PayPal Holdings, Inc.

Good evening. My name is Brianna and I will be your conference operator today. At this time, I would like to welcome everyone to PayPal Holdings earnings conference call for the third quarter 2022. All lines have been placed to prevent any background noise. 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, Press the pound key. Thank you. I would now like to turn the call over and introduce your host, Ms. Gabrielle Rabinovich, Senior Vice President and Acting CFO. Please go ahead.

Thank you, Brianna. Good afternoon, and thank you for joining us. Welcome to PayPal's earnings conference call for the third 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. We 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 2022, our preliminary framework for 2023, and our 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, November 3rd, 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 our results in the third quarter exceeded the guidance that we announced in August, marking the third consecutive quarter of delivering on our non-GAAP guidance. Before reviewing our results and operational progress, I want to share two exciting developments that we believe will enhance our long-term strategic position. First, I am very pleased to announce that we are working with Apple to enhance our offerings for PayPal and Venmo merchants and consumers. Leveraging Apple's tap-to-pay on iPhone functionality, merchant customers in the U.S. will soon be able to accept contactless debit or credit cards and mobile wallets, including Apple Pay, using an iPhone and the PayPal or Venmo iOS app. This will allow PayPal's merchant base to easily use their iPhone as a mobile point of sale without the need for a dongle or other payment terminals. We believe that this, along with our other in-store initiatives, will continue to accelerate our opportunity to seamlessly process payments in the physical world for our merchants. We are also adding Apple Pay as a payment option in our unbranded checkout flows on our merchant platforms, including our PayPal commerce platform. We are already in beta with several e-commerce platforms and merchants and anticipate a broader rollout in the coming months. And next year, US customers will be able to add their PayPal and Venmo network branded credit and debit cards to their Apple Wallet and use them online and in-store wherever Apple Pay is accepted. We anticipate this to be available in the first half of 2023, expanding the opportunity for our consumers to transact in-store. This is a significant step forward in our relationship with Apple, and we are excited to work closely with them to bring these new capabilities to our mutual customers. Second, I'm excited to share that we continue to ramp Pay with Venmo on Amazon, and we plan to be fully ramped in time for peak holiday shopping. This partnership is a reflection of Venmo's scale and ubiquity, particularly in younger demographics. And we look forward to working closely with Amazon on this new offering to drive results. These relationships are aligned with our practice of working collaboratively with the major players across technology and financial services to provide more choice and superior experiences to our mutual customers. We are regarded by many as a partner of choice due to our scale and ubiquity, enabling us to create unique value for our customers. And while we continue to enhance our strategic position We remain focused on the operational initiatives that we shared last quarter. Our efforts to reduce our cost structure and drive productivity gains are yielding strong results. We remain on track to drive over $900 million in cost savings across our operating and transaction expenses this year, and at least $1.3 billion in cost savings next year. This focus on efficiency while continuing to invest in key growth areas is a high priority for us. And we now expect to grow our year-over-year non-GAAP operating margin in Q4 to approximately 22.5%. We further anticipate that in 2023, we will deliver at least 100 basis points of operating margin expansion. Let me now turn to our results. Our revenues in the third quarter were $6.85 billion, up 12% FXN and 11% spot, exceeding our guidance. I'm pleased to say that eBay's migration to managed payments is behind us. and will be inconsequential to our results in the fourth quarter. Normalizing for eBay's migration to managed payments, our Q3 revenues grew approximately 13% on an FX-neutral basis. Non-GAAP EPS was $1.08, which exceeded the midpoint of our guidance by 13 cents. The cost containment actions we discussed on last quarter's call have slowed the growth of our year-over-year non-transaction related expenses to 4 percent. We now expect that non-transaction related operating expenses for Q4 will be flat to slightly negative year-over-year, and we are planning similar levels in 2023. We are pleased with this execution, particularly as we are driving reinvestment in key growth areas and continue to enhance our strategic position. In the quarter, our free cash flow was $1.8 billion, up 37% year over year, and an all-time record for us on an organic basis. We added 2.9 million NNAs in Q3, and we expect to add another 3 to 4 million NNAs in Q4. I'm also very pleased to report that our transactions per active account in the quarter grew by a record 13% to 50.1 times per year. I'd like to spend a few moments discussing our progress on checkout. With 35 million active merchant accounts and nearly 400 million active consumer accounts, our scale is like few others in the world and represents a substantial competitive advantage in a business that is driven by network effects. In addition, we have built a high level of trust with our customers that drives significant preference to use our branded marks for online transactions. We have continued to grow faster than overall e-commerce in Q3, with our total TPV up 14% FXN, demonstrating the competitive differentiation and diversification of our global platform. Within our PayPal branded checkout business, we believe we held or gained share in the United States with PayPal branded checkup volumes up 4% year over year. While there is not a standard proxy for e-commerce growth, I would point to Bank of America's credit and debit card volume data, which highlights 2% U.S. e-commerce growth in Q3, a full 200 basis points below our 4% branded checkout growth rate. We do expect we will continue to grow at or above the rate of e-commerce growth. However, we know there are still substantial opportunities for us to pursue. We have three major areas of focus for checkout. First, elevating and optimizing the consumer experience. Second, providing merchants with a seamless integration experience and a one-stop shop for payments. And third, innovating new checkout solutions. As consumers move towards mobile shopping, we are focused on creating the simplest mobile checkout experience possible. These enhancements include allowing customers to check out without leaving the original merchant point of interaction. For example, our recently updated mobile SDK allows merchants to provide a seamless in-app checkout experience. We are also deploying the latest secure user authentication standard for our consumers, enabling pass keys on all iOS devices to drive speed, simplicity, and conversion. Our latest innovation is accelerated checkouts. which will provide merchants with a robust solution and enables one-click checkout. This simplified consumer experience is achieved by leveraging vaulted credentials within our network to authenticate and approve customer purchases without the need for a password. This enables seamless guest or account checkout experiences by removing obstacles which currently cause abandoned sessions. We are currently piloting this with several key partner platforms and we look forward to expanding this initiative as we move through 2023 and beyond. For each segment of our merchant base, we are implementing detailed processes, go-to-market plans and KPIs to measure our migration from legacy integrations. Moving more of our merchant base to our latest and most advanced integrations will take time. This will clearly be a multi-year initiative, but it represents a significant opportunity for us, and we are putting resources, process, and discipline in place to assure our execution. We continue to see good momentum with our unbranded payment platforms. We believe we are well positioned to help merchants orchestrate payments, leveraging our insights and machine learning to route traffic between multiple PSPs, resulting in increased approval and retention rates. Braintree is a key growth area for us, and we will continue to invest to further enhance the platform. Braintree TPV grew 38% in the quarter. Our Braintree momentum is driven largely by recent merchant wins and share of wallet expansions, And we recently signed an expanded agreement with Live Nation, which establishes Braintree as their primary card processor across the globe and includes an extended marketing partnership with PayPal and Venmo at some of Live Nation's largest festivals. Buy now, pay later continues to be a major asset to our checkout experience. And PayPal was just ranked as the best overall buy now, pay later value proposition in the United States by the Wall Street Journal. In the third quarter, we processed nearly $5 billion in volume, up 157% year over year, with over 25 million consumers using our buy now, pay later services approximately 150 million times since launch. As a result of this robust growth, we believe we have become the largest Buy Now, Pay Later providers in the world with a unique competitive advantage derived from our two-sided network. Our upstream presentment continues to grow with over 280,000 merchants displaying our Buy Now, Pay Later on their product pages. The size of our active account base and the years of transaction data we have on our customers provides us with an additional competitive advantage from an underwriting perspective. As of the end of Q3, our loss rates remain among the lowest in the industry with no observable deterioration to date. Venmo continues to be a significant asset in our portfolio with much untapped potential. We have almost 90 million Venmo active accounts, including 57 million monthly active accounts. Total payment volume on Venmo grew 6%, while Venmo commerce volumes grew 150% in Q3. We began to onboard charities to Venmo this quarter, which we expect will encourage more giving as we enter the holiday season. As I shared earlier, we are obviously enthusiastic about our partnership with Amazon and look forward to working with their team. In October, we announced the launch of PayPal Rewards, which unifies our Honey and PayPal Rewards programs, and customers now can earn track, save, and redeem cashback rewards and merchant offers in their PayPal app. In addition, our customers can also combine the benefits of their existing card rewards and offers, allowing them to save even more. PayPal Rewards is ramping in time for peak holiday shopping, and we have a robust roadmap to extend and enhance the program throughout 2023. In closing, I'd like to underscore that we're confident we have turned a corner in our transformation. We will continue to drive cost savings and streamline our processes to improve productivity while investing to differentiate our value proposition, drive market share, and deliver on our commitments. Given a challenging macro environment, slowing e-commerce trends, and an unpredictable holiday shopping season, we are being appropriately prudent in our Q4 revenue guide. At the same time, we are raising both our full year and Q4 EPS outlook and expect EPS growth in Q4 to be positive 6% to 8%. And given our commitment and focus on driving continued operational efficiency and earnings leverage. We plan to deliver no less than 15 percent non-GAAP EPS growth next year. While there are a number of unknowns regarding the macro environment, we can largely control our spend and its implication on earnings growth. Of course, we are also focused on investing for growth, and we are balancing efficient spend with continued investment to drive future top-line growth. We are excited by the operational initiatives, product enhancements, and new strategic partnerships that position PayPal in a substantially stronger position from when we started the year. I want to thank the PayPal team for the work they do every day to support our merchants and consumers, live our values, and drive our results. And I'm also pleased that John Kim has recently joined us as Chief Product Officer. He has deep technical and operational expertise with extensive experience overseeing product and engineering teams and has driven customer-focused innovation at scale. We are fortunate to have the chance to work with him to drive this next chapter in PayPal's story. And with that, I'll turn the call over to Gabrielle.