PayPal Holdings, Inc.

Good afternoon. My name is Sarah 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 second 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 the number one on your telephone keypad. If you would like to withdraw your question, please press star 1 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 second 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 calls 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, without limitation, our guidance for the third quarter and full year 2023, our planning assumptions for 2023, our comments related to anticipated foreign exchange rates, operating margin, impact from our sale of loans to KKR, 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 2, 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 on today's call. I'm proud of the PayPal team as we delivered another solid quarter. Revenues came in above the top end of our guidance and non-GAAP EPS grew 24% to $1.16 in line with the midpoint of our guide. And we are reiterating our guidance for non-GAAP EPS and operating margin expansion for the full year. Encouragingly, e-commerce growth appears to have stabilized in the mid single digits, substantially above our estimates when we enter 2023. Our branded checkout volumes grew roughly in line with the industry in Q2. and accelerated to nearly 6.5% growth in the month of June. And in July, our branded checkout volume growth accelerated again to over 8%, our highest monthly growth rate since the end of the pandemic. We expect branded checkout volumes will strengthen throughout the back half of the year, supported by traction from our key strategic initiatives. Of course, we still face a fluid global macroeconomic environment. However, it is quite encouraging to see core inflation rates continue to come down. As inflation cools, we would expect to see discretionary spending rise, which we believe will support and possibly accelerate the overall growth of e-commerce spending. And as a market leader in digital payments, any uptick in e-commerce will accelerate our growth. Revenues in Q2 grew by 8% on a currency neutral basis to approximately $7.3 billion. It's instructive to note that we are lapping certain items that provided an outsized benefit to us in Q2 and Q3 last year. Consequently, those items pressure our revenue growth rate by approximately 1.25 percent in each of those quarters this year. Excluding these items, our growth in Q2 would have been between 9 and 10 percent. As we mentioned last quarter, we expect our revenue growth in the second half of the year to be roughly the same as, and given recent trends, maybe a bit better than the first half. We expect Q3 revenues to grow approximately 8 percent on a currency-neutral basis. I would highlight that July was a very strong start to the quarter, with currency-neutral revenue growth of 9 percent and TPV growth accelerating into the low teens. And for the year, we anticipate our revenue growth to be between 9 and 10% on a currency neutral basis. We continue to exercise good discipline in managing operating expenses. For the quarter, non-GAAP, non-transaction related expenses fell 11% year over year. As a result, our non-GAAP operating margin was 21.4%. up approximately 230 basis points from a year ago. We expect to increase our non-GAAP operating margin for the full year by at least 100 basis points. As we look ahead to the rest of 2023 and into 2024, we expect to drive meaningful productivity improvements. Our initial experiences with AI and continuing advances in our processes, infrastructure, and product quality enable us to see a future where we do things better, faster, and cheaper. These overall cost savings come even as we significantly invest against our three strategic priorities. We know exactly what we need to do as we look towards 2024. And as you can see in our results, we are beginning to see the fruits of our labor. We understand that over the medium to long term, we need to deliver growth in our transaction margin dollars to ensure we sustainably grow our earnings. And we are beginning to see clear signs that our initiatives will yield notable traction against that objective over the next several quarters. As I mentioned, we expect our top line to accelerate to low double digit growth by Q4. We expect transaction margin dollars to increase while our operating expenses continue to create significant leverage. That in connection with our share buybacks enables us to target low to mid-teens EPS growth to the remainder of 2023, even as we begin to lap the increases we enjoyed on our interest income. I'd like to now turn to our three strategic priorities in which we are investing our resources and energy. Branded checkout, our PSC merchant solutions, and our digital wallets. As I've mentioned in the past, all three of these are critical and interrelated. They are essential for us to increase our share of the e-commerce market, as well as accelerate our margin dollar growth. As we discussed in our June investor meeting, we are meaningfully accelerating new product innovations into the market, scaling our A-B testing, and significantly improving our time to market. We are now consistently delivering against our roadmap on schedule. This is the result of significant investments in our platform infrastructure and tools, an enhanced set of measurements and performance indicators, hiring new talent, and early successes using AI in our software development process. We continue to ramp our test velocity with more than 300 experiments launched across our product experiences, in the first half of the year. Every successful test leads to incremental customer benefits, and the cumulative effect of those changes leads to noticeable improvements in our key metrics, including the gains we are seeing in branded checkout growth. For instance, our buy now, pay later traction has meaningfully accelerated with the introduction of pre-approved amounts to our consumers. Our work in onboarding and onboarding new experiences has driven new monthly cohorts with higher engagement and lifetime value. And this month, we are expanding the rollout of PassKeys in the US and Europe, which will greatly simplify the branded checkout login experience and drive improved authorization rates that will further extend our lead over our competitors. Our goal is to continually close the gap in our login and checkout experiences every quarter and to be equal to or better than any competitor within the next year. We simultaneously aim to drive differentiated wallet experiences across both PayPal and Venmo. We believe that only those companies with unique and scaled data sets will be able to fully utilize the power of AI to drive actionable insights and differentiated value propositions for their customers. We are already experimenting internally with an AI-driven PayPal Assistant. We envision that a version of this will be part of our consumer app, and we plan to introduce it later this year. We continue to see impressive traction in our PSP business with our growth rates nearly 30% on a currency-neutral basis. Many of the largest tech companies in the world are now either using our Braintree capabilities or are in deep strategic negotiations with us to do so. We are in the process of rolling out high-margin value-added services, expanding internationally, and making noticeable progress with in-person payments. and we continue to receive exceptional interest in our next-generation checkout solution, which will leverage the scale of our network vault, our deep understanding of our two-sided network, and the development of proprietary AI models. I couldn't be more pleased with the initial rollout of PayPal Complete Payments, our PSP merchant solution for channel partners in the SMB market. We are seeing tremendous interest in the platform with a substantial pipeline of completed sales and a backlog of deals that continues to grow. Importantly, our major channel partners are enthusiastic about its capabilities. We have already implemented PPCP with leading channel partners like Adobe, Lightspeed, Recurly, Shift4, Shopify, Stacks Payments, UltraCart, Wix, and WooCommerce with more than 25 additional channel partners scheduled to be live by the end of the year. This not only demonstrates the strength of our platform capabilities, but will also enable a meaningful number of SMB merchants to access our latest checkout experiences. There is a remarkable sense of energy, excitement, and enthusiasm among our leadership teams. as we see clear and distinct signs of reinvigorated success in the market. We are now able to take advantage of many of the investments we have made over the past years to deliver a best-in-class experience for our customers, leveraging a modern infrastructure and our scale in the age of AI. We have successfully recruited a large number of external talent to complement our internal teams in both AI and machine learning, as well as throughout our product, engineering, and technology groups in order to build upon our success and maximize our opportunity. I'd like to end my remarks talking about our CEO succession plan. We are in the very final stages of the process with several outstanding candidates, all of whom are highly qualified and excited to lead PayPal as we go into our next chapter of growth. I'm eager to welcome PayPal's next CEO, to work with them on a seamless onboarding, and to support them and the amazing PayPal team as I transition to my role on the board. As you can hopefully tell, we have a lot of energy and confidence that we are on the right path with good momentum. Many of the headwinds we face are now turning into tailwinds. We are executing with a high degree of excellence. We have a firm handle on our business model and can point to numerous successes already making a real difference in the market, which will only continue to compound over time. PayPal is in an increasingly strong position, and we are poised to deliver for our customers and our shareholders. Thank you. And with that, let me turn the call over to Gabs.