PayPal : Q2-21 Earnings Buyside Call Transcript

Second Quarter 2021 Buyside Call | July 29, 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, Corporate Finance & Investor Relations

C O N F E R E N C E C A L L HOST

Lisa Ellis, MoffettNathanson

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

Lisa Ellis

Alright it's the top of the hour, Lisa Ellis here from MoffettNathanson. I'm sure we still have some folks dialing in as there's always a big turnout for these calls, but since we've got a large amount of content to get through today, I wanted to go ahead and introduce and get started. We are joined today by John Rainey, Chief Financial Officer and EVP, Global Customer Operations at PayPal. As well as Gabrielle Rabinovitch, Head of Corporate Finance and Investor Relations, who you all know very well, and a few members of Gabrielle's team. John, thank you for joining us for this customary post earnings buy side call.

John Rainey

It's a pleasure to be on the call with you Lisa, thanks for hosting.

Lisa Ellis

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Second Quarter 2021 Buyside Call | July 29, 2021

All right, terrific okay, we will dive in. Thanks to everyone on the call for funneling in your questions to us, we had pretty overwhelming response,this time around, and we have curated these down to the greatest hits list here of questions for John. John I'm going to start with, certainly the most frequently requested question which is around take rates. Can you just walk through the detailed attribution of the take rate compression that we saw into 2Q? As well as comment on your expectationsfor how take rateswill evolve going forward.

John Rainey

Sure, I'd be happy to, Lisa. So we'll start with you know we're talking about a 37 basis point decline, which is obviously larger than what we normally experienced. Fully a third of that 37 bps is related to the transition of eBay to managed payments and I should include in that the performance of their underlying business as well. And so, you know that that is somewhat anomalous to what we've been experiencing over the last several years, but that that is transitory and will go away.

There's an equal amount that is composed of probably three other things that I would start with probably FX fees. The way that we price our cross border cross currency products. We are able to monetize the delta between the high and the low on an FX spread each day and as currency volatility was reduced year over year that inhibits our ability to monetize that, so that's in that second bucket as well. All these I'm getting ready to talk about think of them as five to six basis points in terms of the impact on take rate. The second area is hedge losses, we had a hedge loss this year, relative to a gain last year, the delta there was $122 million and so that impacts our take rate as well. You all follow us along and know that you long enough that you know that vacillates between a positive contribution to a negative contribution dependent upon what's happening and currency markets. The third area, I would say is Braintree and specifically what we experienced in the second quarter was much more pronounced growth in the travel and events vertical than what we had expected and Braintree does most of that processing, for us. That

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Second Quarter 2021 Buyside Call | July 29, 2021

tends to carry a lower take rate and so as the mix of revenue and TPV changed year over year to be more of that unbranded processing. I'd also include Paymentus [bill pay vertical] in Braintree, which carries a lower take rate, but also carries a lower transaction expense. Those three areas that I described really have an equal representation in terms of the eBay impact, so you knowthat fully describes over two thirds of the decline and take rate.

Beyond that it's kind of the normal dogs and cats, you know more P2P, Venmo things like that, but the takeaway that I would want everyone to have on take rate is that we're not seeing any degradation in same store sales declines in take rate. That still is holding up very strong. Getting to the second part of your question around expectationsfor the back half of the year, we would expect the compression in take rate to decline from what we saw in the second quarter, it'll be a little bit less than the third quarter and even less than that in the fourth quarter.

Lisa Ellis

And then over the longer term just following up on that question once we're through the eBay transition is the way to think about it, I think you called it out, yesterday, on the call like the delta between your long-term guidance of 25% TPV growth and 20% revenue growth that that kind of dimension realizes your longer-term expectations.

John Rainey

That's exactly correct, given the various parts of our business, the diversification of our platform and the mix effect of that that will contribute to some take rate decline. Once we get past some of these issues around this transition with eBay it'll be much more normalized and really only subject to some of these anomalous things like hedge losses and things like that or hedge changes from one period to the next.

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Second Quarter 2021 Buyside Call | July 29, 2021

But again, I'll remind everybodythat while I know there's a lot of focus on it and, perhaps, for good reason, this quarter, we don't manage our business to maximize take rate. We look at transaction margin and operating margin. And we want to grow those margin dollars that's the thing that's most important to us. You know the addition of bill payment is a great example there. Knowing that's going to make take rate go down, but that it also carries a low transaction expense. If we can expand margins and grow those transaction and operating margin dollars, then we think that that is the thing that most closely correlates to the creation of shareholder value versus simply trying to maximize take rate in one period.

Lisa Ellis

Okay well on a somewhat related point let's talk a little bit about the eBay migration can you just give a little bit more, I don't know transparency, or sort of what's been going on behind the scenes, because it has felt a bit like the timeline and magnitude of that roll off has been a bit difficult to predict. Can you discuss a bit where we are, your confidence level in the outlook over the next couple quarters of the eBay headwind and the fact that that will be completed I think now by the end of the third quarter and also sort of where you think you'll level out in terms of share of checkout within eBay.

John Rainey

Sure, well first I'd like to pull back just a little bit here and talk about bigger picture, because in January of 2018 when eBay made the announcement that they were going to go down this path. I think everyone probably remembers there was a precipitous decline in our stock price. That began all the planning towards okay what's going to happen in this year of transition. To be sitting here in 2021 and reporting 19% revenue growth at the peak of this transition, I think, is something that we feel very good about and we feel very good about it because the underlying business is performing so well.

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Second Quarter 2021 Buyside Call | July 29, 2021

I noted on the call yesterday, but I think it's a very important point to really illustrate that and that we reported 19% revenue growth, with over 800 basis points of pressure from eBay. So imagine what that would be if we didn't have that, and so you know I think it's fortuitous that we're performing as well as we are. The transition itself, when we first started off down this path and planning for this what's actually happened is not too far from what we initially expected. But if you remember Lisa when they transitioned to their first two markets Germany and the US it was a very slow, migration. Even their own comments on some of their earnings calls provided expectations that the ramp would take much longer than what we're actually seeing right now. It was those two points that caused us to sort of reset expectations and assume that the longer tail of merchant transition would take longer than what we've experienced.

More recently, they've really accelerated that transition and somewhat to our surprise, but appreciate the more of their volume that they transition over to managed payments, the less visibility that we have into the performance of their business, and so it gets more difficult to predict. and particularly when we're talking about something that at the end of the day we don't control. And so that's what's happened this year, and if you just take the second quarter, we expected about 700 basis points of pressure and it came in over 100 basis points higher than that. And so that's what we're experiencing right now, and we expect to have something similar in the third quarter. The good thing is this, after this year this is largely past us. By the end of the year, our expectation is that both from a TPV and a revenue perspective that eBay will be about 3% of our business. So the transition is largely done and so next year is really only dealing with comparing to known results in 2020, which makes that a little bit easier.

When we look at our share of checkout we're still maintaining a share of checkout north of 50% in most markets. Even much higher than that in certain markets and so that's always been consistent with our initial expectations. I think going forward just becomes something that is much easier to plan around much easier to guide around and hopefully doesn't prompt as many questionsfrom investors aboutwhat's going on there, and our business.

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