PayPal : Q1-23 Earnings Analyst Call Transcript

First Quarter 2023 Analyst Call | May 8, 2023

C O R P O R A T E P A R T I C I P A N T S

Dan Schulman, Chief Executive Officer and President

Gabrielle Rabinovitch, Acting Chief Financial Officer and Senior Vice President, Investor Relations and Treasurer

C O N F E R E N C E C A L L P A R T I C I P A N T S

Ashwin Shirvaikar, Citi

Bob Napoli, William Blair

Michael Ng, Goldman Sachs

Sanjay Sakhrani, KBW

Trevor Williams, Jefferies

Tim Chiodo, Credit Suisse

Josh Beck, KeyBanc

Jamie Friedman, Susquehanna

Craig Maurer, FT Partners

Ken Suchoski, Autonomous Research

P R E S E N T A T I O N

Operator

Hello, and welcome to the PayPal's Q1 2023 earnings analyst call. As a reminder, this is a 45- minute call. (Operator Instructions). I will now turn the conference over to Gabrielle Rabinovitch. Please go ahead.

Gabrielle Rabinovitch

First Quarter 2023 Analyst Call | May 8, 2023

Thanks, Sarah. Thanks, everyone for joining us. Again, as Sarah mentioned, we have 45 minutes. Dan is here with me, as is Ryan from the IR team. We can get started in terms of questions, and we'll try to get through as many as we can over the next 45 minutes.

Operator

Okay. Your first question comes from the line of Ashwin Shirvaikar. Please go ahead.

Ashwin Shirvaikar

Thanks. Hey guys, thank you for doing this.

I wanted to ask about, at least relative to our model, a lot of the outperformance was within OVAS [Other Value Added Services]. And I'm thinking probably also driven by Braintree, but if you could comment on some of the factors that are driving that [outperformance] and what the forward expectations might be.

Gabrielle Rabinovitch

Yes, you bet, Ashwin.

So, OVAS revenue grew 39% in the quarter year on year. That was predominantly driven by interest income on customer-stored balance, which benefited us from the increasing interest rate environment. We did start to see that benefit come through in the back half of last year, but Q1 was particularly strong. We also had good performance on our merchant and consumer credit books. But the 39% [growth in OVAS was] predominantly driven by interest income.

Last quarter when we reported our Q4'22 results, we did indicate that we expected overall for OVAS revenues to grow in the high teens [in FY'23]. Based on how we started the year, our expectation has pushed up a bit. Now we expect to see on the year OVAS revenue grow probably around 20% [y/y], maybe a little bit stronger than that. That said, we do expect to see deceleration as we move through each quarter of the year. So, Q1 will be the strongest quarter for OVAS growth based upon our expectation, and it will moderate slightly as we move through the year.

Ashwin Shirvaikar

Okay. On active accounts, net new adds, if I could talk about that. The sequential decline, should we expect that trend to continue and how much of it is driven by maybe PayPal trying to actively get down to just higher quality accounts? How much of it may be driving away some of the accounts you don't want in your base?

Dan Schulman

Our focus is clearly on driving monthly active users and engagement. And that engagement, think of it as both ARPU [Average Revenue Per User] and transactions. Our monthly active users,

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First Quarter 2023 Analyst Call | May 8, 2023

we've got about 190 million of them. They average approximately 70 to 90 transactions per year versus other active accounts [that average] single digits.

Monthly active users are 20 to 30 times more valuable to us and we're clearly focused on driving that. That is driven through product enhancements. It's not about spending marketing dollars to drive that. It's about having beautiful experiences. That's why we're really pleased to see our monthly active users grow slightly. You put on a million monthly active users, it's like the equivalent of bringing on 20 million active [accounts]. It's that more valuable than our active accounts.

We are not interested in throwing marketing dollars to drive just active accounts coming in. We tried that. We saw that. That didn't work. It was not a positive ROI. These new cohorts that we are bringing in, and they still are quite substantial, have attributes that we really like right now.

Their TPA [transactions per active] way higher than what we've seen before, 24% higher [March cohort had 24% higher TPA and 40% higher ARPA]. Their ARPA, how much revenue they're spending the first couple of months, [was] higher than what we've seen before. Their ARPA, how much revenue they're spending the first couple of months, [was] higher than what we've seen before. We're not asking somebody to make a transaction and giving them a reward to do so. People are coming in and finding value in the products themselves.

Our CPGA, our cost per gross add for these cohorts we're bringing in, is also substantially lower. This is clearly the right thing to go do. A lot of the accounts that we've lost were in markets where we've decided not to build out a consumer presence, whether that be Brazil, India, some countries in Southeast Asia. I could easily see our actives continuing to go down, but I would fully expect our monthly active users to continue to grow throughout the year. That's really what drives the overwhelming predominance of volume on our platform and profits.

Ashwin Shirvaikar

Makes sense. Thank you.

Dan Schulman

You're welcome. Thank you.

Operator

Your next question comes from the line of Bob Napoli with William Blair. Please go ahead.

Bob Napoli

Thank you and good afternoon. I'm going to dig a little bit more into your effort on the SMB [small-to-medium business] side, but if you could clarify. Your monthly active users did grow in the quarter and you expect those to grow through the year? I would like to get a little more color on the success of and thoughts around your strategy of doing a lot more in the SMB space.

Dan Schulman

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First Quarter 2023 Analyst Call | May 8, 2023

Sure. So, the answer to the first question is yes. Did monthly active users grow in the quarter and do we assume they'll grow through the year? Yes and yes on that. And then your question on SMBs?

Bob Napoli

You had talked in the last call quite a bit, Dan, about a big opportunity and the SMB market and adjusting your product set to address that market.

Dan Schulman

Yes, okay. I think you're talking about the introduction of PayPal Complete Payments (PPCP).

Bob Napoli

Yes.

Dan Schulman

We really have not had an unbranded offering for the small and mid-sized market. Braintree is focused predominantly on large enterprises. It's a terrific platform, but it's bespoke because a lot of the largest enterprise customers have very unique needs that we're fulfilling quite nicely through Braintree. I expect that platform to continue to do quite well going forward.

PPCP opens up new $750 billion TAM for us, where we can now address the small and mid-sized market with a standardized mass customized platform that enables all the things that the market needs, whether it be IC++ [interchange++] pricing, whether it be vaulting of [payment] instruments, all the appropriate alternative payment methods, APMs, including Apple Pay and Google Pay comes on this coming quarter. PPCP is now GA [general availability] in the US and will expand internationally next quarter.

That is very different than serving the large enterprise market. First of all, as you know Bob, large enterprises have smaller margin structures for those who supply them than small and mid- sized businesses. SMB is inherently a more profitable market for us, but really importantly it enables us to address a need that the small businesses and medium-sized businesses have been asking us for. They want PayPal to provide that strategic service to them, but it [also] enables us to get our latest checkout integrations into the hands of the long tail of small business merchants that we have out there.

There are two ways that it happens. One is we have a set of modern APIs and easy and simple to use software development kits, SDKs, to enable anybody who wants to proactively have a developer go in and upgrade their site. Typically that has been a strength of Stripe in that market, but now at some of the leading developer portals, PayPal SDKs and APIs are ranked even higher.

The other thing we are excited about is that PPCP is also something that we are targeting at channel partners and marketplaces. Channel partners are a really important distribution channel for us for many of our small and mid-sized businesses, mostly smaller businesses. Those

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channel partners have hundreds of thousands of merchants in them, some even more than that, some millions.

As we upgrade these channel partners to PPCP, if they run a hosted service which most of them do, once we upgrade that to PPCP all of those small merchants are automatically upgraded onto our latest checkout integrations. As I said on our Q1'23 earnings call, where we have our latest checkout integrations in place - where we reduce friction, passwordless login, you're not bouncing out from your native website out to the PayPal site, [and] we either have stable or growing share of checkout.

That's why we're so excited about the opportunity. It's a big addressable TAM, but it also takes those merchants and brings them on our latest checkout and it adds a new source of margin for us as well.

Bob Napoli

Thank you, Dan.

Dan Schulman

You're welcome.

Operator

Your next question comes from the line of Mike Ng with Goldman Sachs. Please go ahead.

Mike Ng

Hey, good afternoon. Thanks for the question. I just have two. First, I guess while we're on the topic of PPCP, could you just talk a little bit more about the positioning relative to branded checkout? Obviously, both businesses had really strong growth this quarter. Do you ever worry about overlap and things like that going forward? And what are you doing to position things so that those both can thrive? Thanks.

Dan Schulman

So Mike, just to clarify, I'm not sure exactly if this is your question, but PPCP is our unbranded platform, not branded, for small midsize merchants and channel partners. As a part of that, when somebody enables that unbranded, what comes with that is our latest integrations of our checkout experiences.

There's no conflict whatsoever between the rollout of PPCP and hopefully it's great success in the market, and what we want to do on branded share of checkout. In fact they're very complimentary. That's why I said we have three initiatives that are complimentary, that what we're focused on. Grow share of branded checkout through all the improvements that we're doing specifically around that. Grow unbranded, because when we grow unbranded, we grow our share of [branded] checkout as well because it's our latest integrations. And then grow our

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