.

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 Merchants are repositioning for the post-pandemic world. Relative to our expectations, which were for reopening spend to closely track vaccination rates we've seen travel and events volumes return more rapidly. At the same time in markets that have reopened elevated e-commerce spending above pre-pandemic levels is ongoing and indicative of permanent shifts in consumer behavior On a two-year basis our business performance is remarkably consistent and very strong. Our second quarter results last year were exceptional. We grew revenue 22%, delivered a 28.2% operating margin and grew non-GAAP EPS 49%. Both the operating margin and earnings growth, were the best performance we've ever delivered it's remarkable that in the second quarter of this year when we're lapping this explosive growth, our business is continuing to perform at a very high level. Our results are even more impressive given the transitory headwinds we're facing from eBay this year. As part of eBay's managed payments transition we're absorbing a rapid migration of marketplaces volumes off of our platform. Further compounding this effect is the eBay benefited meaningfully from COVID last year, which makes the comparison this year even more difficult. For context from 2016 to 2019 the three-year compound annual growth rate for eBay Marketplaces revenue on our platform was approximately 2% and in 2020 this revenue grew 11% approximately 5 times faster Also worth highlighting is that through this period as eBay's contribution to our revenue declined from 22% to 13% we've expanded our operating margin 500 basis points given the accelerated pace of migration in 2021. There is a more pronounced effect on our operating margin and earnings growth profile this year. At the same time, this is truly a transitory effect on our results, which we now expect to be very largely contain to 2021 with much less of a tail into next year. And as we've discussed over the past several quarters, near-term forecasting continues to be complex given the global macroeconomic backdrop various stages of pandemic recovery and differing tasks of reopening. It's with this orientation in mindset that we head into the back half of 2021. Before discussing our outlook for the remainder of the year, I'd like to highlight for second quarter performance. Total payment volume grew 40% at spot and 36% on a currency neutral basis to $311 billion. Our Q2 TPV grew at a two-year compound annual growth rate of 34% accelerating from 33% in Q1 and indicative of the strong momentum in our business. Versus the second quarter last year Merchant Services volume grew 43% currency-neutral, a resurgence in travel and advance as well as core payment volumes contributed to this performance. This quarter, eBay had a much greater effect on our TPV then in the first quarter. In Q2, eBay marketplaces volumes declined 41% currency-neutral from last year. This is in comparison to a 3% decline last quarter. eBay represented 4% of our volume in Q2, down 512 basis points from last year. In addition to lapping elevated growth during the pandemic, we saw a faster ramp of the payments transition than what we had expected earlier this year, which resulted in a larger decline in Q2 volume. Given the speed at which we're seeing intermediation progress our plans now contemplate nearly 100% completion of the merchant migration by the end of the third quarter. This accelerated timeframe means that while we expect a similar drag to our volume revenue and earnings growth in the third quarter this impact lessens in Q4 and begins to tail off from there. As a result, we will have a much cleaner exit to 2021. Revenue increased 19% on a spot basis and 17% currency-neutral to $6.24 billion. Transaction revenue grew 17% to $5.8 billion and on a two-year basis transaction revenue grew 22.3% in Q2 versus 22.7% in Q1 of this year. In addition to the consistency of our results, this performance is even more remarkable excluding eBay. In the second quarter, eBay Marketplaces revenue declined 51% in comparison to Q2, '20 and 27% sequentially. Our revenue, excluding eBay, grew 32%, an 11 point acceleration from last year's already strong second quarter. Other value-added services revenue grew 40% on a spot basis and 36% currency-neutral to $441 million. These results were driven by strengthening credit performance and portfolio growth partially offset by lower interest income on customer balances. In the second quarter transaction take rate was 1.86% and total take rate was 2.01%. The mix effect of eBay contributed to more than a third of the 37 basis point reduction in take rate. The blended take rate on eBay volumes this quarter was 3.22% in comparison to 4.1% in Q2 last year. The remainder of the decline was primarily driven by reduced currency volatility in the quarter, which resulted in lower growth rate in foreign exchange fees, a decline of $122 million from foreign currency hedges recorded as international transaction revenue and growth in bill payment volumes. Bill payment is a vertical, characterized by both a lower take rate and an overall lower cost of funding than our e-commerce volumes, Q2 was another great quarter of volume based expense performance. Transaction expense came in at 81 basis points as a rate of TPV this year relative to 83 basis points last year. Transaction loss as a rate of TPV was a record low 9 basis points versus 12 basis points in Q2 last year. The net effect credit provisioning on credit losses in the quarter, inclusive of originations and reserve reversals resulted in a benefit of $104 million. In the quarter, we had an increase in loan origination activity and ended Q2 with $3.9 billion in gross receivables. reflecting sequential growth of 11%. Strong performance of our loan portfolio, improving macroeconomic trends and the mix of shorter duration originations from our instalment products resulted in our reserve coverage ratio declining to 14.9% from 21.4% at the end of the first quarter. As a result, transaction margin dollars grew 19% in the second quarter and transaction margin reached 56.8%. I'd now like to cover our non-transaction related operating expenses. Overall, these expenses increased 27% and represented 30% of revenue. These are higher growth rates than what we've incurred historically, but as I suggested before, we believe that there has never been a more important time to invest in our business and the secular tailwinds in our business has perhaps never been stronger. In Q2, we again invested aggressively in product innovation and our go-to-market initiatives. Sales and marketing increased 68% in the quarter and technology and development spend grew 23%. On a non-GAAP basis, operating income grew 11% to $1.65 billion and our operating margin was 26.5%. This includes an approximately 12% or $360 million decline in transaction margin dollars from eBay Marketplaces. Normalizing for the reserve build last year and subsequent release this year, non-GAAP operating income declined 7% and operating margin was 23.9%. And on a two-year basis, the compound annual growth rate for operating income is 29%. For the second quarter non-GAAP EPS grew 8% to $1.15. This includes an approximate $0.27 per share headwind from the decline in eBay Marketplaces transaction margin dollars. Adjusting for our increased credit provisions last year and this year's release of reserves, EPS declined 9%. And on a two-year basis, this represents 27% earnings growth annually. We ended the quarter with cash, cash equivalents and investments of $19.4 billion and in addition, we generated $1.1 billion in free cash flow. I'd now like to discuss our outlook for the rest of 2021. Our business is performing exceedingly well, and overall, consistent with the outlook we provided on our last call. Given our strong year-to-date performance and our expectations for the back half, we're raising our TPV outlook and reiterating full year revenue and earnings. We now expect TPV growth to be in the range of 33% to 35% given the strong volume trends in our business. We continue to expect revenue for the year to be approximately $25.75 billion representing 20% growth on a spot basis. In addition, we continue to expect non-GAAP earnings per share to be approximately $4.70 or growth of approximately 21%. We raised our 2021 revenue outlook by $250 million or approximately one point of growth when we reported our first quarter results in May. We're now absorbing more pressure from eBay than we had previously expected. Our current outlook contemplates an approximately seven point negative impact to revenue growth for the year. This corresponds to an approximately $0.85 negative impact to non-GAAP EPS from reduced transaction margin dollars. We're pleased that the strength of our platform, and the diversification of our business is allowing us to maintain this elevated outlook. In addition, we expect to generate more than $5 billion in free cash flow or approximately $0.20 of free cash flow for every dollar of revenue. Now turning to guidance for the third quarter. This quarter we're up against our toughest revenue comparisons versus last year. In Q3 20, we reported 25% revenue growth, our strongest performance for the year. As a result of this dynamic as well as eBay's managed payments transition our plans had always assumed that in Q3 we would report our lowest level of quarterly revenue growth for the year. However, now planning for eBay's drag on our revenue growth to be greater than previously expected resulting from both the accelerated pace of merchant migration in international markets as well as some additional core pressure, which magnifies this result. For the third quarter, we expect revenue to be in the range of $6.15 billion to $6.25 billion. At the midpoint this represents growth of approximately 14% of spot and includes about 8.5 points drag from eBay or approximately $465 million negative impact. On a two-year basis, inclusive of this drag, our guidance represents 19% growth. We also expect non-GAAP diluted EPS to be flat to last year or approximately $1.07 reflecting increased investments to support our growth initiatives and the pressure, we're facing from eBay. Our financial performance over the first half of 2021 has been very strong and consistent with the guidance we've outlined at the outset of each quarter. At the same time the environment in which we're operating while more stable than a year ago continues to be very dynamic and more challenging to predict than normal. Adding to the complexity is this exercise a predicting eBay's transition for which we have less than perfect visibility. Each quarter we try to provide our best estimate of the level of performance that we believe we can deliver. Overall, our growth remains strong, and importantly we continue to see the categories that benefited from quarantine measures and shelter in place activities last year maintain higher levels of e-commerce volumes in comparison to pre-COVID levels. Our conviction in our ability to drive sustainably strong performance, and in the strength of our franchise has never been greater. This year we expect to process approximately $1.25 trillion of payments volume. We expect to grow revenue by 20% more than offsetting pressure to revenue growth of approximately 7 points from eBay and lapping our strongest year with 22% revenue growth. And given the momentum we have in development and innovation and the pace of scale of the new experiences, we're bringing to our customers we are investing in our business at record levels. Further, last year we grew earnings 31%. On top of that performance this year, we plan to grow our earnings by 21%. Importantly, our team has never been more focused or aligned around the shared goal of being the leading digital payments company in the world. Last year was a pivotal moment in our history and this year we're building on that foundation and continuing to realize our ambition for greater relevance, ubiquity and impact as a global payments leader. We look forward to sharing more of our progress with you. With that, I'll turn it over to the operator for questions.

Tien-Tsin Huang:

Thank you. Thanks so much and thanks for all the details in the slides here. Good, 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 1 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 moving pieces here, that would be great. Thanks.

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 a 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.

Dan Schulman:

Absolutely.

Dan Schulman:

That’s part of the system exactly, right. Yes.

Dan Schulman:

Thanks, Tien-Tsin.

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?

Dan Schulman:

And if I can maybe complement some of John's comments there, first of all, I do want to say this about 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 Alibaba 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 this 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.

Dan Schulman:

Yeah, you bet.

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.

James Faucette:

Thanks a lot.

James Faucette:

Thanks for clarifying that, Dan.

Operator:

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

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 into 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.

Operator:

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

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 [ph]. 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.

Colin Sebastian:

Great, thanks guys.

Operator:

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

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.

David Togut:

Thanks so much, Dan and John

Operator:

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

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 [ph] 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.

Operator:

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

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.

John Rainey:

All right, thanks, Jason.

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.

Gabrielle Rabinovitch:

Thank you, Gabriel. Good afternoon, and thank you for joining us. Welcome to PayPal's earnings conference call for the first quarter 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 the Investor Relations section of our website. In discussing our company's performance, we will refer to some non-GAAP measures. You can find the 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 second 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 report on Form 10-Q filed with the SEC and available on the Investor Relations section of our website. You should not place undue reliance on any forward-looking statements. All information in this presentation is as of today's date, May 5, 2021. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

John Rainey:

Thanks, Dan. I want to start by thanking our customers, partners and employees for helping us deliver an outstanding quarter. We recently marked 1 year into the COVID-19 pandemic. Notwithstanding the challenges that our teams have faced, our focus on execution and culture of collaboration are allowing us to deliver very strong results. We're off to a great start to the year. In Q1, we outperformed on both revenue and earnings and built on our operational and financial momentum exiting 2020. In looking at our results for the quarter, the year-over-year growth rates benefit from the comparison to a softer March last year when we absorbed the most meaningful negative COVID impact. That said, our business is growing at structurally faster rates than pre-pandemic. And as a result, we're raising our guidance for this year. Before discussing our updated outlook, I'd like to highlight our Q1 results. Total payment volume grew 50% at spot and 46% on a currency-neutral basis. This is the strongest quarterly growth we've ever reported. Our Q1 TPV grew at a 2-year compound annual growth rate of 33%, accelerating from 30% in Q4 and reflecting our strong momentum in user growth. Notably, while we typically experience a sequential decline in volumes from Q4 to Q1, this year, our volume grew 3% quarter-over-quarter. Versus the first quarter last year, merchant services volume grew 50% currency-neutral. And volume contributed by eBay marketplaces declined 3% on the same basis. In Q1, eBay represented 5.5% of our volume, down 53 basis points sequentially and down 260 basis points from Q1 last year. Revenue increased a record 31% on spot basis and 29% currency neutral to $6 billion. Transaction revenue grew 33% to $5.6 billion, representing 20 points of acceleration from last year on a spot basis and 8 points of acceleration sequentially. Strong performance across core PayPal, Braintree and Venmo drove these results. Excluding eBay, transaction revenue grew 42%, indicative of the ongoing strength of our diversified 2-sided platform. Other value-added services revenue grew 2% on a spot basis and 1% currency neutral to $412 million. These results were driven by strengthening credit performance, which was partially offset by lower interest income on customer balances. In the first quarter, transaction take rate was 1.97%, and total take rate was 2.11%. Nearly 1/3 of the 24 basis point decline in transaction take rate resulted from the mix effect of eBay. A reduction of $101 million in international transaction revenue from foreign currency hedges, growth in bill payment volumes and accelerating Venmo volumes also contributed to this decline. The 31 basis point decline in total take rate resulted from these factors as well as lower growth in other value-added services revenue. Volume-based expense performance was the strongest in our history. These expenses increased only 9% to $2.5 billion on 31% revenue growth. As a result, transaction margin dollars grew 52% in the first quarter, and transaction margin reached 57.8%. Normalizing for the macroeconomic-related credit loss provisioning last year, transaction margin dollars grew 38%. Going into the expense highlights. Transaction expense improved 12 basis points as a rate of TPV to a record low of 80 basis points, driven by both volume and funding mix. Continued improvements in our risk decisioning and mitigation strategies resulted in transaction losses improving 3 basis points to another record low rate of 10 basis points overall. In discussing our credit losses for the quarter, I want to provide additional context given the increased provisioning last year and the complexity in the year-over-year comparison. As a reminder, in Q1 2020, we increased reserves by $227 million for expected credit losses due to the deterioration in the macroeconomic environment. After taxes, this represented a negative $0.17 per share impact. During 2020, we increased our reserve coverage ratio and ended the year at 23%. In addition, our gross receivables balance declined from $4.5 billion at the end of the first quarter last year to $3.6 billion at the end of 2020. Tightened underwriting and strong repayment activity contributed to lower balances in our merchant loan portfolio. This decline was partially offset by growth in our consumer portfolio. These trends continued in the first quarter of 2021, and we ended the quarter with $3.5 billion in receivables. More favorable economic conditions and portfolio performance resulted in a partial release of reserves in Q1. This reserve release benefited credit losses by approximately $87 million and provided an approximate $0.06 benefit to EPS. As a result, at the end of the first quarter, our reserve coverage ratio declined to 21%. In the quarter, nontransaction-related operating expenses increased 31% and represented 30% of revenue, remaining essentially flat to last year. We are prioritizing growth. And to advance our key initiatives, we're continuing to invest more in sales and marketing and technology and development. On a non-GAAP basis, operating income was $1.67 billion, and our operating margin was 27.7%, our strongest performance for any first quarter. Normalizing only for the macro-related provisioning last year, operating income grew 46% and operating margin expanded approximately 300 basis points. In Q1, on this normalized basis and inclusive of our elevated investment spend, we earned an incremental $0.38 of operating income for every additional dollar of revenue generated. Non-GAAP other income declined by $39 million relative to last year. This was driven by reduced interest income from lower interest rates and higher interest expense from our debt issuance last May. The negative impact on non-GAAP EPS from the decline in other income was largely offset by a lower effective tax rate. For the first quarter, non-GAAP EPS grew 84% to $1.22. Again, normalizing for the $0.17 negative impact last year related to increased credit provisioning, non-GAAP EPS still grew 47%. We ended the quarter with cash, cash equivalents and investments of $19.1 billion. In addition, we generated $1.54 billion in free cash flow, representing 27% growth from the first quarter last year. For every dollar of revenue in the first quarter, we generated $0.25 of free cash flow. Now I'd like to discuss our updated guidance for 2021 and our guidance for the second quarter. This updated outlook reflects our ability to accelerate growth at scale at increasing rates of profitability as well as the underlying strength of our core business. For the full year 2021, based on our record first quarter performance and sustained momentum, we are raising our net new active TPV revenue and earnings outlook. Relative to our prior expectations, eBay's managed payments transition has accelerated, and we now expect a greater percentage of the migration to be complete by the end of the third quarter. This acceleration puts more near-term pressure on our revenue and earnings growth. At the same time, this more compressed timing allows for a cleaner exit in 2021. Broad-based strength in our Merchant Services business and improving credit performance allowed us to more than offset this impact. We now expect revenue to be approximately $25.75 billion for a growth of approximately 20% on a spot basis for the year. We are raising our expectations for revenue growth by 1 point while at the same time absorbing an additional 2 points of pressure to revenue growth from eBay. In addition, we expect to generate approximately 100 basis points of operating margin expansion this year relative to the more modest margin expansion we had guided at the start of the year. As a result, we now expect non-GAAP earnings per share to be approximately $4.70, representing growth of approximately 21%. Relative to the guidance we provided at the start of the year, this is an additional 4 points of non-GAAP earnings growth in 2021. We're executing from a position of strength and seeing strong adoption of our new products and services. Our updated guidance includes increased investment in our digital wallet initiatives to drive further innovation, adoption and engagement. The strong underlying trends in our business and Q1 outperformance are allowing us to offset these incremental investments and the more pronounced eBay headwinds to deliver stronger earnings growth than we previously expected. For the second quarter, we expect revenue of approximately $6.25 billion, representing approximately 19% growth at spot. In addition, we expect non-GAAP earnings per share for Q2 to be approximately $1.12, representing growth of approximately 5%. As a reminder, last year, operating margin expanded more than 500 basis points in the second quarter. Favorable volume and funding mix dynamics, combined with COVID-related underspend and nontransaction-related expenses, contributed to the strong margin performance and resulted in 49% growth in non-GAAP EPS. This record growth last year creates a tougher comparison. On a 2-year compound annual basis, our earnings guidance reflects 25% growth. I'd also like to discuss our updated net new active outlook. We're raising our guidance for 2021 net new active accounts. Based on the 14.5 million additional accounts in Q1 and our current trends, we now expect to add in the range of 52 million to 55 million net new users this year. This is an increase from the 50 million net new actives that we guided to start the year. On top of the approximately 73 million users added last year, at our current pace, we'll add more new users between last year and this year than we did in 2016, '17, '18 and '19 combined. As a reminder, in Q2 last year, we added 21.3 million accounts and are now lapping this growth. Given this tougher comp, and the ramp of our initiatives throughout the year, we expect Q2 net new actives to be lower than Q1 and for Q3 and Q4 adds to be sequentially stronger. It's worth noting a couple of points related to our guidance and our business overall. First, the environment in which we are operating, while more stable than a year ago, continues to be very dynamic and more challenging to predict than in normal times. In many of our core markets, we're on the threshold of some degree of a return to normalcy. People are getting vaccinated. There's a return to physical experiences. Travel is resuming. Some of this is certainly pent-up demand from the void that resulted from COVID-19 over the last year. For some, perhaps it may be a reversion to the way things were prior to 2020. The pace and degree of this change and its impact on the trends on our business is challenging to predict from 1 quarter to the next with the same level of certainty that we have in normal times. This brings me to my second point, which is unassailable. Our business has and will continue to benefit from the changes in consumer behavior that have resulted from this pandemic, namely, the acceleration of the continuing trend of the growth in e-commerce penetration and importantly, the growing ubiquity of digital payment experiences. We continue to see elevated e-commerce spending well above pre-pandemic levels, even in countries and markets that have begun to reopen. We're positioned to be a long-term beneficiary of these secular trends and as we've repeatedly said, are investing heavily to help shape this outcome. That said, our short-term forecasting is susceptible to more variability than normal. To wrap up, our first quarter results underscore the ongoing strength, diversification and relevance of our scaled, two-sided global platform. We extended our leadership position in digital payments and delivered some of the best performance in our history on both an absolute and relative basis. And our strong trends across the business reflect enduring secular trends and continued business momentum. We're continuing to invest aggressively to drive accelerated growth in a post-pandemic world and capture the significant opportunity ahead. At the same time, our meaningful scale enables us to realize additional efficiencies, expand our operating margin and support significant free cash flow generation. With that, I'll turn it over to the operator for questions.

Darrin Peller:

Hey, thanks, guys, and great results here. When we look at coming out of last year's record NNAs, we thought 50 million was a good number, and now you're raising that. If you could just touch on the dynamics you're seeing around the net new actives, what's driving the upside even after these kinds of record rates? And especially as we go into reopening in the market, can you just talk through the activity and the churn levels? And then maybe on the other side of the funnel, if you could touch on the incremental users coming on, even as the world reopens, is it partnerships like Alibaba you mentioned today or other kinds of international? Or just really what's the big driving force for that confidence? Thanks, guys.

John Rainey:

Yes. I'll just add real quickly, Darrin. Like if you go back to a year ago or maybe three quarters ago, when you saw the record amount of net new actives that came in the second quarter, I mean I think that -- I mean, candidly probably surprised everybody, right? That was an enormous number. And then you think about it sort of like, "Okay, well, now what?" Because we've got to make sure that we're engaging these customers and they're using us in all the ways that they can. And we -- even going back to that point in time, a year ago, we knew that the second quarter this year was going to be our toughest comp from a net new active perspective. Even as Dan said, despite the improvements we've made in reducing churn, there's still a lot of pressure there. And so Q2 is going to be sort of the low point for the year for us. And then we expect 3Q and 4Q to see strengthening acceleration there. But the thing that I will say that sort of gives us confidence in this, and we've talked about this for a period of time, but we've consistently said that these have been our most engaged cohorts that we've ever seen. And we're continuing to see those trends. They haven't waned like what you might expect related to people returning to the physical world. And so that gives us the conviction around raising this and really what it bodes for the rest of our business as well.

John Rainey:

Yes. Thanks, Darrin.

Tien-Tsin Huang:

Thank you. Thank you. Really impressive results on many fronts. I wanted to ask on the first quarter revenue. So you beat your revenue guidance, looks like, by 3 percentage points. I think that's the widest margin of upside we've seen in a few quarters. So I'm curious, what surprised you? Can you rank for us what surprised you? What drove the upside? And how does it change your revenue outlook for the year? It sounds like it's enough to offset the bigger eBay drag, but would love it if you could rank it for us maybe. Thanks.

Dan Schulman:

Yes.

Dan Schulman:

I'll just add on to that, John, because I think that is the strength that we're seeing even in markets that are opening. If you think about, we did a 100-point raise in guidance for revenues, you had 200 incremental points of pressure from eBay. That's really, in effect, a 30-point raise on our core business. And that's because we are now seeing people living a digital life. And what used to be and for us as well, like 1 year, 1.5 years ago is there was a separate distinction between in-store or the physical world and e-commerce in the online world. And now what we're seeing is that it's just a digital world. Even as economies open, more and more of those payments are moving to digital. Think about it, like Uber would be a good example. As more and more rides start there, they're moving into a physical environment, but it's all done through a digital platform and digital payments. And so clearly, that is something that we see as a sustaining and growing trend going forward. And I think John mentioned cash is definitely being replaced. There's just a study done a week or 2 ago by one of the major networks that said anywhere between 60% to 70% of consumers are going to use cash less frequently, and that's moving to digital. It's moving to digital forms of payment, and it's moving to P2P. And by the way, when it moves to digital, it's moving predominantly to debit, which obviously is also great from a funding perspective on that. And so I think we have this portfolio of services right now, whether it be Zettle or Braintree or QR codes or just what's happening in the physical world that complements now what's happening in the online world with our more traditional products. And that's kind of a 1-, 2-punch that I don't think any of us really understood the extent of or the depth of the transition to a digital economy.

Operator:

Your next question will come from Lisa Ellis from MoffetNathanson.

Dan Schulman:

Yes. So we have had quite a number of conversations here in the U.S. and really across the world with the leaders of those regulatory bodies and some of the key players in government. I won't kind of obviously talk about the specifics of any of our conversations that we've had with them. What I would say is it is a conversation that is very much one of learning from each other, understanding the capabilities that each of us have, what some of the concerns that some of the central banks might have or governments, what some of the benefits of a platform like PayPal could do in various forms of how CBDCs could be issued. And I believe based on all my conversations that each country is going to go at different speeds. We're going to have different regulatory oversight in it. But there isn't one country around the world in which we've engaged in, where I don't think that they're envisioning a future that isn't one of a digitized Fiat currency. I think, obviously, there's a lot of synergy with digital wallets. There's a lot of interesting things as you think about next-generation technology that can add utility to payments, that can take down perhaps cost, the elimination of unnecessary intermediaries and certainly can speed the time in which somebody can access their money. So we've got a tremendous amount of really great results going on tactically with our cryptocurrency efforts right now. And we're excited about those. We're investing in those. But this whole idea around establishing a digital currency and blockchain business unit inside PayPal is to think about what is the financial system going to start to move towards? And how can we be a shaper of that, a leader within that and not a reactor to how that's happening. And that -- those conversations have been -- have gone well beyond my expectations in terms of the openness of governments and central banks to think about new ways of managing and moving money through the system.

Dan Schulman:

It is actually, yes.

Sanjay Sakhrani:

I had a question on the reopening trends seen thus far this year. And any discernible trends that you might have observed, like how it's affecting volume mix, funding mix and just overall engagement with the PayPal ecosystem?

Operator:

Your next question will come from Colin Sebastian of Baird.

Dan Schulman:

Yes, sure. So first of all, Venmo had another really strong quarter. TPV, up 63%. It's off to a great start in Q2 as well. One really interesting thing on that John and I were remarking on the other day, is if you look at the annualized TPV of Venmo right now, call it about $205 million, $210 billion of TPV. Think back when we went public, our TPV for the year was $285 billion. So you basically have another PayPal inside of PayPal when we went public a year ago. And there is such huge monetization opportunity on that. I think, obviously, we feel very confident in the $900 million, but that is scratching the surface of what Venmo can be. This is a huge base that's growing. And the great thing is that the team there is executing on all of their initiatives. Credit card, we knew is a great experience, but it's performing beyond our expectations, new sign-ups, transactions. That's what happens when you have a great value proposition consumer experience. Crypto launched at 1% ramp. It just went to 5% ramp. It will be 100% ramped by the end of this month, the end of May. And obviously, if you look at again surveys that have come out recently and you look at millennials, something like 74% of them anticipate that they're going to use crypto in the next year or 2 in some way. Business profiles growing above plan. We're going to be introducing things like goods and services by our protection. That's a huge revenue generator on the PayPal P2P side. That same thing will be happening on the Venmo side. Pay with Venmo, which by the way, is very little of this year's $900 million. But that Pay with Venmo is going to be the majority of revenues as you look out several years from now. And so we're really excited about that rolling out. And eventually, Venmo is going to move down the same path that the PayPal super app digital wallet is going down. It's going to become a super app itself, putting in more and more capabilities and services around, again, shopping and basic consumer financial services and payments. It has international expansion in front of it. And there's just so much opportunity. I think we've all been bullish on the potential of Venmo. We are now beginning to see it realized and we just think that -- just want to keep investing in that because the opportunity is quite large.

David Togut:

Good to see the strong growth engagement from Buy Now, Pay Later customers. Can you talk about your expectations for Buy Now, Pay Later for the balance of this year? More broadly, how you expect the most engaged Buy Now, Pay Later customers to engage in the PayPal ecosystem overall?

David Togut:

Thanks for all those great metrics. Just a quick follow-up on bottom of the funnel impact from the growth of Buy Now Pay Later.

Operator:

Your next question will come from Bryan Keane of Deutsche Bank.

Dan Schulman:

Happy to address that, Bryan. So again, I want to repeat the number because it's a whopping number. 38% incremental operating margins in the quarter. That's -- it really demonstrates the scalability of our platform, particularly when you think about the level of investment that we've had internally, and you can look at some of the year-over-year comps in our expense line items and get an idea of that. But I think there's a number of different areas, but a couple that obviously stand out are the transaction-related operating expenses of transaction expense and transaction loss. To have record lows in both those, again, like the improvements that we've made in our risk capabilities to drive down transaction losses has just been tremendous. And we start talking about this probably 5 or 6 quarters ago. And look, I don't know if we're going to come in at 10 basis points every quarter. I certainly would hope so. But that is a performance that was really hard to imagine a couple of years ago. But the improvements there that we've made in terms of the capabilities are definitely sustainable. On transaction expense, look, I think you can pick at any one part of our P&L. And like -- take rate as an example. We saw declines there. Some of that's related to mix, like we're obviously doing, as an example, more bill payment right now, which carries a lower take rate. Well, at the same time, it carries a lower transaction expense. And so we've always focused on that margin between the 2. And again, to have a margin, a transaction margin approaching 60% this quarter, we're really pleased about it. And so the obvious question is where does that level out over time? Does it go down from 80 basis points, does it go up from 80 basis points. It's tough to tell, but I certainly don't think that we're going to see levels that we saw pre-pandemic. There may be some inflation. But I think all of the mix changes in our business and what we're seeing around the pull forward of e-commerce, we would expect transaction expense to remain at lower levels pre-pandemic, which, again, gives us the just amazing leverage that we have on this platform.

Dan Schulman:

Yes. Thanks so much. Thanks you everybody, for all of your questions, and thank you for the time you spent with us today. I hope that all of you and your families are safe and healthy. We look forward to not just speaking to all of you soon, but hopefully seeing all of you soon as well. So again, thank you for your time. Take care and goodbye.

Gabrielle Rabinovitch:

Thank you, Gabriel. Good afternoon, and thank you for joining us. Welcome to PayPal’s earnings conference call for the fourth quarter and full year 2020. 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 the Investor Relations section of our website. In discussing our Company’s performance, we’ll 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 first 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 Report on Form 10-Quarter filed with the SEC and available on the Investor Relations section of our website. You should not place undue reliance on any forward-looking statements. All information in this presentation is as of today’s date, February 3, 2021. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

John Rainey:

Thanks, Dan. I want to start off by thanking our customers, partners and employees for helping us deliver a record-breaking year. 2020 was pivotal for PayPal and the broader payments industry, marked by rapid acceleration in digitization, cash displacement and e-commerce adoption. These secular trends have been shaping our sector for some time. That said, the rate of change we experienced last year, resulting from the widespread implications of the COVID pandemic, was profound and transformative. Crisis, which has led to hardship and suffering for so many, increased the urgency across our organization to serve our customers in new and innovative ways. Notably, the isolation defined by lockdowns and working from home actually resulted in greater collaboration and brought our teams closer together. We’ve entered 2021 energized by a greater sense of purpose and responsibility and ready to build on our strong momentum. Now, to our fourth quarter results. Total payment volume grew 36% on a currency-neutral basis. This is the strongest quarterly growth we reported in history and represents 14 points of acceleration from 2019. Our merchant services volume grew 40%, another record for PayPal, accelerating each quarter in 2020. Volume contribution from eBay Marketplaces continued to decline. We exited December with eBay representing less than 6% of our overall volume. Revenue in the fourth quarter increased 23% on both a spot and currency-neutral basis to $6.1 billion. Relative to the fourth quarter of 2019, U.S. revenue grew 18%, and international revenue grew 29% as the U.S. has a greater proportion of revenue from credit and the travel and events verticals. Transaction revenue grew 25%, representing 8 points of acceleration from last year on a spot basis. This growth was primarily driven by strength across our core PayPal business, including strong cross-border activity. Our core payments platform continues to deliver exceptional growth, with transaction revenue, excluding revenue from eBay, growing 30% in the fourth quarter, also an acceleration of 8 basis points from 2019. Other value-added services revenue increased 1% on a currency-neutral basis, reflecting incremental Honey revenue, offset by lower interest income on customer balances and less credit revenue. Honey contributed approximately 1.7 points of growth to total revenue and approximately 20 points of growth to other value-added services revenue. In the fourth quarter, transaction take rate was 2.05%, and total take rate was 2.21%. The 22 basis-point decline in transaction take rate resulted primarily from changes in volume mix with eBay’s contribution continuing to decline, bill payment and P2P volumes accelerating and a reduction of $97 million in international transaction revenue from foreign currency hedges. The 28 basis-point decline in total take rate resulted from these factors as well as lower value-added services revenue. In the fourth quarter, our volume-based expense performance was exceptional. These expenses delivered 216 basis points of leverage in the quarter, increasing 18% to $2.7 billion. Transaction expense improved 12 basis points as a rate of TPV to 84 basis points, driven by both, volume mix and funding mix. Transaction losses improved 5 basis points to a record low rate of 10 basis points. Credit losses were 3 basis points as a rate of TPV. Our credit loss reserve coverage ratio at the end of the quarter was approximately 23%, decreasing slightly from the third quarter. The combination of strong revenue and volume-based expense performance resulted in transaction margin dollars increasing 28% to $3.4 billion. In the fourth quarter, we generated incremental transaction margin dollars of $753 million, more than 2 times the incremental contribution last year. Non-transaction-related expenses grew 28%, reflecting increased investments in our key strategic priorities as well as growth related to our acquisitions. This higher level of investment contributed to a 56% increase in sales and marketing expenses and a 27% increase in technology and development spending in the quarter. Leverage across customer support and operations, and general and administrative expenses partially offset this increased level of investment. On a non-GAAP basis, operating income in the fourth quarter grew 29% to $1.5 billion. Our operating margin was 24.7%, expanding more than 100 basis points and representing our strongest performance for any fourth quarter. We continue to demonstrate our ability to deliver operating efficiencies and scale our platform at low incremental cost, while investing in our strategic growth priorities. Non-GAAP other income declined by $62 million relative to last year, driven by reduced interest income from lower interest rates and higher interest expense from our debt issuance last May. The negative impact on non-GAAP EPS from the decline in other income was offset by a lower effective tax rate. For the fourth quarter, non-GAAP EPS grew 29% to $1.08. We ended the quarter with cash, cash equivalents and investments of $19.2 billion. In addition, we generated $1.1 billion in free cash flow, representing 50% growth from fourth quarter last year. I’d now like to discuss our guidance for the full year and the first quarter. We’ve just completed the strongest year in our history, achieving record growth in net new accounts, volume, revenue, operating income, earnings and free cash flow. We delivered these results while absorbing meaningful macroeconomic headwinds affecting our credit business, the revenue and income effects of lower interest rates, idiosyncratic pressure on the travel and events verticals and the initial step down of volumes from eBay, post operating agreement. These headwinds persist as we move into 2021. And yet, our core business continues to perform at unprecedented levels. Our addressable opportunity has never been more expansive, and we’re confident we’ve never been better positioned to capture the benefits of this accelerated secular growth. We believe the effects of the pandemic on consumer behavior and business transformation are enduring and sustainable. We also expect e-commerce to drive continued strong payment volume and transaction growth globally. While it appears that additional stimulus measures will support the path toward a more sustained economic recovery, the backdrop continues to evolve and much remains uncertain. And as we’ve commented on several occasions over the past nine months, we’re focused on balancing transparency with certainty as we develop our outlook. It’s with these considerations that we’re providing our full year guidance, which is our best estimate at this time. For the full year, our plans contemplate TPV growth in the high-20% range. We expect to generate revenue of approximately $25.5 billion, representing growth of approximately 19%, based on current spot rates. Included in our guidance is a headwind to revenue growth of approximately 400 basis points from eBay’s managed payments transition. In addition, our current forecast contemplates an approximate 200 basis-point impact from foreign currency translation as the U.S. dollar has weakened relative to 2020. As we’ve discussed previously, in 2021, we will absorb the greatest revenue impact from the loss of volumes from eBay. In the face of this pressure, we’re pleased to be guiding spot revenue growth at 19%. Equally important, once we are beyond the eBay transition, we expect our rates of growth for total payment volume, revenue and earnings to accelerate. In 2021, we also expect to deliver approximately 17% growth in non-GAAP earnings per share. This earnings guidance contemplates ongoing elevated levels of organic investment. We believe the structural tailwinds for PayPal have never been stronger. To fully realize these opportunities, strengthen our competitive positioning and advance our leadership in digital payments, sustained investment in our business is critical. Cost discipline, together with our ability to efficiently scale our payments platform, will allow us to generate modest operating margin expansion in 2021. In addition, we anticipate that below the line factors, namely higher interest expense and a higher tax rate in 2021 relative to 2020, will offset much of this margin expansion. For the full year, we expect to generate approximately $6 billion in free cash flow. Before I discuss our Q1 guidance, I’d like to contextualize how to think about the trajectory of our revenue and earnings performance for the year. This year, there are several dynamics that we believe will contribute to more durability in our year-over-year growth rates from quarter-to-quarter than our historic trends. These include lapping our 2020 performance, this year’s cadence of planned investments and product introductions, the roll-off of eBay volumes and our timing expectations related to the recovery of travel and events volumes and of a more normalized growth in our credit portfolio. Underlying our guidance for 19% revenue growth on a spot basis is our expectation that we’ll report our highest rate of revenue growth for the year in the first quarter, followed by relatively stable but more moderate growth in the second, third and fourth quarters of 2021. Our full year earnings guidance of 17% growth also contemplates delivering the highest rate of growth in Q1. In the second quarter, we anticipate non-GAAP earnings to be relatively flat year-over-year, primarily due to the outsized EPS growth we experienced in Q2 last year, which exceeded 49% as well as the expected timing of our investment spend. Then, in the back half of 2021, we expect a meaningful and sequential reacceleration in earnings growth. Importantly, throughout the year, we expect the absolute dollar performance of our business to be very strong. As we move through the year, we’ll keep you updated on how we’re tracking relative to this expected cadence. Consistent with my earlier comments, in the first quarter, we expect revenue growth of approximately 28% on a spot basis, with non-GAAP earnings growth of approximately 50%. In summary, last year was a year like no other. But, in all of the turmoil and difficulty that people encountered, one thing was clear in our business, PayPal has never been more relevant and needed than we are right now. Our industry, our Company is moving forward. The next five years will be very different than the last five, and we’re striving to shape that outcome, that future, a future where e-commerce and digital payments are not just a fallback when one can’t make it to a physical store or don’t want to handle cash, but instead a necessity, a necessity that is sought out as the preferred way for people to transact every single day. It’s a future where I expect that our scale, our brand of trust and security, and our leading solutions for merchants and consumers alike, will allow us to continue to create immense value for all of our stakeholders. With that, I’ll turn the call back over to the operator for questions.

Jason Kupferberg:

Good afternoon, guys. Congrats on the results. I wanted to ask about the new growth initiatives, and two-part question here, maybe one for John and one for Dan. First part is, does your guidance assume that the aggregate revenue contribution of these new growth initiatives will be enough to offset the 4% eBay headwind in 2021? And then, the second part is, among the various new growth initiatives, which have surprised you the most to the upside so far, and which did you perhaps think would be seeing a little bit more adoption to date than they have been to date?

Dan Schulman:

Jason, I’ll try and answer your second question there. So, that’s like asking me to choose, which of these are my favorite kids. And none of the product managers that are hanging [indiscernible] answer. So, look, we put out a couple of big initiatives into the markets. Our in-store to our crypto, to our Buy Now Pay Later, and honestly, all of them surpass our internal projections and they all are creating a halo impact that is really pleasing to see. I talked about kind of QR having a 19% halo effect. Crypto, yes, started off with a bang and just kept going and is continuing to go. But, in a surprise winner, if I had the envelope, I would talk about Buy Now Pay Later, honestly, as surprising me most to the upside. Since I’ve been here, I’ve never seen a product launch with that kind of scale so quickly. I mean, we talked about moving into the U.S. in October, we announced, and we had almost 3 million customers using Buy Now Pay Later, hundreds of thousands of merchants. By the way, that’s not the total number of transactions. We already saw in the quarter a 40% repeat rate on that as well. And so, it’s not just that you had customers in it. I mean, they’re just voting with their feed and moving forward. And we think that we have a value proposition that is second to none out there. First of all, we’ve got 350 million customers that we can bring their trust to PayPal. We know them. And so, our approval rates are higher we think than anybody else out there, when people sign up for Buy Now Pay Later. Second, it is no incremental cost to the merchant. I mean, all of the other competitors charge a pretty significant incremental cost. And for us we’re just charging the same take rate that the merchant had. It’s very, very light integration, which is why we saw well over 10,000 merchants integrate Buy Now Pay Later up the funnel really on the product pages and not at checkout. We’re beginning to see more and more of that as we come into the year. Another thing that is really interesting to me -- oh, here, the halo effect, by the way, very early days, it’s the halo effect. It’s about 15% increase in TPV. And we think all of that TPV so far is incremental TPV for us. But the other thing is we’re seeing a meaningful double-digit reduction in the cost of those transactions as well. And so, when you look at kind of the scale and you look at the value proposition the take up of merchants, and that’s continued on into the first quarter, this is clearly a home run for us and a winner. And it is not to dismiss any of my other favorite kids because they all had great years, but Buy Now Pay Later was probably the biggest surprise.

Dan Schulman:

Yes, you bet.

Tien-Tsin Huang:

I really enjoyed the presentation here. I wanted to ask on M&A, if that’s okay. I just wanted to check your appetite on acquisitions, and especially at this point of cycle, given that so many of these digital assets have been inflated in terms of valuation during the pandemic here. And any change in your thinking around M&A? I saw on the slide you had some great detail on your strategic investments, but how about M&A?

Dan Schulman:

Yes. I’d just add to that, Tien-Tsin. If you think about our need for acquisition, that -- what is our pace of organic innovation? And in 2020, we put out more product and services than we’ve ever put out before. I said, in my remarks that we’re going to step up that pace in 2021, and we’re going to go do that. When I look at all the investment we’ve made over the past five plus years in our tech infrastructure and our compliance and risk management, what that’s enabled us to do now is pretty radically accelerate the amount of software releases that we have. We put out last year, between config release and software releases some 60,000 releases. That was up 30% year-over-year at the time where we’re all working from home. So, our productivity has gone way up. Our developer toolkits are much improved, using modern programming language, you have a service oriented architecture. And by the way, all that’s happening while the number of bugs has gone down 25% in all of our releases from 2019 levels. And so, I’m really happy with the pace of organic innovation and our ability to deliver products. And that takes away a lot of our need to do acquisition. I would just build on John’s point. We obviously had a strong balance sheet, strong cash flow. We will be acquisitive going forward. But we’re going to look at that and as John said, in a very disciplined manner, we’re going to look at talent, types of acquisitions, where can we do maybe a smaller acquisition to bring in great talent in a particular area. We’ll look at geographic types of acquisitions where we may want to go after geography and there may be a player or two there that could help us leapfrog into that market, and we’ll look at that carefully. And if there’s a real capability that not that we can’t develop and do, but it’s going to take us too long to get there. Because what we’re trying to do on our roadmap, then we would take a look at that as well. Those are kind of the basic areas, I would say. So, I think we’ve got a good one-two punch between what we can do internally and what we can do from an inorganic perspective.

Operator:

Your next question comes from the line of James Faucette of Morgan Stanley. Please go ahead.

Operator:

All right. So, your next question will come from Darrin Peller of Wolfe Research. Please go ahead.

Dan Schulman:

Yes. Darrin, I think, when we look at the cohorts of net new actives from last year, which clearly incremental people coming on, over 50 demographic, 50 years old demographic, one of our strongest growth vectors that we’ve had. So, you’re really seeing new demographics come on to the platform. But, what’s really interesting to me is the engagement metrics of that cohort are also up substantially. We have double digit increases in a value per net new active, our 90-day engagement rates are up 13% plus over traditional cohorts. If you look at a normalized transaction for active spend, because this kind of gets a little bit lost because we’re including Honey net new actives in the denominator, and we also -- as you said, we put on 72.7 million net new actives last year. If you normalize that for 37 million that we would put on a typical year, because when you put somebody on to the platform, they don’t have all the transactions. They all didn’t come in on January 1, they come in throughout the year. And so, that puts pressure on it. But, our TPA, which is a real measure of engagement, normalized basis was grown 11.5%. That’s above any trend line that we have up to about 45.1 times a year. And so, our churn rates in general, because of that, are coming down. And when you have a base as big as ours right now, it is as much, maybe even more about the churn rate than it is the new adds coming in. There is plenty of demand to come onto our platform. But, when we see churn reduction, like we’re seeing right now, because of increased engagement, and that increased engagement is coming I guess again people who are just moving online, and because of these new products that are out right now, that people are just using a ton more, like crypto is a great example. Everyone has signed on for crypto. So, it is opening up their wallet at 2 times the level of what they did previous. And so, I think, that 50 million is a real good guide right now. We’ll obviously update, as we go on. But, we’re seeing a lot of really encouraging trends in the underlying cohorts that we’re bringing on, which gives a lot of confidence to that 50 million number.

Operator:

Your next question comes from the line of David Togut of Evercore ISI. Please go ahead.

John Rainey:

Sure, David. You packed in a lot in that question. So, let me just -- I’ll take them in reverse order. We still are seeing elevated levels of debit, and that’s consistent with what others have said across the ecosystem, although not at the levels that we saw in 2Q, and likely driven by the impact of stimulus measures at that point in time. Braintree continues to perform very well for us. But, it really suffers the brunt of the impact from the travel and events vertical, which was down 50%, five-zero percent for us. And so, that’s a pretty meaningful impact when you consider that that’s in excess of 10% of our volume. But, when you look at the areas of leverage for our business, so I think we will continue to see strong core PayPal trends, PayPal volume. And those tend to come at a higher transaction margin. At the same time, we’ve seen record performance in transaction expense and transaction losses. And those -- transaction expense will be impacted more by the mixes in our business. But, we expect those will be below the levels that we entered this pandemic with and we expect transaction losses to stay at these levels. So, we’re performing very well there. But, if you think about the remainder of our income statement, if you will, and all the other sort of non-volume related expenses, we’ve invested a lot obviously in the back half of last year and our guidance assumes that as well. But, we also demonstrated the ability for our business to scale very efficiently. And so, if you just -- we don’t give expense guidance for the year, but you can back into it based upon our revenue and earnings growth. And, that expense growth that we’re assuming in 2021, about 75% of that is related to investments we’re making in the business, discretionary go to market initiatives, all of the things we’re doing to help accelerate or continue these trends. And so, that leaves the remainder 25%, which is really just demonstrating the scalability of our model. And I’ll end my question with one data point that I think is reflective of how successful that model is. And so, you know, David, I often talk about the incremental margins in our business. And so for every dollar of revenue that we brought in, in the quarter, what was the profitability related to that? And in the fourth quarter, the organic incremental operating margin was 32% for PayPal. So, for every new dollar of revenue we’re bringing in, it’s got a higher margin on it than what the rest of the business does. That’s a model that we find very appealing and one that we want to continue to keep our foot on the gas on. And that’s why that even in a year, like 2021, when we have meaningful investment in our business, we can still at least guide to a point where we’re expecting modest operating margin expansion.

Operator:

Your next question comes from the line of James Faucette of Morgan Stanley. Please go ahead.

John Rainey:

Sure, James. The revenue guide of 19% growth for the year, we sit here in February of 2021, and there’s still uncertainty. There’s uncertainty with the level of stimulus measures, the pace of the vaccine rollout. But there are some things that we’ve seen that certainly give a lot more confidence than where we stood nine months ago, sort of at the peak of the, concern and trepidation that people had around what could happen to the economy and the impact on everyone’s respective company. Some of the trends that we’re seeing that Dan talked about in his prepared remarks, they’re definitely sustainable. And there’s this movement to digitization and the pull forward of e-commerce that certainly stands to benefit us and others in this space. But, we provided sort of an approximate number, right? We said approximately 19%. There is not a range around it, like we normally do, because, quite frankly, that range would be somewhat artificial or arbitrary. It’s -- there are a wide range of outcomes that could happen. But, we feel pretty good about what we see in the business. And I think, it’s important to note that we are a pretty diversified portfolio of products. And so, we’re not just reliant on one thing. And I’ll give one example before I close my answer, but the travel and events vertical. So, I mentioned that in an earlier answer, like our baseline assumption on that 19% revenue growth is that as the -- as people begin receiving vaccines, there is pent-up demand for travel. People want to take that summer vacation in 2020 that they missed. And so, we’re assuming that we start to see a rebound in travel and events in the second quarter. And that certainly stands to benefit the Braintree side of our business. But channel things aren’t, if that’s not the case, then likely there’s been other concerns that result in people sort of lacking mobility that still stands to benefit us on the core PayPal business. So it’s -- I know it’s 11 months out that we’re projecting here. But, as we’ve moved through this, we’ve got more confident with some of the trends that we’re seeing and feel really good about that guide.

Colin Sebastian:

Great. Thanks, guys. Good afternoon, everyone. A lot of good stuff here, but hoping you could provide a little more color on the strategy to build out the presence in China? How you see the combination of GoPay and PayPal position from a competitive standpoint, both within the country as well as the cross-border perspective?

Operator:

Your next question will come from the line of Dan Dolev of Mizuho. Please go ahead.

Dan Schulman:

Yes. Dan, that’s a great question, kind of goes at the heart of a lot of our strategy. And we’re going to be talking a lot about that at our Investor Day next week as well. So, let me just very quickly say that we are seeing engagement levels already. I talked about it. If you normalize for Honey and all the incremental net new actives that we brought in that are bending our traditional curves. We’ve never really been above 9% or 10%. Normalized, we’re at about 11.5% of growth. Our churn rates are down. All of the new functionality that we’ve put into place, whether that be crypto or that Buy Now Pay Later, the Venmo card, QR codes, are adding to usage. They’re adding incremental TPV, they’re adding incremental transactions, ones that I didn’t mention is that people who use a PayPal product in-store. And again, these are early days on this, but those that are using it in-store, we’re seeing, Dan, 54 incremental transactions that are just in-store that don’t displace the online. It’s just -- it’s basically doubling the number of transactions we have. And so, as we start to build out our digital wallet really into the super app, that transcends across payments, commerce and financial services, all of that on a common platform, all of that leveraging common data elements and machine learning on top of that to give next best recommendations. I think we are going to see, as I mentioned in my opening remarks, a real bend in the historic rate of engagement. And it’s going to be all around that super app functionality in that digital wallet, moving well beyond just payments. So, I think, Dan, thank you for that great closing question. And I want to thank everybody for your time today. And I really hope that all of you and your families are safe and healthy. And we are looking forward to speaking with all of you again next week at our Investor Day. So, thank you for your time. And everybody, take care. Bye, bye.

Gabrielle Rabinovitch:

Thank you, Gabrielle. Good afternoon and thank you for joining us. Welcome to PayPal’s earnings conference call for the third quarter of 2020. 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 the Investor Relations section of our website. In discussing our company’s performance, we’ll refer to some non-GAAP measures. You can find the 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, the impact of our acquisitions and outlook for 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 Report on Form 10-Q filed with the SEC and available on the Investor Relations section of our website. You should not place undue reliance on any forward-looking statements. All information in this presentation is as of today’s date, November 2, 2020. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

John Rainey:

Thanks, Dan. I’d like to start by also thanking the entire PayPal team for their efforts to serve our customers and execute on our priorities. PayPal’s third quarter was one of the strongest in our history. The sustained momentum in our business allowed us to outperform. our results demonstrate the strength of our diversified platform, our global reach, the scalability of our business and our sustainable earnings power. Notably, we delivered these outstanding results against the backdrop of eBay’s managed payments transition, continued weakness in the travel and events verticals, and the decline in other value-added services revenue. relative to our expectations going into the third quarter, eBay’s payments intermediation proceeded faster than we had anticipated. In addition, the recovery and travel volumes were slower than our forecast, travel and events volumes, which represented slightly more than 10% of our TPV last year, were down 40% year-over-year. While this is an improvement from the decline in the second quarter, it makes our overall volume growth even more remarkable. Now, I’ll discuss more details of our financial performance for the third quarter. Revenue in the third quarter increased 25% on a currency neutral basis to $5.46 billion. Transaction revenue grew 29% on a currency neutral basis, representing 11 points of acceleration from the third quarter last year. This growth was primarily driven by strength across our core PayPal business, including strong cross-border growth. notably, transaction revenue, excluding revenue from eBay grew 31% in the third quarter, accelerating approximately four points from Q2 and approximately seven points from Q3 last year. Other value-added services revenue declined 10% on a currency neutral basis. reduced interest income on customer balances from lower interest rates and less credit revenue contributed to this decline. Honey contributed approximately one and a half points of growth to total revenue, which only partially offset the headwinds to other value-added services revenue. In the third quarter, transaction take rate was 2.06% and total take rate was 2.21%. The 15 basis point decline in transaction take rate was driven ratably by the impact of 47% growth in P2P volumes, merchant volume mix, which includes incremental bill payment volumes and the reduction of $87 million in international transaction revenue from foreign currency hedges. the 24 basis point decline in total take rate resulted from each of these factors as well as lower other value-added services’ revenue. transaction expenses hit a record low rate of 82 basis points, driven by both funding mix and volume mix in the quarter. Transaction losses were 13 basis points as a rate of TPV, one basis point better than Q3 last year. We continue to improve our loss performance through the ongoing advancement of our risk mitigation strategies and enhancement of our risk models. Credit losses were one basis point as a rate of TPV, fewer originations in conjunction with a consistent macro outlook and no meaningful change in credit quality relative to the second quarter contributed to this lower rate. As you’ll see in our 10-Q, our loan loss reserve coverage ratio increased from 22% to 24%, which is primarily driven by the contraction of our merchant receivables portfolio. moving to our non-transaction related expenses, consistent with our remarks when we reported second quarter results, we are increasing our organic investment spend in the back half of the year. This environment has created a unique opportunity for us to advance our leadership and payments, and extend our competitive advantages and emerged from this period stronger and better position to increase our relevance. While this incremental investment is more heavily weighted to Q4, we began deploying these funds in Q3. Non-transaction related expenses increased by 23% from Q3 last year, reflecting this increased level of investment. While sales and marketing spend was higher as a percentage of revenue, this was more than offset by leverage across each of our other non-transaction related expense line items. Overall, we realized leverage of 50 basis points on non-transaction related expenses. Operating margin for the quarter was 27.2%. This is the strongest performance we’ve reported for any third quarter and represents a 377 basis point improvement from last year. We continue to be focused on delivering operating efficiencies while investing in our strategic priorities. Non-GAAP other income declined by $57 million relative to last year, driven by increased interest expense from a higher debt balance and reduced interest on corporate cash from lower interest rates. From a modeling standpoint, we expect this line item to continue to be a net expense in the near-term. For the third quarter, non-GAAP EPS increased 41% to $1.07. The timing of our incremental investment spend, which is weighted more towards the fourth quarter contributed to the strong performance. We ended the quarter with cash, cash equivalents and investments of $17.6 billion. In addition, we generated $479 million in free cash flow. lower free cash flow in the quarter resulted primarily from higher cash taxes. The core cash generation of the business remains extremely strong. On average, in 2020, we’ve generated approximately $1.3 billion in free cash flow each quarter. And for the full year, we continue to expect to generate more than $5 billion in free cash flow. And now, I want to shift to our expectations for the rest of 2020 and 2021. In reinstating guidance in July, we were providing our best estimate of performance for the back half of the year. The degree of difficulty inherent in providing an outlook was and continues to be significant. We are an important part of the foundation of global commerce and do not operate in isolation. COVID rates, quarantine measures, stimulus programs, election outcomes, and the normalization of economic activity all affect our estimates. What we do know is that our business is very strong. Our core business continues to perform at an unprecedented level. We’ve seen a step change in e-commerce penetration this year. We expect there to be a deep and permanent change to commerce and consumer behavior, both in the U.S. and internationally. while it’s difficult to quantify the precise degree to which secular trends will be affected by the pandemic. Our addressable opportunity has grown meaningfully. Our fourth quarter forecast contemplates, sustained strength in our business, reflecting the powerful value proposition of our two-sided platform and the profound shift in consumer behavior we’ve seen this year towards e-commerce and increased digitization. relative to a few months ago, we expect a greater impact on fourth quarter revenue growth from eBay’s payments intermediation, given the pace of merchant migration in the third quarter. Heading into Q3, we anticipated this to be about a two point headwind to fourth quarter revenue growth. We now expect it to be about three and a half points. over the longer-term, a more rapid transition emergence to eBay’s managed payments platform is better for us strategically, financially and operationally. It will allow us to contain this impact mostly to the back half of this year and next year, relative to a slower progression of merchants with a much longer tail. All of this is to say, and this is a very important point that while headwinds to our revenue growth and transaction margin expansion will appear more pronounced over the next year from eBay. This impact will be largely contained to that period. Even more importantly, once we are beyond this transition, we expect our volume and revenue growth rates to reaccelerate given the drag that eBay has been for the past five years. during this period, on average, PayPal’s revenue, excluding eBay has grown about 23% annually by comparison revenue from eBay’s marketplaces business, even including this year stronger growth profile has grown on average only about 4% each year. on a volume basis, the divergence between these growth rates is even more stark. In addition, we expect the slower recovery and travel to persist while we sell travel volumes strengthen in June and July, we’ve not seen these levels sustain. We believe this is likely due in part to continued high coronavirus infection rates and the impact of the virus on global mobility. Similar to eBay, the headwinds from travel volumes are transitory and exogenous. As a result of these dynamics, we expect our fourth quarter revenue growth to be in the range of 20% to 25% on both the spot and currency neutral basis. for the full year, this will result in a range for revenue growth of 21% to 22% on a currency neutral basis or 20% to 21% on a spot basis. This guidance is approximately three points higher than our expectations at the start of the year. To put it in perspective, we expect to add more than $3.5 billion to our revenue base this year, which is more than one and a half times the revenue we added in 2019. On our call last quarter, we stated that we expected to deliver 25% EPS growth for the back half of the year. We are raising that outlook to 29%; incorporated into this outlook is 17% to 18% growth in EPS in the fourth quarter, which reflects the increased weighting of investment spend relative to the third. for the year, we now expect this will result in approximately 27% to 28% growth in non-GAAP EPS; marking the fourth consecutive year, in which we delivered at least 25% growth in EPS. Again, to put this in context relative to last year on an essentially flat share count, we’ll be adding more than $0.80 in earnings for each share outstanding and relative to our medium-term outlook, which calls for approximately 20% EPS growth each year. We are now more than $0.30 per share ahead of this plan. I’d now like to discuss how we’re thinking about our outlook beyond 2020. The strong acceleration we’ve experienced this year, along with the pronounced shift in consumer behavior, sets us up exceptionally well for the years ahead. I don’t think we’ve ever been more excited or energized about our prospects. We are clearly on a trajectory to deliver stronger long-term growth than our previously guided medium-term outlook of 17% to 18% currency neutral revenue growth, and approximately 20% earnings growth on average annually. That said, 2021 still presents a hurdle. Given the transition off of eBay, next year was always going to be a tougher comp for us. Our very strong performance this year adds to this dynamic. In providing guidance this year, our goal has been to responsibly balance transparency with reliability and certainty. looking at the range of outcomes for the entirety of 2021 requires us to look out over the next 14 months. We are very confident in our opportunity set, positioning and ability to drive increased engagement. However, there continues to be significant variability in macro-related factors, and we feel that providing guidance for that period right now would require a wider guidance range than we believe is constructive. Once we close out 2020, we’ll be better positioned to provide our thoughts for 2021, which we will share in February when we report our full-year results. In addition, at our Investor Day later that month, we look forward to providing more context for our longer-term outlook. Our ability to sustainably deliver strong growth at our scale is indicative of the network effects of our business. Our performance demonstrates our ability to successfully execute in the face of a more challenging operating environment, as well as the strength, diversity and resilience of our platform. This is really a year unlike any other. in many ways, our collective experience has demonstrated that we’ve never been more connected or more dependent on one another to help each other drive prosperity and development and realize the promise of globalization. PayPal stands at the center of this. In 2020, we will process more than $900 billion in payment volume and serve approximately 375 million customers. We are the largest open digital platform for payments globally; in the events of this year, have served to strengthen our value proposition and relevance. We have an important role to play in facilitating commerce and payments, and we’re executing our plans with an urgency to meet the growing needs of our customers in this increasingly digital world. With that, I’ll turn it over to the operator for Q&A.

Darrin Peller:

All right. Thanks, guys. I know you’re all holding off at this point on guidance, given the macro variability. but coming off a year with 70 million net new actives, which at least 30 million more than you would have expected, a lot of these are new demographics rather than a pull forward, as you guys are talking about. Can you just talk, maybe, touch on the types of NNAs you’d expect for either 2021 or even longer-term, kind of additions you can add and really thinking about that in context of 32% growth in daily active users. what are we talking about in terms of opportunity there and really what are the drivers of it? Is it international? All the partnerships? It seems like there could be a long runway, but a lot of people, I think just want to hear where – what the sources are? Thanks, guys.

Darrin Peller:

All right. Thanks a lot, Dan.

Operator:

Your next question will come from the line of Tien-Tsin Huang of JPMorgan. please go ahead.

John Rainey:

Sure, Tien-Tsin, it’s good to speak with you. So, we did see a strong acceleration in TPV in the quarter. and aside from just growth overall in the business, there’s a couple things to call out. I think notably P2P volume was up almost 50%, 47%, I believe is the exact number. And then we saw a lot more volume from bill pay with the 100% ramp of Paymentus and the quarter and so good strong growth there. As it relates to revenue, we had a $17 million hedge loss in the quarter and that relates to a $70 million hedge gain in the prior year. So, you’ve got the difference there that really put pressure on the revenue side relative to TPV. on take rate, there’s a couple of dynamics to think about too. You’ve got – while P2P and bill pay tend to have lower take rates, they also have lower transaction expenses. And so what we consistently focus on in our business is not necessarily take rate, but the incremental transaction margin dollars and a way to think about our business in the quarter, Tien-Tsin, like for every dollar of revenue of incremental growth that we brought in, in the quarter, almost $0.70 of that fell to the transaction margin line. And so it shows that there’s a good balance between those items that maybe have a lower take rate, but also have a lower transaction expense. So, we’re very focused on the margin profile of those different elements of our business with respect to the fourth quarter. the only thing I’d call out in addition to eBay, which we talked about in our prepared remarks, the travel and event vertical, as I also mentioned, has been slower to recover, to recover than we anticipated. Again, we saw some green shoots back in June and July and those haven’t persisted to the extent that we mentioned. but again, I’ll point out both of those things are transitory and they really in terms of the long-term impact to our business, it’s not going to matter for us. We’re very excited about not only what next year holds, but each year thereafter, the math of each of those is that, yes, it’s a tougher comp for next year. But when we laughed out, we’ll be at a place, where we actually have accelerated growth from that time period.

Tien-Tsin Huang:

Great. Makes sense. Thank you, all.

Operator:

Our next question will come from the line of Jason Kupferberg, please go ahead – sorry of Bank of America.

Dan Schulman:

Thanks for the question, Jason. I appreciate trying to kind of parse out what 2021 would look like. Let me just say this. There are a number of puts and takes for our business next year. On the sort of headwind side obviously, eBay will continue to be a headwind next year, as they ramp through the year. We’ve been pretty consistent though with our expectations around the pace of that, and we have long thought that they would be largely complete by the end of next year. And at the same time, we are still maintaining a share of checkout, which is north of 50%. And so this has been very consistent with our expectations from the onset. travel and event is going to be largely tied to the path of the virus. It’s an overused term, I know, but that’s largely outside of our control and when the world regains mobility, I’m sure we will see a resurgence in that, but the other area that I think people perhaps haven’t quite taken into account yet is the ongoing headwind that credit should be next year. And so those would be on the headwind category in terms of things that we’re excited about that can help you get that or completely offset that there’s a number of things that that we’re doing that we’ve called out. But the continued monetization of Venmo, the launch of paying for is something that we’re very excited about and then expanding the consumer wallet with things like bill pay and subscriptions and so forth. So, it puts us in a pretty good position as we look at the new products that we’re rolling out, which I’ll say is like our product and technology team has never rolled out more products at the rate that they are at any time in my five years here. So, we’re exceedingly pleased about the progress there.

Jason Kupferberg:

Thank you.

James Faucette:

Great. Thank you very much. I wanted to just build on some of the questions particularly around next quarter and that cadence, it looks like, it sounds like John, from what you’re saying is that there’s going to be going to be some incremental spend in the fourth quarter, maybe, they got started late in the third quarter and that is going to impact margins. Can you talk a little bit about, I guess, the contributors to the very strong margins in the third quarter, a little more color on how to think about the spending and impact on the fourth quarter and then how we should think about what that margin trajectory looks like beyond that, and particularly as we head towards a normalized world.

James Faucette:

Thank you very much.

David Togut:

Thanks so much. Could you dimension the impact on PayPal’s ecosystem from introducing cryptocurrencies, both to buy, sell, and hold and to use as a funding mechanism in the PayPal wallet, and if it’s used as a funding source, can you help us think through the impact on transaction expense, would that be similar, let’s say to ACH or debit funding?

David Togut:

Thanks so much.

Operator:

Your next question comes from the line of Heath Terry of Goldman Sachs. Please go ahead.

Dan Schulman:

Yes. So, I think the best way of thinking about this, Heath, is that every five years to seven years, there’s a replacement cycle for point-of-sale and we are really entering a period of change right now, where the operating models for POS have kind of literally changed overnight. Payments clearly need to now reside in the cloud, not at the physical or retail location. They need to be fully omni; they need to reside on a full platform experience across channels. And I would say that being an incumbent, this space does not add any advantage. In fact, they will need to change fundamentally the way that they think about point-of-sale. And clearly, the tailwinds are moving towards mobile-oriented point-of-sale and we want to capture what is a huge in-store opportunity, be one of the first movers to move to an online, full omni solution, and then set that up to take advantage of our two-sided network. And we have a number of plans underway with our eyes that will and PayPal here teams really to try and become a market leader over the longer term that could be five years to seven years, but you’ll start to see us make moves in that. I think that really compliments all the things we’re doing, as we move in-store with our consumer base, our QR codes, our contactless payments, and if see inside our app, as well as embedding ourselves and other star pays. But we’re beginning to see, as I mentioned, a lot of early traction in our move in the offline space, and I think there’s a really huge opportunity and we are – as I mentioned last quarter, we are being pulled into that space by retailers and by consumers, and the faster we move, the more opportunity I think we can gain there.

Dan Schulman:

Yes.

Brian King:

Hi, guys. Just want to ask about the new products in particular, the BNPL, just trying to get a sense of how much incremental volume opportunity is there versus replacing other PayPal payment options. Just thinking about are you going to be able to gain share or checkout at the merchant site? And then secondly, on the Venmo monetization, I heard the $900 million revenue number, any sense of how that breaks out next year with growth rates for Venmo credit card, is that a big percentage of that versus pay with Venmo, et cetera? Thanks so much.

Brian King:

Great. Thanks so much.

Operator:

And we have time for one last question from Lisa Ellis of MoffettNathanson. Please go ahead.

Dan Schulman:

Yes. Hi, Lisa. good to hear your voice. happy to do so. This is probably one of our, not probably – this is one of our top focus areas; this is building out a comprehensive and compelling digital wallet for our consumers. I don’t think there’s any question as we move into the digital economy that – apps that provide a comprehensive suite of interlinked functionality around financial services, payments, shopping identity management will be an essential part of our customers’ lives. I mean a daily part of their lives. Now with the wallet, the capabilities that we’re talking about are both online and in-store. So, that’s sort of, online, offline shopping capabilities, rewards management, being able to use rewards points, translate those, the fiat to pay, at any one of our merchants and also incorporate that in-store as well. All sorts of financial services you mentioned a couple of them bill pay increasing focus on direct deposit, check cashing, savings, goals, investments, PFM and then integrating all of our Honey shopping tools, crypto capabilities Buy Now Pay Later. And by the way, Lisa importantly, not just putting all that functionality out into our digital wallet, but creating a UX, a user experience that enables somebody to simply and easily move from one experience to another and have each of those experiences build on each other. And so we will start to roll out bill pay, this month we will – towards the end of the month, we’ll start to roll that out. I think you can expect kind of at end of the first half of this year for us to have a pretty large UX completion design in our customers’ hands with a lot of functionality coming out in my view in the second quarter and the back half of the year. But I expect that the predominance of what I’ve just talked about in place by the end of next year. And as John said, we’re investing behind this. I’m really pleased, as John mentioned with the delivery – on-time delivery and the excellence of the applications that are coming out into our market. And so expect to see a step functionality in the back half of Q2 of this year and then to build on that as we go into the rest of the year.

Dan Schulman:

Yes, it is exciting. Okay. I want to thank everybody for all of your great questions this would really – I’m glad we had a chance to talk about all those things and look forward to talking to each of you more in the weeks and months ahead. So, thank you very much. Everybody, have a good day and we’ll talk to you soon. Bye-Bye.

Gabrielle Rabinovitch:

Thank you, Gabriel. Good afternoon, and thank you for joining us. Welcome to PayPal Holdings earnings conference call for the second quarter of 2020. 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. Please note that we are taking this call from separate locations. We appreciate your patience as we adjust to these new logistics. 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 the Investor Relations section of our website. We will discuss some non-GAAP measures in talking about our company's performance. You can find the 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 as well as the impact of our acquisitions. 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 report on Form 10-Q filed with the SEC and available on the Investor Relations section of our website. You should not place undue reliance on any forward-looking statements. All information in this presentation is as of today's date, July 29, 2020. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

John Rainey:

Thanks, Dan. I'd like to start by thanking the entire PayPal team for their efforts to serve our customers and execute on our priorities during these unprecedented times. Since our last earnings call, the encouraging business trends that we've called out have persisted, and we're reporting the strongest quarterly results in our history. As Dan discussed, in the current operating environment, our business has inherent advantages. By many estimates, the pace of e-commerce penetration has accelerated by several years in a single quarter. And there is greater demand for contactless payments than ever before. These shifts play directly to our strengths and will enable us to advance our competitive positioning. At the same time, there is ongoing uncertainty as it relates to both the progression of the coronavirus as well as the state of the macroeconomic environment. We are carefully monitoring the pace of recovery and these interconnected dynamics. This overall level of macro-related uncertainty has resulted in increased complexity in building our forecast. It is with this backdrop that we're updating you today on our business and our outlook for the remainder of the year. Our second quarter performance highlights the benefits of PayPal's diversification and scale and our resulting earnings power. We delivered 25% revenue growth on a currency-neutral basis, 49% growth in non-GAAP earnings per share and generated $2.2 billion in free cash flow. We did all of this while absorbing ongoing pressure from reduced travel and event spending and lower revenue from our credit products. I'll now provide the details of our financial performance for the quarter and then our expectations for the rest of the year. Revenue in the second quarter increased 25% on a currency-neutral basis to $5.26 billion. Transaction revenue grew 30% on a currency-neutral basis, the strongest growth we've ever reported. Growth accelerated 13 points year-over-year and 15 points sequentially. Transaction revenue growth was primarily driven by strength across our PayPal Checkout experiences, which more than offset the approximately 60% decline we saw within our travel and advanced volumes. For context, travel and events represented slightly more than 10% of our TPV in the second quarter last year. In addition, cross-border volumes increased 24% in the quarter, which also supported transaction revenue growth. Other value-added services revenue declined 26%. Lower credit revenue in the quarter resulted from a number of factors. These included customer relief actions, fewer merchant loan originations, the lapping of $58 million of interim servicing revenue from Synchrony recognized in Q2 last year, and an approximate $17 million impact from increased expected credit loss provisions related to macroeconomic adjustments. Lower interest income due to lower interest rates globally also contributed to this decline. Revenue from Honey, also part of this line item, only partially offset these headwinds in the quarter. In the second quarter, transaction take rate was 2.23%, and total take rate was 2.37%. Compared to the second quarter last year, these declined 2 basis points and 13 basis points, respectively. Transaction take rate increased sequentially, and excluding the effect of person-to-person volumes, increased year-over-year as well, reflecting strong volume growth from PayPal checkout experiences. Moving to our volume-based expenses. As the rate of TPV, we're reporting record low transaction expense and transaction loss performance. Transaction expense was 83 basis points as a rate of TPV, a decline of 11 basis points versus Q2 last year, primarily due to the funding mix on our platform in the quarter. Transaction loss was 12 basis points, an improvement of 2 basis points year-over-year and the fifth consecutive quarter in which we performed in this range. Risk mitigation strategies and risk model enhancements continue to drive this improved loss experience across our platform. Together, transaction expense and transaction loss provided 335 basis points of leverage. At the same time, given current economic forecast, we increased our macro-related reserves for expected credit losses by $117 million. This flows directly to our income statement, increasing credit losses by $100 million and reducing other value-added services revenue by $17 million. After taxes, this adjustment to our provision represented a $0.07 per share impact to earnings. Entering the quarter, our reserve coverage was 17%. With this additional increase in our reserve, we exited the quarter at 22% coverage. Overall, the combination of our strong revenue and volume-based expense performance resulted in transaction margin dollars increasing 26% to approximately $3 billion. Our transaction margin expanded 179 basis points to 56.6%. 335 basis points of margin expansion from transaction expense and transaction loss was partially offset by 156 basis points of deleverage from loan losses. Nontransaction-related expenses increased by 10%, resulting in 326 basis points of leverage. Customer support and operations as a line item contributed more than 40% of this leverage. Excluding the impact of our recent acquisitions, nontransaction-related expenses increased 3% or only $0.04 for every incremental dollar of revenue, once again, demonstrating the scalability of our business and our operating discipline. Operating margin for the quarter was 28.2%, improving more than 500 basis points year-over-year, the highest level of operating margin expansion we reported in our history. Strength across all parts of our business contributed to this performance. Non-GAAP other income in the quarter declined by $60 million relative to last year, predominantly driven by increased interest expense from a higher debt balance and reduced interest income from lower interest rates. For the second quarter, non-GAAP EPS increased 49% to $1.07. Our earnings performance demonstrates our ability to successfully execute in the face of a more challenging operating environment as well as the strength and resilience of our platform. Excluding the macro-related charge for expected credit losses, non-GAAP EPS would have increased 59%. We ended the quarter with cash, cash equivalents and investments of $16.2 billion. In May, we raised $4 billion in long-term debt with a weighted average effective interest rate of 2.26%. We ended the quarter with $9 million in long-term debt. In addition, we generated $2.2 billion in free cash flow in the quarter or approximately $0.42 of free cash flow for every dollar of revenue. And year-over-year, free cash flow grew 112%. We're very well positioned from a balance sheet and liquidity perspective. This solid footing gives us the flexibility to successfully navigate this environment and emerge stronger. We've identified several opportunities to accelerate our long-term growth and advance our leadership position in digital payments. As a result, in the back half of the year, we plan to invest heavily in support of these plans, which I will discuss in more detail shortly. I now want to shift to our expectations for the rest of 2020. With more than half of the year behind us, our strong results and ongoing momentum as well as the secular tailwinds that have accelerated this year, we are reinstating our full year guidance. While the timing of the end of the pandemic and the eventual path to economic recovery remain unclear, we have more visibility and confidence in our trajectory for the remainder of 2020. Our updated full year outlook is a significant raise relative to our prior guidance for revenue, earnings and free cash flow. For the back half of the year, our overall expectations are that TPV and revenue will perform in line with the second quarter, with 30% volume growth and 25% revenue growth on a currency-neutral basis. We also believe non-GAAP EPS will grow approximately 25% on a spot basis in both Q3 and Q4, based on the strong leverage we're seeing and our investment plans. As a result of these expectations, for the full year, on a currency-neutral basis, we now expect TPV to grow in the high 20s percentage range and revenue to grow approximately 22%. In addition, for the full year, we now expect to grow non-GAAP EPS in the range of 25%. I'd also like to note that included in this guidance for 25% EPS growth is our expectation that the other income line item will reflect a net expense for the year, given lower interest rates on our corporate cash and the debt we've recently raised. Relative to the guidance we provided in January, our updated guidance represents a raise of approximately 3.5 points of growth to revenue and 9 points of growth to earnings. In addition, we now expect to generate more than $5 billion of free cash flow this year, an increase of $1 billion relative to our prior guidance. I'd like to give some context for this improved outlook. The revenue growth we expect reflects continued strong performance in transaction revenue, partially offset by ongoing pressure in our credit products. It also reflects a 1-point headwind to growth from the eBay managed payments migration. The rate of growth we're expecting for the year represents a 7-point acceleration from 2019 and is indicative of the elevated and sustained engagement we're seeing across our platform. In addition, we now expect our operating margin to expand by at least 100 basis points relative to our prior guidance that would have been flat versus last year. Based on the mix of transaction volume and our strong business trends, we expect to continue to show transaction margin expansion throughout the rest of the year. At the same time, included in this guidance and partially offsetting transaction margin expansion are our plans to invest approximately $300 million in the back half of the year to advance our key priorities and accelerate our growth initiatives. We believe that we have a unique opportunity to strengthen our competitive positioning and extend our leadership. We've never been more relevant to our customers around the world, and we're focused on doubling down in several areas to help ensure that we sustain and enhance our strategic advantages. This is quite costly an inflection point in the growth of e-commerce and digital payments. And as a result, we're electing to invest much of our margin improvement to help ensure our long-term success. We believe that the guidance we're providing today is consistent with the significant advantages from which our business is currently benefiting. Relative to when we last reported earnings nearly 3 months ago, we have more confidence in the sustainability of the elevated e-commerce trends we are seeing. When it first felt like a potentially short-lived phenomenon resulting from initial panic and pantry packing and even stimulus checks, has become a much more durable and profound behavioral shift. We've seen the strongest and most encouraging new customer volume and engagement trends in our history. At the same time, given our exposure to travel and live events, we've watched demand in these verticals essentially grind to a halt. Our business has demonstrated its ability to withstand exogenous shocks. And the diversity and scale of our platform is allowing us to outperform even while absorbing meaningful pressures. Three months ago, the idea that our PayPal-branded experiences would enjoy TPV growth for an entire quarter at a level consistent with and only previously seen during high-velocity holiday selling days like Black Friday and Cyber Monday was bold and even somewhat inconceivable, especially in the midst of a global pandemic and the highest levels of unemployment in our lifetime. And while we know more today than we did a few months ago about both the virus and the economy, there continues to be palpable uncertainty. As we sit here today, the concept of normalcy is being redefined, and at times, feel elusive. What we do know is that this is a pivotal moment in PayPal's history. We believe that we've never been better positioned to realize our ambition for greater relevance, ubiquity and impact as a global payments leader. We recognize that this is our time to capitalize on our strategic position and financial capacity to serve our customers better and to advance our platform, and we're committed to achieving our full potential. In addition, through this period, we've learned a lot about our organization and its resiliency and what we can accomplish when we're focused on delivering against a defined set of key objectives. We're committed to continuing to support our employees, our customers and our communities through these challenging times and to create sustainable long-term value for all of our stakeholders. I'll now turn it over to the operator for questions.

Tien-Tsin Huang:

Really terrific results here. Just trying to think about what to ask upfront here. But with -- you've got record new adds, volume, engagement numbers, all great. So is there a way to maybe hone in on what changed since April? What's driving the performance? If you had to rank the biggest factors, enough to give you confidence to reinstate guidance and call for sustainability in the third quarter in relation to what we talked about last quarter. I'm just trying to maybe summarize that, if you don't mind.