PayPal : Q2-21 Earnings Analyst Call Transcript

Second Quarter 2021 Analyst Call | July 28, 2021

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

John Rainey, Chief Financial Officer and Executive Vice President, Global Customer Operations Gabrielle Rabinovitch, Vice President of Corporate Finance & Investor Relations

C O N F E R E N C E C A L L P A R T I C I P A N T S

Sanjay Sakhrani, KBW

Craig Maurer, Autonomous Research

John Davis, Raymond James

George Mihalos, Cowen

Bob Napoli, William Blair

Lisa Ellis, MoffettNathanson

Josh Beck, KeyBanc

Jamie Friedman, Susquehanna

Harshita Rawat, Bernstein

Trevor Williams, Jefferies

Timothy Chiodo, Credit Suisse

Chris Brendler, D.A. Davidson

Chris Donat, Piper Sandler

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Second Quarter 2021 Analyst Call | July 28, 2021

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

Operator

Welcome to the PayPal Second Quarter 2021 Analyst Call.

I would like to turn the conference over to your host, Mr. John Rainey, Chief Financial Officer. Please go ahead.

John Rainey

Thank you very much. Thank all of you for joining us here today.

As usual, I'm joined with Gabrielle and the rest of the IR team. We really look forward to addressing the questions that you have. With that, we'll get right into the queue, Operator, and I'll turn it back over to you.

Operator

We have your first question from Sanjay Sakhrani, with KBW. Your line is open.

Sanjay Sakhrani

Thanks, hope you guys are doing well. I have a two-part question. One is, given that you've been able to absorb 2x the eBay impact you thought when you gave the medium-term targets, does that suggest that there's upside to those medium targets? Is that a fair assumption to make?

Then secondly, as we think about the take rate, obviously, the result of that faster conversion has impacted the take rate more negatively. Should we see a subsiding of the pressure on take rate, could it actually go the other way next year?

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Second Quarter 2021 Analyst Call | July 28, 2021

John Rainey

To start with, what's happening with eBay is really more a matter of pacing versus magnitude. What I mean by that is we've seen a more accelerated transition to their managed payments than what we had expected. Over our five-year planning horizon, that doesn't necessarily equate to upside in our-the guidance that we provided. With respect to take rate, again, pivoting back to the medium-term guidance, we gave guidance earlier this year of 25% compounded annual TPV growth and 20% revenue growth. That does contemplate some decline in take rate over that period of time. But it is obviously more pronounced right now with what we're seeing with eBay, and frankly, was exacerbated in the quarter by a couple other things that are probably worth calling out.

One is that we had a change in our hedge position from a gain to a loss in the magnitude of $122 million. Then something that we often don't call out but impacted this quarter was the fact that we benefit from volatility and FX in the way that we price. As currencies were less volatile in this quarter than they were a year ago, that had a similar impact to take rate as some of the other items.

Those things are really what's driving the larger take rate decline this quarter versus what we normally see. We would expect, once we get past eBay, to see some of those pressures abate and get to a more normalized rate that is in line with the medium-term guidance that we gave.

Sanjay Sakhrani

Thank you.

Operator

We have your next question from Craig Maurer with Autonomous Research your line is open.

Craig Maurer

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Second Quarter 2021 Analyst Call | July 28, 2021

Yes. Hi, thanks for taking the time to do this call again. I appreciate it.

Staying on the take rate for a second, I wanted to ask if you saw any appreciable shift in funding mix during the quarter as we're starting to see some resurgent credit card volumes out of the issuers? Secondly, the tax rate, should we think of 12% to 14% as the right rate going forward?

Lastly, I wanted to ask a more fundamental question about the offering at brick and mortar. Over the long term as basically you see the majority of merchants probably look somehow to get to an omni channel footing in case we have another situation like we're still experiencing. How do you view the fact-the competitiveness of the product when it is more of a fragmented offering when you're going through Clover or you have iZettle or you have other things, versus something that is a solid end to end offering like Shopify with retail POS that is seamless from Brick and Mortar to e-com? Thanks.

John Rainey

Sure, Craig, good to speak with you, you packed in a lot there.

Craig Maurer

Sorry.

John Rainey

That's all right. I'll start where you started with funding mix. We did not see any appreciable change in our funding mix, and you really see that in our transaction expense. It was 81 basis points, which is relatively consistent with prior quarters. But you ask that in the context of take rate, and one of the things that we did see that impacted our take rate by about 6 basis points in the quarter was the fact that we had more volume from Braintree. Because unbranded processing tends to carry a lower take rate. The mix effect of that actually brought down our take rate by about 6 points.

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Second Quarter 2021 Analyst Call | July 28, 2021

On tax rate, which was your second question, or subpart one to your question, subpart two. I think generally when you look at the policy environment right now globally, there's an expectation probably that taxes will go up over time, I think. On the international front, it would probably be 2023 before I think the OECD G20 aligns on anything that could be implemented there. Even then, it's unclear how PayPal would be affected, if we would be excluded as a-under pillar one as a financial institution. TBD on that. For the year, I'd say, for 2021 and generally in line with what you saw this quarter, probably.

Then lastly, on the competitiveness of our in-store offering. Look, this is a long game here. We're taking our first steps, and this is in some ways uncharted territory for us, notwithstanding the fact that we've done some bespoke things in the past in this area. But over time, we believe that consumers are going to gravitate towards digital wallets. Those digital wallets need to have the functionality and the capabilities that really keep them engaged and allow them to use that wherever they're shopping. I think we have a head start with our network of over 30 million merchants that we have right now.

As we expand that into the offline world, and we include the many different payment options like we're talking about, like buy now pay later, the ability to use rewards, that those value propositions will shine . One of the things that we're very focused on, as you talk about end-to-end solutions and controlling that complete process, is latency, and the in-store experience. When we first launched with CVS, as an example, we had about a seven second latency, in that experience; that's obviously not a good experience. We have that down to two seconds right now and plan to improve it from there.

It's all these types of things that, over time, we think will be very competitive in arguably what will be a fragmented area for a period of time, but I subscribe to the theory that you're going to see a couple of digital wallets win in the space. I say a couple, not necessarily two, but I don't think it's going to be 20. I think that we've got a great value proposition given the head start that we have and the penetration that we have into our customer base right now.

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