PayPal : Q2-22 Earnings Analyst Call Transcript

Second Quarter 2022 Analyst Call | August 2, 2022

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, Interim Chief Financial Officer, Senior Vice President of Corporate Finance and Investor Relations

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

Josh Beck, KeyBanc

Colin Sebastian, William R. Baird

James Faucette, Morgan Stanley

Bob Napoli, William Blair

Ken Suchoski, Autonomous Research

Jamie Friedman, Susquehanna

Jeff Cantwell, Wells Fargo

Ashwin Shirvaikar, Citi

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

Operator

I would like to welcome everyone to the Sell-Side Analyst Call for PayPal's Second Quarter 2022 Earnings.

Thank you. I would now like to turn the conference over to Dan Schulman. Please go ahead.

Dan Schulman

Thanks so much. Hi, everybody. Welcome. We are looking forward to getting all of your questions, no real limit to them, so just fire away. That's all the opening remarks I really need to say, except again, congratulations, Gabz on your expanded role. We're all really excited about that and thank you for everything you did in the interim. Okay with that, let's open it up for questions.

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Second Quarter 2022 Analyst Call | August 2, 2022

Operator

Our first question will come from the line of Josh Beck with KeyBanc. Please go ahead.

Josh Beck

Yes, thank you for taking the question. I think one of the important points investors are looking for, and certainly applies to [market] share gains, is when I look at the FX-neutral excluding eBay growth in the first half and the monthly detail, it certainly seems to be intact. Behind that, are there major items you would point to? Is it moving higher in the funnel? Is it some well-funded competitors have less funding? What would you point to as we try to kind of communicate the share gain momentum that you do seem to have?

Dan Schulman

Yes, Josh, I'll start off and then maybe Gabz can add into it.

Markets never move in V's. They move more gradually than that. It's a combination of a number of things that have been underway for quite some time.

First of all, I think buy-now-pay-later has gained a tremendous amount of momentum for us. We are in more merchants than any other player out there. We have more upstream presentment than any other buy-now-pay-later player and that adds to flexibility and more share.

Second, we are clearly seeing a flight to quality in the market. I think retailers got a little bit spooked by some of the announcements where people are pulling back, retrenching, wondering if they're going to be able to raise money, seeing valuations crash. We've had more sales wins than we've seen in quite some time and a number of them are quite large, especially on the Braintree side. That's going to make a difference going forward, because Braintree integrations, that's the best possible integration for both PayPal and Venmo in terms of a native in-app experience. You're not seeing people buying placement anymore in the market. People were using venture [capital] dollars to buy placement. We were never going to chase that, and it's just not out there anymore, you're not seeing people offering parts of their companies for placement.

Then, I talked about little things, but it's not really a little thing. Taking off five seconds of latency in checkout, when every second matters, really makes a difference. Our reliability now is pretty close to five 9's [statement on up-time of our checkout processing] across the board which is outstanding. Our authorization rates are going up as well. Little things we're doing right now are improving conversion. Our conversion went up by 0.3 or 0.4 of a basis point last quarter.

All those things together add up to share gain. The ones I'm most excited about are the in-line checkout and native checkouts, so you don't need to [access a] pop out [to check out]. That SDK API [Software Developer Kit that enables native in-line checkout on mobile devices] that we're putting out, if that hits, that could be a pretty big thing in the future. Not today, but going forward, that could make a big difference.

Josh Beck

Okay, very helpful, and then maybe just the follow-up. You obviously covered it pretty well in the call, about the success that you're having with Venmo monetization. As we look out to next year and beyond, I'm just curious how meaningful the shifts in the different monetization buckets may be, as we think about some of the new partners that you have. Obviously, you gave some really impressive stats on the

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Second Quarter 2022 Analyst Call | August 2, 2022

commerce transaction front. But, just curious, as we think about the next phase of Venmo monetization, if it will be quite a bit different, maybe, than what you're seeing take place this year.

Dan Schulman

Yes and Venmo is going to grow more and more on the commerce side. The way that I think about it, PayPal started off many, many moons ago as a P2P business and then started monetizing merchant payments. Venmo started off as a P2P business. It's got a ton of advantages that PayPal didn't have those many, many years ago. Pay with Venmo I think will be the dominant way we will monetize Venmo going forward. That's why we look at these commerce stats religiously and we are pushing to make sure that every integration of Pay with Venmo is seamless. When we tried to do this several years ago, it was a clunky experience. That's why I've come back to the teams. It's not about getting experiences out there, it's about getting beautiful experiences out there and doing less but doing it in a beautiful manner. The commerce stuff is what I'm quite focused on. There will be other things in the wallet people will be able to do, but commerce will be the main growth driver of it going forward.

Gabrielle Rabinovitch

I'd also point out the card strategies for Venmo are important, as well. The debit and credit cards continue to grow their volumes and those are really important for habituation. They reinforce all the in-wallet spend with offline spend, as well.

Dan Schulman

Yes, I totally agree with that. If you look at Cash App, their big growth is off of their debit card. We have a lot of room in our debit card and credit card to grow too.

Josh Beck

Super helpful. Thanks, Dan and Gabz.

Dan Schulman

You bet. It's a pleasure.

Operator

Our next question will come from Colin Sebastian with Baird. Please go ahead.

Colin Sebastian

Thank you and good afternoon guys. I think these are both follow-ups. I guess Dan, this question's come up a little bit with investors. I wonder if you could expand a little in terms of the operational changes or balance of the expense savings that you're committed to today and next year with upping investments in areas like product and engineering where the headcount isn't exactly one of the lowest cost areas of investment. How much is your commitment to increasing investments in R&D and technology versus lowering the overall expense structure and expanding margins? Then, I have one follow-up.

Dan Schulman

I think the way you should think about it is we have a lot of engineers. They were not all focused on the right things. Our highest impact highest conviction growth opportunities, we're putting a lot of investment behind. At the same time there's a huge amount of opportunity. The numbers we put out there, we're very confident and we think there's more room beyond that. We see a lot of opportunity for productivity.

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Second Quarter 2022 Analyst Call | August 2, 2022

When you have engineers, first they need to be focused on the right things and we now know exactly where we want to be focused. Second, when you have duplication of platforms that makes things inefficient. As we are now starting to bring those platforms together, we can be much more productive. Our development environment is getting better and better. We could probably do the amount of work we need with less than more once we start to put all the productivity out there.

As Gabz mentioned, a lot of the cost savings we're doing right now are leveraging our scale and driving down unit costs. And that has nothing to do with headcount but everything to do with scale. A lot of people said, "Well, you've got the scale. What can you do with it?" We are leveraging it through our cost structure right now.

We have a lot of room to be even more efficient and productive. The whole team knows that, we're focused on it. The number one issue that we have is gain share, grow and invest. It is as simple as that and we will put the investments in places that we need, but we're going to be focused on it. I think we have a pretty clear game plan right now. We're seeing the impact of it in the market, the whole company is rallying behind it. We are bringing in really seasoned people who are operationally focused, who are no-nonsense, understand exactly what needs to get done. Like when we brought in Archie Deskus (Chief Information Officer) from Intel a couple quarters ago to run our tech platforms, she's making a huge difference. It's just a pleasure to watch her in action. One of the major things we love about Blake Jorgensen (Chief Financial Officer) is he is very operationally oriented as well. You can be sure the new Chief Product Officer that we bring in will be from a tech background, will understand scale, will understand beautiful consumer experiences at scale, and be operationally oriented as well. So, quite excited about the team that is assembling here. It's kind of the next generation. We're managing all the moving pieces. I think we've been working it for quite some time and it's beginning to show up finally.

Gabrielle Rabinovitch

Colin, just one more thing I'd add. I know the cost savings numbers sound big. They certainly are big and we're excited about the opportunity to deliver against them as well as to do more. When you think about the non-transaction related opex growth in our business over the past few years, in 2020 we grew 17% and in 2021 we grew 20%. You're talking about a tremendous amount of increased costs that we invested into. What we're doing right now is really just scaling more efficiently with what we have and making the right decision to ramp prioritization. We're not going to sacrifice any of our key priorities, but we're really looking to do things as efficiently as we can to grow more profitably.

Colin Sebastian

That's great. That's very helpful and I think that's crystal clear. Dan, by the way, covering EA [Electronic Arts] for years, Blake is definitely operationally focused, so it sounds like a great hire there.

Dan Schulman

Yes.

Colin Sebastian

Then I guess secondly, and lastly, if you look at Amazon and Shopify and PayPal, adding up GMV, I mean that's a significant portion of e-commerce GMV in markets where you guys overlap and so the announcement [] I know you partner with Shopify already, but the expansion of that relationship seems pretty interesting. Is this French opportunity, is that something that has potential to expand across more of Shopify's merchant base over the near or medium term?

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Second Quarter 2022 Analyst Call | August 2, 2022

Dan Schulman

Our relationship with Shopify I think continues to get closer. We both see a number of strengths that each of us have and we both want to figure out how we can do more and more together to serve our mutual customers. So, yes, that partnership which was already strong is clearly getting stronger.

Colin Sebastian

Okay, thank you.

Dan Schulman

On the Amazon side we're excited about Pay with Venmo. On all of these things you start off in one place and then you see how things evolve from there. But clearly some things like getting out of the eBay contract was painful in a lot of ways. Most of that is in the rear-view mirror right now and you're seeing that, but it also opened up quite a number of doors to us as well that we'll take advantage of.

Colin Sebastian

Sounds good. Thank you, Dan.

Dan Schulman

Yes, you bet.

Operator

Our next question will come from James Faucette with Morgan Stanley. Please go ahead.

Dan Schulman

Hey, James.

James Faucette

Hey, good afternoon, Dan, Gabrielle. My thanks and congratulations as well as everybody else's.

I wanted to just hit on a couple of quick things around assumptions and details. First, I think, Dan, you quoted some different numbers for forecast e-commerce growth this year. Can you give us a sense of what you're baselining on for the year, overall, just so we have some sense of how you're thinking about your business relative to the e-commerce growth, especially since, as we all can appreciate, e-commerce growth right now is probably the hardest thing to forecast?

Dan Schulman

It really is. I'll let Gabz get into some of the details of it. I think it's an uncertain macro-economic and geopolitical environment that we're in and nobody's got a crystal ball. We thought hard about where [] we want to anchor our guidance and we anchored it to the low end of our [prior] FX-neutral range because we thought that was the most prudent thing to do.

You could see through our revenue growth over the next several months that it's not this major step-up. We're [preliminarily] at 14% plus [revenue growth] in July and our guidance is for 14% growth [in Q3-22] if you normalize for the PPP revenue recognized in Q3-21 [PayPal's Q3'22 revenue outlook is for +12%

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