PayPal Holdings, Inc.

Good afternoon. My name is Gabriel. I will be your conference operator today. At this time, I would like to welcome everyone to PayPal's third quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. And after the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, simply press the pound key. Thank you. Ms. Gabrielle Rabinovich, you may begin.

Thank you, Gabriel. 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 fourth quarter and full year, the impact of our acquisitions, and our 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 2nd, 2020. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

Thanks, Gabrielle, and thanks, everyone, for joining us on today's call. I hope that all of you are safe and well. I'm pleased to say that PayPal had a very strong quarter across all of our key operating and financial metrics. Our performance is particularly noteworthy given the macro environment. We are battling a pandemic that shows no signs of slowing down. Economies around the world are still quite fragile, and the next six to 12 months will be defined by the timing and amount of additional fiscal stimulus and progress towards a widespread and effective vaccine. And obviously we sit here on the eve of one of the most important elections in our country's history. And I hope that all of you who are U.S. citizens have already voted or will tomorrow. This is the landscape we face as we go into the last quarter of 2020. At the same time, PayPal is at an exciting and meaningful inflection point in our history. Our mission has never been more important. The pandemic has brought focus to the stark reality that billions of people across the world are struggling to get by. In fact, in the past nine months, over 100 million incremental adults moved into extreme poverty. The current financial system is just not working for most people. It's inefficient and expensive for the underserved. Today's environment demands new ways of thinking about our economic system. Emerging technologies combined with mobile phones and financial platforms like PayPal can drive a future of inclusion and financial health. PayPal is in a strong position to help shape a future where everyone, not just the affluent, can participate in the new digital economy. As the use of cash continues to decline, new and innovative financial technologies are rising. For example, central banks around the world are seriously exploring or even trialing forms of retail digital currencies that they issue directly. And it's also clear that digital wallets are a natural complement to all forms of digital currencies. These trends create an opportunity for us to work with central banks and regulators to shape a modern and inclusive financial system built on more efficient digital infrastructure designed for the future. The digitization of the global economy combined with the rise of digital wallets will drive our growth over the next decade. Our scale, two-sided network, trusted brand, our strong relationships with regulators around the world and our AI and data modeling capabilities can all be leveraged to ensure our PayPal and Venmo apps are essential parts of our customers' daily lives. We still have a lot to do to achieve that vision, but let me be clear. We are investing to create one of the most compelling and expansive digital wallets in the world. And you can see this beginning to play out in our strong Q3 results. In Q3, our total payment volume grew by a record 36% on an FX-neutral basis to $247 billion, an annual run rate just shy of $1 trillion. Even more impressive is the growth of our volumes excluding eBay, which grew 38%, eclipsing any previous record. And in early October, we hit our all-time highest TPV day, outperforming any previous day in our history. These record results are happening even as eBay moves their base to their managed payments platform. eBay is now just 7% of our total volumes and will likely be between 5% to 6% by the end of the year. Our transactions in the quarter were just over 4 billion, growing 30% year over year. This is the first time we have processed over 4 billion transactions in a quarter. And it's worth noting that that our core PayPal daily active accounts increased 32% versus a year ago, consistent with last quarter. We added 15.2 million net new actives in Q3, our second highest quarter for organic customer acquisitions, after last quarter's 21.3 million NNAs. We added over 1.5 million new merchants in the quarter, over two times our pre-COVID rate, and we now have 28 million merchants on our platform. We ended Q3 with 361 million active accounts, and we remain on track to end the year with a record 70 million NNAs. This influx of new customers and record transactions drove strong financial results. Our revenues grew by 25.4% on an FXN basis to $5.46 billion. We grew our non-GAAP EPS by 41% to $1.07 even with incremental investments into our sales, marketing, product, and engineering teams. In the quarter, our operating margin grew by 377 basis points from a year ago. I'd like to detail some of our investments and how we see them shaping our future. And let me start with Venmo. Venmo had a very strong Q3, with 65 million users driving $44.3 billion in TPV, up 61% year over year. Venmo's growth continues to exceed our expectations, and we are forecasting revenue for Venmo to approach $900 million in 2021, driven by investments in new capabilities. As Venmo's revenue base diversifies and scales, its transaction margin continues to improve. And we now expect Venmo to also make a positive contribution to our transaction margin dollars in 2021. By Q1, the Venmo checkout experience will mirror the ease and simplicity of a PayPal branded transaction. We anticipate a meaningful increase in merchant transactions with some of the world's largest retailers and marketplaces incorporating Venmo as a payment option at checkout, both online and offline, as our QR codes are integrated into physical retail. The Venmo credit card will be fully rolled out in Q1. I think it is the best credit card in the market. It is a true extension of the Venmo app and fully linked into its capabilities. It is the first to have a personalized QR code embossed on the card, as well as a contactless chip. so that transactions can be split right at the table and reflected instantaneously on your Venmo feed. Our cashback rewards are amongst the most generous in the industry and automatically calculate your top spend categories every month to apply the appropriate cashback percentages. I would encourage all of you to try it as soon as you can because it is truly a best-in-class experience. Over the next year, both the Venmo and PayPal apps will undergo a fundamental transformation intended to dramatically increase their functionality and drive engagement. Our goal is to provide our customers with a comprehensive set of services and tools to manage their financial lives, as well as enhance their ability to shop both online and offline. This expanded suite of services will include enhanced direct deposit and check cashing, budget and savings tools, bill pay, investment alternatives, including crypto, subscription management, buy now, pay later optionality, and all of Honey's shopping tools, from wish lists, price monitoring, deals, coupons, and rewards. An important enabler of engagement is our comprehensive push into the physical world. Our consumers, merchants, and regulators all believe that PayPal plays a crucial role in allowing safe digital and contactless payments. Our goal is to be the most ubiquitous payment capability in the offline market. Through a combination of QR codes, contactless cards, NFC inside our mobile apps, as well as our embedded PayPal wallet experiences inside Google Pay and Samsung Pay, among others. As I mentioned, Honey's shopping tools, coupons, and rewards will be integrated into our Omni checkout solutions, assuring the best deals for our consumers wherever they shop. And we will also enable merchants of all sizes to access anonymous demand data so that they can drive incremental sales and increase customer engagement across their multiple channels. Our move into physical retail will no doubt be a multi-year journey, but we are already seeing strong early adoption of our QR code solution. We have 10 major retailers signed, including CVS, Nike, Tumi, Bed Bath & Beyond, and Samsonite. And we are in meaningful discussions with well over 100 large retailers. We have also signed 20 channel partners and point of sale providers from Verifone to Adyen who are in the process of integrating our QR codes with an additional 70 channel partners in deep negotiations. Just the signed deals alone enable our QR capabilities at millions of merchant locations. We anticipate ending the year with over 500,000 small and micro merchants accepting our QR codes. Finally, I'd like to discuss our recent announcement to increase the utility of cryptocurrencies as well as embrace new forms of central bank digital currencies. We are entering a new era of financial services. where our wallets and all the services around them are moving from physical to digital. These include identity management, new forms of commerce, and fully digital payments and financial services. As such, we recently announced that PayPal will allow account holders to buy, sell, and hold cryptocurrencies. first in the U.S. and then expanding to international markets and the Venmo platform in the first half of next year. Importantly, we are doing this in close partnership with regulators. As you saw, the New York Department of Financial Services granted PayPal a first-of-its-kind conditional BIT license. With this foundation in place, we will rapidly move at the beginning of next year and allow consumers to use cryptocurrencies as a funding instrument to shop across all 28 million of our merchants. The solution will not involve any additional integrations, volatility risk, or incremental transaction fees for either consumers or merchants. and will fundamentally bolster the utility of cryptocurrencies. This is just the beginning of the opportunities we see as we work hand in hand with regulators to accept new forms of digital currencies. We are at a moment in our history where all of our past efforts, our scale, brand reputation, and regulatory relationships position us to play an expansive role in our customers' lives. There's obviously plenty in the near-term macroeconomic environment that makes us cautious as we look ahead to Q4 in 2021. At the same time, we see multiple tailwinds from the permanent shift towards a digital economy. Our revenue and EPS forecasts for the years ahead are substantially higher than those we had developed just a year ago. And I've never been more enthusiastic about PayPal's role in shaping a new future. I'd like to close by thanking our employees who continue to give so much time and energy to supporting our customers while doing their best to balance a blurring work and home life. Their dedication and commitment to PayPal and our customers is inspiring. And with that, I'll turn the call over to John. John?