PayPal Holdings, Inc.

Good afternoon. My name is Sarah 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 first quarter 2023. All lines have been placed on mute 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 one on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. I would now like to introduce your host for today's call, Ms. Gabrielle Rabinovich, Senior Vice President and Acting CFO. Please go ahead.

Thank you, Sarah. Good afternoon, and thank you for joining us. Welcome to PayPal's earnings conference call for the first quarter of 2023. 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'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. We will make forward-looking statements that are based on our current expectations, forecasts, and assumptions, and involve risk and uncertainties. These statements include our guidance for the second quarter and full year 2023, our planning assumptions for 2023, and our comments related to anticipated foreign exchange rates, operating margins, 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 the 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, May 8th, 2023. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

Thanks, Gabs, and thanks, everyone, for joining us today. We're at a good start to the year. with stronger than expected growth across our key financial metrics. And I'm particularly pleased to see the TPV from our branded checkout meaningfully accelerate to 6.5% growth FXN, up 200 basis points from Q4, while our unbranded TPV growth also accelerated from Q4 to post year-over-year growth of 30% FXN. Even with this strong start, there remain many challenging issues to navigate as we look forward. Both the macroeconomic and geopolitical environments are complex and difficult to predict. In these times, the strong message I'm giving the PayPal team is to focus on the things we can control. We know that job number one is to invest and innovate to improve our value proposition to our merchants and consumers. Since we honed our strategic priorities last year, we have consistently executed and delivered against our roadmap, and this work is beginning to reflect in our results. Of course, we still have room to improve in multiple areas, but we are making large strides in upgrading our merchant and consumer experiences, which are both significantly strengthened from a year ago. We are focused on executing in the most cost-effective and efficient way possible. As you can tell from our non-transaction related OPEX performance, we are more than delivering against our plan. As encouraging as these early results are, I would point out that we are just at the beginning of a multi-year efficiency journey. For several years, we've been at the forefront of advanced forms of machine learning and AI to combat fraud and to implement our sophisticated risk management programs. With the new advances of generative AI, we will also be able to accelerate our productivity initiatives. We expect AI will enable us to meaningfully lower our costs for years to come. Furthermore, we believe that AI, combined with our unique scale and sets of data, will drive not only efficiencies, but will also drive a differentiated and unique set of value propositions for our merchants and consumers. So despite the fact that today's macro environment is difficult to forecast, we believe we are well positioned to deliver a strong year and enter next year poised to reap additional revenue streams from the investments we are making in our products while continuing to drive efficiencies and reduce our overall cost structure. Let me now turn to our Q1 results. As I said, we were quite pleased with the quarter. Our revenues grew by 10.4% FXN to $7.04 billion in Q1. nearly one and a half points better than our guidance. Consequently, we anticipate our full year revenues to be stronger than we expected, with the back half of the year being roughly similar in growth to the front half. We processed $355 billion of TPV. an acceleration of nearly 300 basis points sequentially from Q4 to 12% FXN driven by 5.8 billion transactions in the quarter. With our branded checkout growing by 6.5%, we believe we improved our global share of checkout and gained share in unbranded processing. We saw our monthly active base slightly increase in line with our expectations, while TPA grew by 13% year over year. Importantly, our core PayPal consumer transactions per user improved throughout the quarter and in March was 400 basis points higher than in March of last year. In addition, we saw consistent improvement in the quality of new cohorts in Q1 versus last year. For instance, our March cohort of new accounts had 24% higher TPA and 40% higher ARPA than March of last year. These results strongly reinforce our decision to focus our resources on engagement and driving high-value accounts. Driven by continued discipline and execution, our non-GAAP EPS for Q1 grew by 33% to $1.17, exceeding the high end of our guidance by 7 cents. As a result, we are increasing our non-GAAP EPS guidance for the year to $4.95, up 20%. Our three strategic priorities remain consistent. Improve our core checkout proposition, grow our unbranded processing, and drive adoption of our digital wallets. We are making good and steady progress on each of these interrelated goals. I'd like to highlight our unbranded suite of services, including Braintree and our newest platform for SMBs and channel partners, PayPal Complete Payments. Within the highly fragmented processing ecosystem, our PSP offering across unbranded and other merchant services is growing faster than the market, and we are taking share. We believe that in an apples-to-apples comparison, our volumes in these areas are now roughly equal to that of Audion and Stripes. There are four points I want to make regarding our unbranded momentum. First, unbranded processing is a strategic imperative for us. Enabling our merchants with our unbranded service helps ensure that we have a deep relationship with our most important merchants. It enables us to bring our latest and most technologically sophisticated checkout integration across PayPal and Venmo and our Buy Now Pay Later service to our merchant base. Going forward, we will primarily focus on enabling unbranded processing and our latest branded checkout experiences through Braintree and PayPal Complete Payments. Based on our early observations, our share of branded checkout stabilizes or grows when our latest checkout integrations are in place. We will continue to invest to help ensure our unbranded platforms are best in class, enabling our merchants to reduce fraud and increase their sales conversion rates. We will do this while providing a comprehensive orchestration layer that enables our merchants to have a single point of contact and integration in a multi-PSP environment. Our platform reliability is now amongst the best in class, and our integrated servicing capabilities are increasingly differentiated. Third, we are focused on substantially improving the margin structure of our unbranded business. Our PayPal complete payments platform opens a new $750 billion TAM in the small and mid-sized business market. With a significantly enhanced margin structure, compared with our largest enterprise customers. Our Braintree and PayPal Complete Payments platforms are also expanding overseas, where we can drive higher margins. And we are adding value-added services to our platform, like risk as a service, full omni-channel capabilities, payouts, and FX as a service, to both enhance functionality and add incremental margins. And finally, enabling merchants with our unbranded services will provide a constant stream of incremental data to feed our AI engines and fuel our next generation checkout platform. We believe no other company will be able to replicate the unique nature and scale of our data set. And in the future, our AI engines will use that data to drive differentiated capabilities, to improve the entire checkout experience for our merchants. We anticipate that this combination of initiatives will enable our unbranded services to become a clear market leader, drive additional growth in our branded checkout, enable our next generation of checkout, and provide new sources of margin growth. And I would add that we continue to win and expand services with new marquee customers like Live Nation, Booking.com, and Adobe. Our focused efforts in improving our branded checkout are clearly making a difference in the market and in our results. Our product and engineering teams have driven substantial improvements in availability, latency, and passwordless logins. We also expect that our in-app native checkout solution via our APIs and SDKs, along with the deployment of our PayPal Complete Payments platform to our largest channel partners, should begin to bear significant fruit in bringing our legacy base to our latest integrations. Buy Now, Pay Later continues to provide meaningful value to both our consumers and merchants. Over 32 million consumers have used our Buy Now, Pay Later service since inception at nearly 3 million merchants. We are now one of the most popular Buy Now, Pay Later services in the world with $6 billion of TPV and Q1 growing at 70% on a currency neutral basis. Consumers spend 30% more on our branded checkout when using Buy Now, Pay Later And we believe we have amongst the highest authorization rates and lowest loss rates in the industry. Venmo continues to grow its revenues by double digits, and we were pleased to see its TPV accelerate 550 basis points from Q4 to $63 billion. We're continually working to improve the Venmo P2P experience. This quarter, we launched an easier, more intuitive way to split P2P payments across multiple people. And we also increased the ad funds limit for Venmo to $10,000. We recently added the ability for Venmo customers to transfer crypto to other users and external wallets, bringing it on par with the experience on PayPal. Later this year, we will add the ability for a Venmo user to pay a PayPal user and vice versa, bringing more utility to both customer bases. We are currently piloting the upcoming launch of Venmo teen accounts, which have been requested by both parents and teens for some time. Our Amazon and Starbucks experiences continue to grow nicely, and we recently launched PayPal and Venmo with McDonald's. And Jeff signed a deal with Microsoft to launch both Pay With Venmo and Buy Now Pay Later from Microsoft's Xbox store. Finally, I'd like to briefly touch on the search for my successor. The board has formed a subcommittee when we were working with a leading search firm. We have detailed sets of criteria and skill sets to assess both internal and external candidates. We still plan to announce my replacement before year-end, and the process is well underway. One of the most important criteria influencing my decision to retire was that PayPal was on the right path to emerge from this economic climate in not only strong financial health, but also as a clear market leader in payments. Our results this quarter are another solid proof point that we are on that path. I'd like to thank all of our employees for their hard work and excellent execution. We still have a lot to accomplish and improve, but our customers are responding to our efforts, and that is and will always be our North Star. And with that, I'll turn the call over to Gats.