PayPal Holdings, Inc. (NASDAQ:PYPL) Goldman Sachs Communacopia + Technology Conference 2022 September 12, 2022 7:30 PM ET
Company Participants
Daniel Schulman – President and CEO
Conference Call Participants
Michael Ng – Goldman Sachs
Michael Ng
Great. Welcome to the PayPal Keynote at the Goldman Sachs Communacopia and Technology Conference. I have the privilege of introducing Dan Schulman, President and CEO of PayPal. Dan joined PayPal in 2014 to lead the organization following its separation from eBay in 2015. Since then, PayPal has grown into a leading 2-sided payment network, serving nearly 430 million consumer and merchant accounts.
My name is Mike Ng, and I cover PayPal and Fintech here at Goldman. We have about 40 minutes for today’s presentation.
First, thank you so much for joining us, Dan. It’s always a privilege to have you here. PayPal has been at the forefront of digital payment transformation for over 20 years, making financial services and commerce more convenient, affordable and secure. PayPal has been very forthcoming about how it over extrapolated some of the e-commerce tailwinds that occurred during the pandemic as many others did as well. Would you just start by helping to frame PayPal’s strategy for driving continued growth against today’s volatile macroeconomic backdrop?
Daniel Schulman
Yes. Sure. Thanks for having me to, Mike. I appreciate it. And thanks, everybody, for being here. We faced, I think, three distinct challenges over the last year or so. One specific to us, and that was eBay’s migration to managed payments. That put about $2.4 billion of revenue pressure on us over the last 4 or 5 quarters. This quarter, third quarter, it put about 100 bps of pressure on us. But fourth quarter is negligible. And so that eBay distinct challenge that we had is basically behind us now as we go into the fourth quarter.
The second thing, and you mentioned is this is kind of the shift in consumer behavior coming out of the pandemic. Everybody flocked to online when they were locked in their homes. I think trying to figure out how much of that would be a permanent behavior shift and how much of it was due to lockdowns was difficult to predict. But basically, what we’ve seen is that e-commerce was on a pretty steady trend. It left forward during the pandemic, and it’s come back to its trend line.
So e-commerce continues to grow nicely, but at its trend line, that was pre-pandemic. And we had to lap this disproportionate growth in the first half of the year. We had grown by about 30% in first quarter or 25% plus second quarter ex eBay but that’s also behind us now as we approach normalized growth.
And then the third was obviously people coming out of the pandemic into post-pandemic behavior, but going into severe geopolitical and macroeconomic conditions and that everybody is facing. And the guidance we provided earlier this year took that into consideration, and we’ve been executing against that and we took into account what we thought were the macroeconomic trends that would continue on.
I would say we are clearly now at a turning point. You’ve seen our revenues in April were 7% growth, in May, it was 10%, in June, it was 12%, in July, it was 14%. So you’ve seen our revenues start to bend that curve. We’ve talked about a very clear focus on investing in high conviction growth areas where we feel we can take share, both in Checkout, in Braintree and our digital wallet. So we’re focusing our investments, and we are trying to bring in world-class talent into the team to make sure we execute extremely well.
And finally, for the first six years or so, we grew our revenues while growing our operating margins and our leverage. And what we said, and we are on track to do this is that as we go into the fourth quarter, we will start to grow our operating margin, our operating leverage again. And as we go into 2023 due to a real focus on leveraging our size and scale to get unit cost reductions from suppliers and some productivity. So we are right on track on the $900 million that we talked about taking out on costs this year and the $1.3 billion next year. So I’m feeling pretty positive about where we are right now. I think we are quite focused, and we’re executing against that strategy.
Question-and-Answer Session
Q – Michael Ng
That’s a fantastic overview. I wouldn’t dive into several of those things, I guess, starting out on the core — and the core Checkout, PayPal processed $1.25 trillion of TPV last year in calendar ’21. The majority of which, I think, came from the core inventory within Merchant Services. I do you want to talk about these in turn?
So starting with the core Checkout, it’s been gaining or holding share within e-commerce. Could you talk a little bit about the state of the core about Checkout today? What are you seeing as it relates to competition? And what opportunities do you see to improve core Checkout and accelerate those share gains that you managed to show last quarter?
Daniel Schulman
Yes. I think that’s sort of the big question that everybody asks all the time and rightfully so. Checkout is the PayPal as search is to Google. It is core to PayPal’s DNA. And we have a tremendous number of advantages in Checkout, you mentioned it upfront. We have scale like a few others in the world. We have almost 35 million active merchant accounts. We have almost 400 million active consumer accounts that is pretty much 8 times the size of the next nearest digital wallet.
Consumers trust and know the PayPal brand. If you do a consumer survey, there is one that was just done externally, where 60% of consumers would prefer to use PayPal to do an online Checkout. The next closest digital wallet was 8%. And we have some of the highest off rates in the industry, some of the lowest loss rates and therefore, some of the highest conversion rates in the industry for merchants.
That said, competition is fierce in the Checkout space. And we know there are a number of areas that we can be better at. And as I mentioned, this is a unique time for PayPal to tease incremental market share. Many of our competitors have had to pull back. Many of them are reorienting their business model because they lose money every quarter, and the capital that they needed to get placement as well as to continue to grow has been at least taken away for now until they show profitability.
We, on the other hand, will do over $5 billion of free cash flow this year. And so this is a unique opportunity for us to see share as others pull back and there’s a flight to quality in the market by merchants. But what we need to do better, and we are throwing a good amount of resource against this is a couple of things. One, just basic hygiene of Checkout. That basically means like take down latency. You’ve already taken out this year alone from 5 to 7 seconds of latency. And every second you take out of latency, increases conversion rate. And when you have scale like we do little things drive disproportionate amounts of revenues and TPV.
Availability, we’ve taken PayPal over the last several years from 4 9s of availability to 5 9s of availability. That, of course, just translates into more sales for merchants. But very importantly, we are now focused on presentment like where are we presented within a merchant flow, and we look at every single flow, whether it be mobile web, web desktop the various sub flows of a merchant to make sure that we’re on the front page of Checkout.
And then the second thing we’re doing is how do we take away friction from Checkout? And there are two big areas there. One is because we’ve been around for 20 years, we have 35 million merchants — merchant accounts. When we first started, people would pop out of the app back into the PayPal environment and then back into the merchant app. When that doesn’t happen, that’s called in-line Checkout when it’s natively integrated into our tech stack and into the merchant stack where the merchant has control of that Checkout experience as opposed to popping out. That’s a big deal that takes time. It takes extra clicks for somebody to checkout.
We’ve just recently introduced an updated version of our mobile SDK, which will help — it’s a simple integration to help merchants take PayPal Checkout and natively integrate it into their app. That will take time, obviously, to go through our base. There are a lot of different legacy integrations that various merchants have from the very largest to the very smallest, but we are very focused on creating an in-line checkout experience.
The second thing we’re doing is around accelerated checkout. And that’s basically where you as a consumer come in to a merchant, you basically vault your credentials with that merchant. And then any other merchant you go to that is served by that PayPal, we follow you with those credentials, and you can basically do a password-less one-click checkout.
We should be the leader in that. We have billions of financial instruments vaulted inside both PayPal and Braintree. And if we can leverage that scale and the scope that we have with that accelerated checkout combined with in-line could be a real winning combination for us.
Michael Ng
I’ve used that accelerated checkout. It’s a fantastic consumer experience.
Daniel Schulman
It is, yes.
Michael Ng
And just shifting gears a little bit to Braintree, PayPal serves a number of leading enterprise customers like Airbnb, DoorDash, Uber with Braintree. My understanding is that a lot of the Braintree volume is also bill pay. Could you talk a little bit about how Braintree’s product serves enterprise customers, how that might be different from the core button and how it fits together within the PayPal product portfolio?
Daniel Schulman
Yes. So Braintree is very different than the core button Braintree. It’s full stack processing where a merchant will do a single integration with us, and we will do all of the processing of different wallets, cards. All the PayPal instruments natively integrated into our tech stack, multiple currencies, different APMs, alternative payment methods, single integration across multiple geographies. We are having significant traction with Braintree right now.
Last quarter, it grew at 44%. It’s been very consistent in a 3-year CAGR of about 50% growth. And most of the leading mobile app players in the U.S., you mentioned just a couple of them, but there are numerous of them utilize Braintree. It is state-of-the-art single integration. It is the best integration into the PayPal stack. You get accelerated checkout, you get full in-line checkout experience. It has some of the highest outrates in the industry, again, lowest loss rates in the industry. It enables the most beautiful experiences in terms of checkout, especially within the PayPal stack. It marries pay in and pay out.
So people who process, you can also pay out through our Hyperwallet acquisition. And we are doing more and more orchestration where in a multi-PSP environment, we can do smart routing, all with one single integration. Really strong pipeline of sales, really strong pipeline of live to sites coming, and we’re investing heavily in the functionality and the — just the pure capacity of that system.
Michael Ng
So moving beyond, I guess, what I would call domestic merchant services, would you talk a little bit about what you’re seeing in PayPal’s cross-border volumes? This seems to be a segment that was negatively impacted by supply chain issues last year. It was also impacted by eBay and Forex headwinds probably more recently. What are the current trends in cross-border? And how do you expect that to change over the next year?
Daniel Schulman
So last quarter, I think we reported negative 6% FX on cross-border ex eBay, that was positive 2%, but that was also over comps last year of about 28% ex eBay, FXN growth rate. So a lot of comp that we had to overcome and a lot of eBay pressure on that. But our cross-border is different than our Visa and the Mastercard cross-border. Their cross-border is typically all of you traveling overseas and doing spend overseas. So as travelers come back and people have traveled more overseas, their cross-border volumes have increased.
Our cross-border is all about e-commerce. It’s about a consumer in the U.S. buying from a merchant in China or a merchant in the U.K. or a consumer in Germany buying from a merchant in the U.K. And there, we have seen impact because of supply chain issues, China being a perfect example of that. Our China volumes three years ago were growing at 20% plus. This past quarter, they’re down like 30%, 40%, 50%. I mean, quite an incredible swing. But yes, China and in many cases, lockdown, supply chain issues there. You’ve got different economic issues going through Europe right now that are affecting some of that, especially U.K. and other markets.
But over the medium to long term, and you’ll start to see that come back too because eBay will be behind us, you’ll start to see that grow positively as we look forward. But over the medium term, cross-border e-commerce is going to continue to expand. And one of the huge advantages that PayPal has is that we are a trusted brand. And when you’re purchasing, say, inside the U.S. from Walmart, you know Walmart, you know they’re a great company, you trust them. But if you’re purchasing from a merchant, we really want this product, but they’re in the U.K. and you don’t know them or they’re in China and you don’t know them, using PayPal, where we guarantee that transaction to the consumer that will be what they want or they’ll get their money back.
We are heavily used for small business and consumers on cross-border. So when that starts to come back, we’re extremely well positioned to ride that wave.
Michael Ng
Yes. I would certainly agree. On Venmo, Venmo is a business that had $230 billion of TPV in 2021. The leading peer-to-peer product in the United States with 90-plus million consumer accounts. Modernization has lagged a little bit relative to engagement, which is a high-class problem. Can you just talk a little bit about the Venmo strategy, where it is in its product life cycle today and the opportunities for modernization that Venmo is pursuing?
Daniel Schulman
Yes. Well, there’s a lot to be excited about Venmo, and there’s a lot of work yet to do on Venmo. First of all, to your point, we’re doing almost $0.25 trillion of TPV through Venmo, close to 90 million active accounts, 55 million active monthly accounts. So it’s an extremely large, highly engaged base of customers that are now driving over $100 million of revenue every month. So beginning to pick up, but clearly, so much more that Venmo can do and can drive.
We are putting more feature functionality. We’re completely revamping the debit and credit cards associated with Venmo, putting more rewards functionality on that different form factor deeply integrated into the app, reskinning the app, improving search functionality because so much of it is B2B. And if you use Venmo you’re trying to search like it could search, I mean Dan Schulman is not a common name, but like it will take 10 or 15 Dan Schulman’s up there. So you need to know who the right one is, who’s in your contact lists, that kind of thing.
So we’re improving that search functionality. Making sure that no matter where you are in the app, you can send and receive seamlessly, putting on charity profiles as we go into the holiday season, creating teen accounts that will open the addressable market for Venmo by some 20 million or 30 million incremental people inside the U.S., getting ready and looking at international expansion there.
Clearly, we are looking at PayPal and Venmo interoperability right now. One of the great things about network affect businesses as larger network, the more scale and engagement you get. But we have two artificially separated big bases. And if you could seamlessly transfer back and forth funds and money between PayPal and Venmo, we think that’s a big opportunity. And then obviously, we’ve got Pay with Venmo, Amazon. Amazon is 30% of U.S. e-commerce-ish, think about the number of merchants that we would have to sign up here in the U.S. to get that same scale for Pay with Venmo, it would be multiple, multiple millions.
And so we’re excited about the opportunity there and working very closely with Amazon to overcome just the last of the technical issues to make sure we have a beautiful experience when we launch, but we’re both excited about that. And I think a lot of opportunity with Venmo. They’ve made good strides on the team, but clearly more we can do.
Michael Ng
So PayPal is in a unique position of being a large corporation navigating through the current operating environment as well as a business that provides commerce enablement solutions for many small businesses that feel these challenges themselves. Could you talk a little bit about what you’ve learned in this time of macroeconomic uncertainty? And how that may inform the way that you service your customers?
Daniel Schulman
Yes. Well, it’s clearly an uncertain macroeconomic environment for everybody. Everybody has got their own opinion of how it’s going to be. I think it’s — for us, at least, we’re assuming trends continue on. We’re being appropriately, I think, prudent and conservative in our guidance and our actions. I think for our customers, there is clearly a flight to quality in the market right now. You’ve seen a lot of some start-ups go under.
When you’re talking about checkout for a merchant, it’s got to be perfect. It can’t be anything what that because they depend completely on that. We are not seeing the crazy days of people buying placement, and we know it’s an unprofitable placement. The days of VC-funded placement for payment marks is at least now gone, and it’s offering us a tremendous opportunity to work closely with small merchants to make sure that they can navigate in omni environment, but with consumers as well, but we’re finding are things like offering them tailored, personalized deals and offers and rewards is extremely important.
We are saving consumers’ tens of millions of dollars every single month through customized deals and offers, and that is going to continue to accelerate going forward. It is really resonating with our consumer base, and we want PayPal to not just be the most convenient, cure, safe way to pay, but the most rewarding way to pay as well across your commerce and payments journey.
Michael Ng
Since you mentioned guidance, I think that’s a good segue. This is a bit of a transitional year for PayPal. In the first half, you were lapping some of the strongest quarters that you’ve ever delivered. And now in the back half, you’re finally beyond those heavier periods of drag from eBay. Could you talk a little bit about how you feel positioned heading into the tail end of the year? And do you have any initial thoughts about the growth potential going into next year?
Daniel Schulman
Yes. Well, we did say that we expected revenues and earnings to accelerate sequentially in the beginning of the year to the back of the year. And I would say, as I look at the quarter right now, we’re having a good solid quarter right now. I think revenues are coming in where we expected in line with our guidance for the quarter. Actually, EPS looks to be coming in a bit stronger than we anticipated for the quarter. We still obviously have several weeks left in there. But I think this is going to be the third quarter in a row where we’ve met or exceeded our guidance.
That obviously also bodes well as we look into the fourth quarter of the year. It’s an uncertain macroeconomic environment, but I think we finally got the guidance right, and we’re executing against that. I also think as we think about the cost of the business, we’re executing right on that plan, maybe even a little bit above it. We said we were going to take out $900 million this year. We will take out at least $900 million this year, and we’ll take out at least $1.3 billion next year.
We also said that as we exit the year, we will be in our non-transactional operating expenses flat year-over-year, and we will be flat or better as we exit the year. That’s in comparison to, I think, second quarter, where we were up like 19% year-over-year. So clearly, a huge difference in the cost structure of the business, and we will start to grow our margin in the fourth quarter and continue that year-over-year growth in margin in 2023 as well.
Michael Ng
That’s great to hear and excellent to see. And just as a follow-up, is there a certain element that came in a little bit better than expected in the quarter? Was it largely on the OpEx side and the cost?
Daniel Schulman
Revenues are coming in kind of where we guided and what we expected. And so yes, we’re doing slightly better on the cost side. And these are permanent types of things. I mean the team is executing extremely well right now. But remember, a large chunk of those expense cuts were due to the increased scale we got coming out of the pandemic. Our volumes, our TPV, transaction processed volume, almost doubled during the pandemic. That scale and the scale we’re at right now has enabled us to go back to suppliers, cut our unit costs. Those contracts are done, some better than we expected, and that’s flowing through our cost structure.
And then the rest of it is really under our control, and we are focused on the areas where we know we can make a difference in terms of growth, and we’re investing there. But we’re also stopping things and cutting back where it’s either a higher beta or we don’t feel like we can get the return that we expect. We also are much more because of the business model change that we did, our marketing spend has gone down. We’re not chasing after M&As.
And so across the board, when I look at the model or expenses kind of what we thought would happen on the revenue side, things are coming in either at or slightly better than we expected.
Michael Ng
Okay. Thanks. That’s very clear. You’ve recently made additions and changes to the leadership team. Can you talk a little bit about the experience and skills that those new leaders bring to the table? You have dedicated heads of the consumer and merchant organizations within PayPal. Lake is coming on Board. Could you talk a little bit about the new structure and the new executives?
Daniel Schulman
Yes. Well, we had three things that I thought were really important for us to transform the company take us into the next chapter. One was invest in high conviction growth areas to seize market share. Number two, assure that we have the right cost structure in place so that we can drive operating leverage going forward and have room to invest where we need to invest because we are a growth company, we need to do that. But we need to have the right cost structure in place. And number three is have the right talent in place and the right organizational structure in place because every big thing you do inside a company needs to be done end-to-end.
You can have a product team, I think they’re going to put this out, a risk team doing something different and infrastructure team thinking about something else. Everything needs to be fully stacked end to end, everything needs to be thought about in what we call 1, 2, 4, 8, which is what’s going to happen next quarter, what’s going to happen in the quarter after that, what happens four quarters and then what happens eight quarters after that. And so you’ve got to have a rolling process of exactly what you’re going to be doing from both a cost perspective, revenue perspective and infrastructure perspective.
The third thing was bringing in outstanding talent and nurturing outstanding talent inside. Like our voluntary attrition rate inside PayPal is much lower than the tech industry in general. We have a lot of really passionate, really dedicated people who is competitive intensity has risen dramatically. I mean we are not happy about what was happening in the market nor were any of you. And — but we knew that this was within our control. We knew some of the things were temporary, and we’re going to go away, and there are other things that we just needed to address.
Having the right talent is essential and bringing in people like JK, John Kim, who’s been one of the best product managers that I’ve had the pleasure to get to know run large engineering, understand applications, understands a 2-sided network, worked in the financial industry beforehand, great UX individual working with an incredibly talented bench underneath them from Doug Bland running our consumer, Frank Keller and Dan Leberman running our merchant organization structured in such a way that there’s end-to-end accountability and responsibility for every key metric in the business.
And the difference inside the company right now in terms of accountability, in terms of responsibility of understanding who’s got what metric and what are we targeting on each and every day, week, month, it’s impressive to see right now.
Michael Ng
Excellent here. I know we touched on this, the cost savings piece, at least $900 million in 2022 across both transaction and non-transaction-related OpEx, at least $1.3 billion in 2023. Could you talk a little bit about the nature of those cost savings? How do you think about reinvesting those? And what can you share to give us comfort that you’re not cutting too close to the bone and sacrificing high ROI growth projects or investments?
Daniel Schulman
Well, I think that was just — everything comes with the results. You know what I mean, Mike, like saying something and doing something, you need to match up. And we said that our revenues would continue to accelerate throughout the year. Now did 8% Q1, 10% last quarter. We said we were going to do 12%, and we’re on track to do that. We said our EPS was going to grow at the same time, all of that is tracking in line.
The number one thing and the number one place we are is investing to seize market share. And that, as I mentioned, is around Checkout, Braintree and our digital wallets. They’re crucial because if we want to grow — and we’re a growth company, we want to grow not just engagement, but we want to grow NNAs going forward. The issues we’re not going to chase after low-value NNAs through marketing dollars, but by focusing on engagement, which is what our digital wallet stood, people who use our digital wallet, churn one-third less. Our big issue on NNA growth is not top of the funnel. They have plenty of top of the funnel demand. In fact, it’s quite amazing.
But when your 430 million active accounts, if you have a churn rate, and you’re churning out tens of millions of customers at the bottom, if you can increase engagement and lower that churn rate, your NNAs naturally grow as well. And so we are focused on engagement and growth, but it grows through engagement. And our digital wallets drive 2 times the ARPA of those who aren’t using a digital wallet, 2 times the TPA transactions for active than those who aren’t doing that 25% more checkout.
And so investing in that is one of the highest ROI returns that we can do. And we know this is a moment in time that we can accelerate share gains because of what’s happening in the competitive environment, and we’re not going to skimp on that focus. At the same time, we leverage our scale to drive down unit costs.
We are stopping things as well. And stopping things is as important as investing in things. No matter how big your company is, you can’t do 20 things are really well. You can do focus things extraordinarily well. And so we’ve stopped investment in long-tail geographies that much higher beta, much more difficult to get demand a lot of investment in that and an uncertain payback in that. Of course, we’re going to continue to invest in key international markets and grow there, but not long tail.
We’re pulling back, we were going to do stock trading on our platform. We’re not going to start trading on our platform, a very expensive build. There are others who are doing it, some well and some not as well. And if we want to do it, we can always white label it, and we need to work with an additional regulator FINRA on that, a tremendous amount of cost. And we can take that cost. Some of it goes drop down to our bottom line. Some of it, we invest in our key areas of growth.
We’re focused on cards being used at point of sale offline, whether they be credit or debit fully integrated into the app so that you can download your deals and offers. And when you tap in store, you get that deal and offer automatically. You can go back into the app, decide that I want to pay for that later versus immediately, split that purchase between rewards points and fiat currency. And so instead of doing QR codes, which were being pushed to do initially during the pandemic for merchants, once the pandemic ended, then people started going back in store.
There’s a lot of marketing that needed to be done to get people to change behavior on the QR. And we’re just going to go with card until mobile becomes more of a use factor in store, which it will, we’ll be ready for when that happens, but we save a huge amount of money and drive more traffic by focusing on a card strategy. So there are those kinds of things that we’re doing that are driving both incremental usage, but also a tremendous reduction in the amount of operating expenses and we can just be much more productive than we were coming into the pandemic.
Michael Ng
So PayPal has obviously been executing well this year. Today’s announcement included. In closing, would you talk a little bit about your vision for PayPal over the next three to five years, what do you see as the key initiatives to achieving that vision? It’s very clear you’re not resting on your laurels.
Daniel Schulman
No, you can’t rest for a moment. I mean I would say inside the company that the moment things are moving quicker outside the company than inside the company, you’re falling behind. So you just have to constantly be pushing on this.
Look, our big thing is around engagement. How do we drive engagement because engagement will drive growth as well, and that is about creating beautiful experiences around both the commerce journey and the payment journey. So we want to make sure our digital apps have pre purchase behavior. That’s where you go to find deals and offers and rewards that you have the most flexible way to pay for that purchase, whether that be online or off-line. And that then you can have a post-purchase where you can track your packages, can automatically apply for refunds, get that refund directly into your wallet.
And so we’ll just invest in high-growth high-conviction areas like digital wallet, like Checkout, like Braintree, we’ll continue to have productivity as a way of life inside the company make sure that we always have operating margin leverage and stay true to our values and our mission as a company so we attract the very best talent and keep it.
Michael Ng
It’s a fantastic way to cap off the session. Would you please join me in thanking Dan for his time, thoughts and insights.
Daniel Schulman
Thank you, Mike. Thank you, everybody.
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