PayPal Holdings, Inc.

Good evening. My name is Savannah and I will be your conference operator for today. At this time, I would like to welcome everyone to PayPal Holdings earnings conference call for the second quarter 2022. 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 would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. And I would now like to introduce you to your host for today's call, Ms. Gabrielle Rabinovich, Senior Vice President, Corporate Finance and Investor Relations. Please go ahead.

Thank you, Savannah. Good afternoon, and thank you for joining us. Welcome to PayPal's earnings conference call for the second quarter of 2022. Joining me today on the call is Dan Schulman, our President and CEO. 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 our investor relations website. In discussing our company's performance, we will 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 third quarter and full year 2022, and comments related to anticipated cost savings, operating margin, and share repurchase activity. 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 our investor relations website. You should not place undue reliance on any forward looking statements. All information in this presentation is as of today's date, August 2nd, 2022. 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. I'm pleased to share that in the second quarter we met or exceeded our expectations announced in April. marking the second quarter in a row of hitting our non-GAAP guidance. We are well underway in a deep transformation of our business to regain our momentum. This transformation is supported by three major initiatives. The first is to seize the opportunity to grow our market share, as many of our competitors retrench and reorient their business models. We are focusing our investments in the areas where we have tremendous advantage due to our scale and the inherent network effects driven by our two-sided network. We are doubling down on checkout, our PayPal and Venmo digital wallets, and our Braintree platform. These efforts are having their anticipated effect as we once again took share in Q2. Secondly, we are meaningfully reducing our cost structure. I will discuss this in detail, but over the past six months, we have taken action to exit the year with operating margin leverage that will continue to grow in 2023. And third, we have reinvigorated our organizational operating model, and we are recruiting world-class talent to our product engineering and technology functions. And later in my remarks, I'll expand on our progress in these areas. With that in mind, I'm very pleased to announce that Blake Jorgensen will be joining us as PayPal's new Chief Financial Officer starting this week. Blake joins us from Electronic Arts, where he was CFO and Chief Operating Officer driving extensive operational excellence and shareholder value. He has also been CFO at Yahoo and Levi's and was co-founder and president of the investment bank Thomas Wiesel Partners. I am looking forward to working with Blake as we enter the next chapter in PayPal's journey. I would also like to thank Gabrielle for all she has done to support me and the PayPal team in her role as interim CFO. I can't say enough good words about her performance, and I'm pleased to announce that she will be taking on the additional role of treasurer as well as her investor relations and corporate finance responsibilities. Let me now turn to our results. Our revenues in the second quarter came in at $6.81 billion, up 10% FXN and 9% SPOT. Importantly, the shape and dynamics of the quarter reflect the trends we anticipated in our full year guidance. April revenue growth was 7% FXN. May was 10% and June was 12%. And our preliminary revenue growth rate in July further accelerated to north of 14%. eBay payments intermediation was a 400 basis points drag on revenue growth in the quarter. And we anticipate that will drop to approximately 100 basis points in the third quarter and be inconsequential to our results in the fourth quarter. Non-GAAP EPS of 93 cents exceeded our guidance by seven cents as actions we have taken slowed non-transaction related expenses to 6% year over year in Q2. As we discussed during our last call, we have been working to drive productivity improvements across all functions. Our strategy shift to focus on customer engagement from our unparalleled network of consumer and merchant accounts led to significant opportunity for greater efficiency and importantly, deeper investments in our world-class portfolio of assets. We have narrowed our focus, driven greater productivity, and increased our market share gains with profitable growth. We are leveraging our enhanced scale coming out of the pandemic to drive meaningful reductions in unit costs across our supplier base. As a result, we will realize our target of approximately $900 million of savings in 2022 across our OPEX, and transaction expenses, which was contemplated in our reset guidance last quarter. We anticipate this reduction in our cost structure will result in at least $1.3 billion of cost savings in 2023, which will result in operating margin expansion next year. These cost savings are not one time in nature and will continue to benefit the company on a run rate basis. We are also still sharpening our pencils to identify additional areas of productivity improvements across our servicing, marketing, and engineering functions, as well as opportunities to rationalize a real estate footprint and shift our hiring to lower cost geographies. These efficiency gains will allow us to increase our investments in our highest conviction growth opportunities, which, as I mentioned, include checkout, Braintree, and our digital wallets. Importantly, as a result of this exercise and disciplined leadership from our team, we are targeting non-transaction related operating expenses to be roughly flat as we exit 2022. Consequently, we expect operating margin expansion beginning in the fourth quarter of this year and continuing in 2023. As we said last quarter, NNAs for Q2 will represent our low watermark for the year. We are reiterating our full year guidance of approximately 10 million NNAs. However, as with all of our forecasts, NNA growth could be affected by broader economic factors, given the channels that drive organic customer acquisition may be negatively impacted by falling consumer sentiment and reduced demand for discretionary goods. That said, almost 80% of our volume is driven by 30% of our active accounts. which is why our primary focus is on driving engagement across our base. And here, I'm pleased to report that our transactions per active account, or our TPA, grew 12% to 48.7 times per year. And our core daily active users are up over 40% from Q2 2019, a three-year CAGR of about 13%. Signaling its confidence in our business, the PayPal Board of Directors has authorized an additional $15 billion share repurchase plan. We expect the pace of our share repurchases to remain aggressive as we believe there's currently a unique and attractive opportunity to return capital to our shareholders. Our board is committed to evaluating all options for return of capital to our shareholders, and we expect to share a financial and strategic update, including capital allocation at an investor day in early 2023. PayPal is one of the most trusted consumer brands in the world, and we have built a diversified platform with unparalleled global scale. We believe the recent turmoil in both the e-commerce and fintech sectors has created an unparalleled opportunity for PayPal. In contrast to others in the industry, our strong financial model, which will generate more than $5 billion in free cash flow this year, provides us the flexibility to invest and strengthen our competitive position. We are clearly seeing a flight to quality in the market, and we expect to continue to drive market share gains. Our share of branded checkout grew in Q2 and remains strong with leading retailers, where we are retaining the share gains we drove over the last two years. We continue to leverage our inherent strengths in checkout, which include our base of more than 35 million active merchant accounts with billions of financial instruments vaulted across PayPal and Braintree. We are currently testing our new mobile SDK software development kit, which enables native inline checkout, removing friction to make our payment experiences faster and more convenient. And we are also enhancing our checkout user experience to better serve our nearly 400 million consumer accounts by surfacing the most relevant funding instrument based on past purchase behavior, merchant category, and purchase price, among other attributes. We believe innovations like these will continue to differentiate our value proposition and drive increased conversion for our merchants. We are making great strides in the presentment and global distribution of our branded marks. We have expanded our relationship with Shopify and we are now powering Shopify payments in France. In addition, we continue to win large and significant full stack processing deals with leading merchants across the world, including Shein, Zappos, Bette, MGM, and Carrefour. We intend to press the advantages we have in scale with our portfolio of payment assets to take additional share in this challenging macroeconomic environment. Our buy now, pay later products continue to distinguish themselves from our competitors. In the second quarter, we processed $4.9 billion in volume. up 226% year over year, with over 22 million consumers using our Buy Now, Pay Later services over 100 million times since launch. Our upstream presentment continues to grow with over 200,000 merchants displaying our Buy Now, Pay Later on their product pages. We recently expanded our offerings with the launch of Pay Monthly, which gives US consumers the ability to spread payments over longer periods of time. A key competitive advantage for us is our deep expertise and experience lending through all types of credit environments. We benefit from both our scale and longstanding relationships with our customers. We know who we are lending to. And as a result, we have high approval rates and loss rates that are among the lowest in the industry. Our PayPal and Zemmo digital wallets are formidable assets that drive engagement across our commerce and payments platform. Digital wallet users are twice as likely to choose PayPal at checkout. And we have an opportunity to increase both engagement and ARPA by continuing to invest in commerce tools. As macroeconomic factors such as inflation impact our customers, our services like PayPal Honey are helping consumers make their money go further. Through the browser extension, PayPal Honey serves up targeted coupons and rewards at check out and through our digital wallet shopping hub at the beginning of the shopping journey. We are working hard to help our customers save money. Already this year, we've helped consumers save over $100 million. In an inflationary environment, these products are increasingly sought after and valuable. In fact, the PayPal Honey browser extension increased selection and conversion at checkout by 18%. And in the second half of this year, we are focused on driving even more savings for our customers by redesigning the shopping hub in our digital wallet and unifying our rewards programs. Venmo remains a key growth driver for our business, with nearly 90 million active accounts, driving revenue growth in Q2 of more than 50%. with the revenues exceeding $100 million last month alone. We continue to see increased commerce transactions on Venmo, with commerce volumes growing more than 250%. In Q2, we signed or launched Pay with Venmo with leading merchants, including Dick's Sporting Goods, DraftKings, Booking.com, and The Washington Post. And of course, We look forward to launching Pay with Venmo on Amazon. We are also hard at work on new initiatives that will increase both scale and engagement, including allowing teens to create their own Venmo accounts. And in September, we plan to launch the ability for charities to establish a profile on the Venmo app to encourage more giving ahead of the holiday season. As I shared last quarter, we are meaningfully streamlining our organizational structure to simplify decision-making, drive end-to-end accountability, and make it easier for our teams to rapidly bring innovative products to market. Our new operating model is oriented around our customers. Our consumer business is led by Doug Bland, and Doug joined PayPal through our acquisition of Swift Financial, where he was chief operating officer. He has been leading the rapid expansion of our global credit products, overseeing the introduction of a wide range of products, including our buy now, pay later services, and he has deep expertise in navigating challenging credit and economic environments. Our merchant business is organized into two primary areas of focus. Enterprise and merchant platform led by Frank Keller and small and medium-sized businesses and partner channels led by Dan Lieberman. Both Frank and Dan have been with PayPal since before separation in various leadership capacities and have extensive product and operational expertise. These changes will ensure we make the necessary decisions and trade-offs to accelerate our delivery of the highest quality products while driving our operating metrics. Mark Brito, our Chief Product Officer for the past several years, will retire from PayPal at the end of the year. I'm very grateful for Mark's leadership, counsel, and friendship during a period of tremendous growth for PayPal and for the strong bench of talent he has cultivated. An external search to replace Mark is well underway, and we expect to announce his replacement in the near future. In closing, I'd like to acknowledge again that it has been a volatile time for our sector, for our shareholders, for the market, and the global economy writ large. But we feel this is a unique opportunity for high-quality market leaders like PayPal with strong business models to increase their market leadership. We are laser focused on delivering on our key initiatives. We continue to take share. While others pull back, we are investing to improve our value proposition. We are finally moving beyond the lapping of both the pandemic stimulus payouts and eBay intermediated payments. and our increasing revenue growth rate in each successive month of Q2 and July reflect this, setting us up to deliver on our second half expectations. We are driving meaningful productivity and cost improvement in OpEx and our transaction expenses, and we expect to see these actions result in increased operating margins as we exit the year setting us up for a strong 2023. And we've made significant and positive changes to our organizational model with several additional talented leaders joining our senior leadership team. I want to thank our PayPal team for their continued dedication and commitment. I'm grateful for the outstanding support you provide each other and our customers each and every day. And with that, I'll turn the call over to Gabrielle.