PayPal Holdings, Inc.

Ladies and gentlemen, thank you for standing by. And welcome to PayPal's first quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker, Ms. Gabrielle Rabinovich, Head of Investor Relations. Please go ahead.

Thank you, Cherie. Good afternoon, and thank you for joining us. Welcome to PayPal Holdings Earnings Conference Call for the first 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. Due to the length of our prepared comments today, we plan to allow for additional time for questions. 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. We will also discuss April 2020 results. which are preliminary in nature, subject to change, and may not be representative of second quarter 2020 results. In addition, 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 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 reports on Form 10-Q filed with the SEC and available on the investor relations section of our website. You should not rely on any forward-looking statements. All information in this presentation is as of today's date, May 6, 2020. We expressly disclaim any obligation to update the information. With that, let me turn the call over to Dan.

Thanks Gabrielle. Thanks everyone for joining the call. Let me start off by expressing my hope that all of you and your loved ones are safe and healthy in these unprecedented times. I think we all would agree that COVID-19 has fundamentally changed the way we think about the future. One profound change will be a dramatic acceleration from physical to digital. It's clear that digital payments have evolved from a nice-to-have capability to an essential service. There has always been a distinct secular trend towards digital payments, but the current environment has rapidly accelerated that movement. Our products and services have never been more needed and more relevant. We've worked hard in recent years to establish PayPal as one of the world's most trusted digital payments brands, with substantial reach and scale for both consumers and merchants. And those efforts are clearly paying off. In the past month, there has been unprecedented demand for our products and services. Our transactions are up 20% year over year, with branded transactions up over 43%, more than double pre-COVID levels in January and February. On May 1st, we had our largest single day of transactions in our history, larger than last year's transactions on Black Friday or Cyber Monday. Our net new actives hit record highs in April, surging over 140% from January and February levels, averaging approximately 250,000 net new active accounts per day. For the month of April, we added an all-time record of 7.4 million net new customers. I don't want to lose sight of the fact that we also had a record Q1 adding 10 million net new accounts. But that will pale in comparison to the 15 to 20 million net new active accounts we anticipate adding in Q2. And last but certainly not least, in April, our revenues grew by 20% on an FX neutral basis, including record revenue growth of 35% in our PayPal checkout experiences. I'll expand on these trends in a moment as they clearly highlight the strength of our customer value proposition. Like many other companies, our first quarter was a study in contrast. We had a very strong January and February, with FX neutral revenues growing by an average of 18%. and TPV growing at 26%. We began to see some COVID-19 impacts in late February, but the strength of our overall business outweighed cross-border weakness coming out of China. However, all that changed as we exited the first week of March. Shelter in place and social distancing became the norm across the globe, and as one economy after another effectively shut down, we saw a substantial revenue decline, predominantly in our travel and ticketing verticals. Some of our important customers, including Uber, Airbnb, and Live Nation, saw rapid decreases in transaction volumes. That said, the diversity of our business by merchant size and geography meaningfully offset margin pressures. In fact, Excluding increased credit reserves driven by the macroeconomic environment, our Q1 non-GAAP EPS would have been 83 cents, growing by 26 percent and well exceeding our prior guidance of 76 to 78 cents. In addition, excluding those incremental reserves, our operating margin would have been 24.7%, more than 200 basis points better than Q1 last year. Finally, our free cash flow in the quarter was $1.3 billion. Revenues in Q1 were up 13.5% on an FX neutral basis to $4.618 billion. When we provided guidance in January, we had expected revenue growth to be between 17 to 18%. This gap in our growth relative to our previous expectations was predominantly due to the decreased revenues from our travel and ticketing verticals, as well as from lower revenue related to our credit business. As I mentioned earlier, we began to see a very noticeable shift in our results towards the end of March and throughout April. We saw dramatic increases in our daily net new actives and overall engagement levels. Our daily number of transactions accelerated throughout the month, growing from the beginning of April until month end by 25%. With 7.4 million net new actives, record engagement and transaction volumes, and 20 percent revenue growth. I would characterize April as perhaps our strongest month since our IPO. This rapid growth across our metrics is led by distinct preferences in consumer behavior. Our market research indicates an approximate 50 percent lift in consumer willingness to buy when PayPal is present at checkout. On average, merchants who accept PayPal experience a 60% increase in purchase conversion. This is driving very strong revenue growth across almost all regions of the globe. Notably, it is our branded experiences that are gaining the most traction. As a result, we expect our Q2 OI margin to increase year over year, excluding the need for any potential additional macroeconomic-related reserves. Consequently, we would expect strong EPS and free cash flow growth in Q2, and John will cover our guidance in his remarks. I'm extraordinarily proud of the entire PayPal team for delivering these strong results. In the midst of considerable upheaval, They have reacted to the crisis with unprecedented speed, focus and passion. For instance, as soon as the impacts from the virus began to be felt, our team began discussions with government officials across the world to offer our support. Our global scale, platform capabilities and brand reputation are all attractive assets for governments to quickly and efficiently distribute payments. In the U.S., we work closely with Treasury, the SBA, congressional leaders, and multiple other agencies on many aspects of the CARES Act, including distributing loans to small businesses and stimulus checks to consumers. It was an important and proud moment when we became one of the very first non-bank lenders approved to distribute the Paycheck Protection Program funds to the small businesses we serve. We have already funded tens of thousands of loans, distributed well over a billion dollars with an average loan size of 35,000. And PayPal and Venmo customers in the U.S. are eligible to receive their economic stimulus payment directly into their digital wallet. Digital payments whether online or in-store, will become an integral part of our daily lives, even when shelter-in-place restrictions lift. Governments, regulators, and merchants of all sizes are now appealing to us to expand PayPal and Venmo into in-store checkout flows in order to help enable a safe checkout experience. Consequently, we intend to accelerate our rollout of our in-store digital payments in all markets that support our P2P payments. The need for contactless payments is more important than ever before as consumers and merchants move away from handling cash or touching keypads and adhere to strict social distancing requirements. The steps we've taken over the last several years have positioned us to extend our market leadership in the digital payments industry with services that are arguably more important than ever before. Our acquisitions of Zoom, iZettle, HyperWallet, GoPay, and Honey have positioned us to lead in the era of digital commerce and payments. Each of our acquired capabilities take on heightened importance in a time where online and offline have blurred almost overnight for merchants of all sizes and where consumers have embraced e-commerce and digital forms of payment as a way of life. The opportunities for Honey and PayPal to help consumers find the items they need at prices they can afford has never been more important for both merchants and consumers. To put that in perspective, in April, Honey's net new actives grew nearly 180% from pre-COVID levels. And for the month of April, revenues for Honey were up over 40% from January and February. COVID-19 has presented all of us with a unique set of challenges. that will very likely change our lives post-pandemic. But in many ways, it's only reinforced the way we think about our business and our stakeholders. I've always felt that putting our employees first is the best way to build a great brand and an enduring financially strong company. We took significant steps to assure our employees' financial health well before this crisis. Our North Star is always to do the right thing for our employees, ensuring their safety, security, and financial health. We made a commitment that no employee would be laid off as a direct result of COVID-19. We also focused our attention on our customers who need our products and services more than ever, as well as our empathy and support. We took a series of important actions to help our merchants and consumers. Everything from allowing small business customers to defer payments on their business loans, increasing protections with regards to refunds and chargebacks, waiving instant fund transfer fees, and doubling cashback rewards for the PayPal business debit card. These initiatives will impact our revenues and operating income in Q2. and that impact is contemplated in our Q2 guidance. These actions are consistent with our company's values, and I am absolutely convinced that the costs associated with supporting our employees and customers will be vastly exceeded by the benefits generated from these actions. This is a time when a financially strong company like PayPal mission and values guide our actions. We're also supporting our consumers around the globe by directly funding NGOs and charities who are supporting those impacted by the pandemic. Our PayPal and Venmo platforms have exploded with friends, family and countless celebrities helping each other through this time. Venmo and PayPal users are leveraging our platform to virtually tip service providers, bartenders, musicians, artists and small businesses, as well as to send contributions to schools, places of worship and hospitals. And we are helping Facebook, Verizon, Google, Airbnb, Uber, Live Nation, Spotify, and many other partners to raise money for those in need by enabling them to use our many platform capabilities. This is an unprecedented time in our history. The COVID-19 pandemic has impacted almost everyone around the globe. It's demonstrated how connected our world is, and it will change the way we live our daily lives. Digital platforms combined with real-world solutions have enabled us to navigate many of the unique challenges of the pandemic. And I believe we will look back at this time as a tipping point where digital payments, both offline and online, became an essential element of our lives, hastening the demise of cash, enforcing a reimagination of commerce, retailing, and the payment system. and we intend to be a driving force as those trends unfold. We've always committed to being a model corporate citizen. I'm inspired every day by our employees and what they are doing to help our customers. Many are working seven days a week and late into the night because they know that PayPal has become a critical lifeline in the everyday lives of our customers. We will come out of this crisis much stronger and significantly more relevant than ever before. This is our time to make a difference. And we are determined to seize it, do our part and make a lasting and positive impact. And with that, I'll hand it over to John.