PayPal : Q1-22 Earnings Analyst Call Transcript

First Quarter 2022 Analyst Call | April 27, 2022

C O R P O R A T E PA R T I C I P A N T S

John Rainey, Chief Financial Officer, and Executive Vice President, Global Customer Operations

Dan Schulman, President and Chief Executive Officer

Gabrielle Rabinovitch, Senior Vice President of Corporate Finance and Investor Relations

CO NF E RE NC E C A L L PA R T I C I P A N T S

James Faucette, Morgan Stanley

Ashwin Shirvaikar, Citi

Josh Beck, KeyBanc

Timothy Chiodo, Credit Suisse

Jamie Friedman, Susquehanna

Don Perlin, RBC Capital Markets

George Mihalos, Cowen & Co.

Sanjay Sakhrani, KBW

Ken Suchoski, Autonomous Research

Dominick Gabriele, Oppenheimer

Chris Donat, Piper Sandler

P R E S E N T A T I O N

Operator

Good evening and thank you for standing by. Welcome to the PayPal Q1 2022 Analyst call.

I would now like to hand the conference over to your speaker today, Mr. John Rainey, CFO and EVP of Global Customer Operations. Please go ahead.

John Rainey

Thank you very much, I appreciate it. Thanks everyone for joining us this evening. We're eager to address the questions that you have. As usual, I have Gabrielle and the rest of the IR team with me today, but we also have Dan joining us for the call today. So the three of us, or maybe I should say the five of us will be fielding any of the questions that you have.

So, Operator, we can go ahead and go to the first questions.

Operator

The first questions come from the line of James Faucette from Morgan Stanley. Your line is now open.

James Faucette

Thank you very much everybody, and I'll extend my thanks to you John and best wishes. Good luck.

John Rainey

Thank you.

James Faucette

I wanted to dig in a little bit on the underlying assumptions. I think last quarter, as you formulated your outlook for the year you had kind of anticipated that ecommerce growth would be around 10% for the year. Can you give us an idea of how you're thinking about that now as part of the revised outlook? Then I just have a follow-up question around margins.

Gabrielle Rabinovitch

Sure, James. We opened the year and our expectations were around 10% ecommerce growth [for the market as a whole] in the U.S. What we've actually seen in Q1 is actually a little bit lighter than that. So while we haven't seen a lot of third-party sources recalibrate their expectations, given that we're only one quarter in, we've actually done that kind of in our own forecast, and so that's what you see reflected in the guide. Our view is that the U.S. falls short of that 10% on the year; U.K. we think could even be sort of half that, so we're really seeing weaker U.K. trends. Probably early to call for the full year but we're definitely seeing that play out with an even weaker ecommerce growth in the U.K.

James Faucette

Got it. Then from a profitability standpoint and margins, I know you called out a few drivers there. It seemed like maybe the greater contribution from Braintree, you said mix. I don't know if that was revenue mix or funding mix, etc. Can you just deconstruct what the elements are there that have contributed to kind of the lower margin outlook for the year?

Gabrielle Rabinovitch

Yes. I think the revenue and the funding mix in some ways move together because we really did comment that Braintree was outperforming. We expect that to continue through the year, and so with Braintree outperformance the funding mix is higher [cost], more card-based funding. In conjunction with the slower ecommerce growth that we're seeing in the broader landscape, that affects our ecommerce growth on the core PayPal platform as well. It's a much bigger platform too, so we're just expecting to move alongside what we think is sort of the ecommerce growth trajectory on the year, so the funding costgoes up. I think when we think about the operating margin contraction on the year, the biggest contributor of that contraction is, first, the transaction expense dynamics, followed by the lapping of the [credit] reserve release. You really see that all come through predominantly on the transaction margin side.

Then I did call out some additional costs. One is just sort of general additional investing in the business, and so while we do expect to see some savings in year from some of the strategies that we've talked about, we do expect to be reinvesting those savings, both in our people as well as in our platform.

And then maybe just to clarify, we called out Russia. In our earnings materials for Q1 we called out a $0.03 impact from suspending those transactional services in Russia. For the full year it is $0.08 and that contemplates the $0.03 in Q1 as well as an additional $0.05 throughout the year.

John Rainey

I can add some extra color on the $0.03 in the first quarter, some of the impact there was below the line [reflected in "Other Expense"] related to some currency dislocation we saw as we looked to [suspend transaction services in Russia in the first quarter]. That's not really reflective of the run rate of the Russia business by itself. A little bit of an anomaly in the first quarter.

James Faucette

Got it. Sorry, just last thing from me to tie those two pieces together. Look, I think we can all come up with our own assumptions around ecommerce growth and kind of how that recovers and what pacing and to what level, but on the mix, particularly on the extra contribution from Braintree, is that something that we should be anticipating as permanent? Or persistent at least? Or is that something to do with the mix and consumer behavior, and so we should expect normalization of the relative growth rates there that are impacting margins.

John Rainey

It's some of both, James, but I'll say that over the last several years we've been able to manage the mix changes in our business and still see our margins increase. We are a diversified portfolio of products when you consider Braintree and Venmo and the many other aspects that we have, and so we have to manage that. But what we're seeing right now is actually more acute to some fundamental shifts in consumer behavior related to pandemic trends that make the pressure in this quarter more acute.

James Faucette

Okay. Thank you very much, guys.

Operator

Thank you. Your next question comes from the line of Ashwin Shirvaikar from Citi. Your line is now open.

Ashwin Shirvaikar

Thank you. Hey Dan, John, Gabrielle. Good to hear from you all. John, thank you and wish you the best from me as well.

John Rainey

Thank you.

Ashwin Shirvaikar

Gabrielle, wish you the best also for staying and taking this on.

John Rainey

Me too.

Ashwin Shirvaikar

No, it's a tough job for everybody.

The question I had was with regards to getting to that mid-teens type of growth that I think, Dan, you had mentioned in your comments. If I was to break that down, does that sort of break down as mid single digit account growth and then call this 10%, 11%, 12% type transaction per account, which you can then nearly fully monetize? Is that how you're looking at it?

Then the TPA [Transactions per Active Account] part of it, if you could help understand sort of the major sources of engagement that have built up over the last four quarters where it's been pretty consistent double digits.

John Rainey

Ashwin, I'll start and the others can jump in.

Some of the acceleration that we're seeing in the trends really is just lapping the eBay pressure that we're seeing in the first half of the year. That has a pronounced impact on our trends as we go through the year. Also, lapping some of the pandemic trends.

We've got pretty modest expectations around account growth for the year, as we noted on the call, so most of the sort of core acceleration in the business is really coming from the increase in TPA or the engagement activity of our customers.

Gabrielle, Dan, anything?

Ashwin Shirvaikar

If I was to kind of figure out the-is that TPA monetizing and to what extent is that monetizing? How do we think of that?

John Rainey

Yes, the TPA is monetizing. One of the reasons that we continue to focus on the ex-eBay numbers is because of the strong growth that we're seeing there. I think both Gabrielle and Dan noted almost 20% [ex-eBay] growth in the quarter on TPA, and we're continuing to see good growth there across all aspects of the business. But as Dan noted, one of the things that we're really trying to do is kind of get down into that medium- and lower-engaged cohort and get them transacting more. This kind of goes to the point that we're making around the penetration of the digital wallet because we see that when we add or when we allow customers to avail themselves of additional experiences and products that we have, they're going to be much more engaged with us. So our strategy really is around that.

Ashwin Shirvaikar

Got it. Thank you.

Operator

Thank you. Your next question comes from the line of Josh Beck from KeyBanc. Your line is now open.

Josh Beck

Thank you team, and my best wishes to you as well, John.

John Rainey

Thanks, Josh.

Josh Beck

I wanted to ask about the Venmo monetization. Obviously, parts of the forecast certainly contracted. It certainly seems like a lot of it is related to what's happening with discretionary spend in the U.S. and obviously the U.K. as well, but it certainly seems like the monetization story is still on track with respect to Venmo. Just curious as you think about maybe the growth this year and next in respect to Venmo, what are going to be some of the key levers that you all need to pull to kind of sustain this very high growth level?

Dan Schulman

I'll take a crack at it. I think first of all it's good to see that the revenue streams are much more diversified than they've been in the past. Pay with Venmo is beginning to pick up. Clearly at the end of the year we've got the launch with Amazon, which has the potential to be meaningful [over time]. First time we're doing something with them.

The team is working on a host of initiatives. I mentioned some of them on the call. Debit card refresh is going to be a big one for them. The revamping P2P, putting on business profiles and really turning that into more of a storefront than just a business profile. They are looking at new segments of the market, potentially including teen accounts and that kind of thing. They're clearly looking at how do they open the aperture as well as diversify on the revenue streams.

On the instant transfer, you probably saw that pricing is going up. That pricing just puts us at market rates, just to be clear. We have a strong value proposition. There's no reason why we need to be below on market rates.

We see a lot of new revenue streams coming in. Amazon could be a big deal [over time], and the potential expansion of kind of the aperture of Venmo in general.

Josh Beck

Okay. Great. Maybe I can squeeze in a quick follow-up, just on the pricing of BNPL [Buy Now Pay Later] as you think about the broader opportunity with Venmo. Do you think it would likely fall under the existing umbrella, or is there opportunity to maybe look at that differently as you roll up the product within Venmo?

Dan Schulman

I do think that BNPL clearly can go across both PayPal and Venmo, and we're also expanding kind of the buy now pay later portfolio as well. For instance, we'll do installment loans, which will enable us to capture higher priced checkout points, but we really want to combine the back ends between Venmo and