PayPal : Q4-20 Earnings Buyside Call Transcript

Fourth Quarter 2020 Buyside Call | February 4, 2021

Hosted by Credit Suisse

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

Erica Gessert, Senior Vice President, Finance & Analytics

Gabrielle Rabinovitch, Vice President, Corporate Finance & Investor Relations

Timothy Chiodo, Credit Suisse

Operator

Ladies and gentlemen, thank you for standing by and welcome to the PayPal Group Call hosted by Credit Suisse. And your host Timothy Chiodo. Please go ahead, Sir.

Timothy Chiodo

Thanks a lot Operator. Thank you everyone for joining today. We're going do our best to get through a good group of questions here. We're very happy to be hosting this event here. With us we have John Rainey, CFO of PayPal. Gabrielle Rabinovitch, she is the VP of Corporate Finance and IR, and we also have Erica Gessert, who is SVP FP&A and Analytics. So, a full squad here. Thank you, John, Gabrielle, and Erica for being here today.

John Rainey

Thanks Tim. We're awfully excited to be able to speak to this group of investors and address the quarter, as well as the outlook for 2021. You know we're coming off the heels of what is clearly our best year ever, measured by any metric that one would pick. And you know we certainly think [we] are one of the companies that have benefited from some of the struggles that others have gone through by lacking mobility and not having the access to physical stores, but we are equally or more excited about what we're doing internally and the opportunity that we have in front of us with a lot of the new product launches that we have. And you know what that bodes for not only 2021, but the years thereafter which we really look forward to speaking with everyone about it on our Investor Day next week. So, all I'll stop there Tim and the three of us are happy to answer any questions that you have.

Timothy Chiodo

That's great. Thanks a lot John. And just as for the audience, there's couple of housekeeping items. We'll look to go about 45 minutes. So, we'll wrap up in about ten minutes before the hour. Also, the earlier questions will be more around guidance numbers [provided at earnings], again the focus here will be very much on Q4 and the 2021 guide. And then we will get into to a few of the more strategic issues. So, let's start with Q4 TPV. So that, strong results there obviously, 36% ex-FX growth. Trends appear to be strong into January and comps are somewhat easier in March and for Q1 overall. So, with that context, maybe we can walk through for investors, how to think about TPV growth progressing throughout 2021 in the light of the full year high 20%'s guide? Clearly there's either a headwind ramping a little bit in the first half, but there's the Bill Pay contributions still being very incremental in the first half, so many moving parts.

John Rainey

Sure Tim, I'm happy to do it. And yesterday on the call, I gave some context to the revenue trajectory for 2021. And obviously the TPV follows that same trajectory. So, we'll see the peak of growth likely in the first quarter and that's primarily impacted by the extremely soft March that we had last year. And you might remember that at the end of February last year, we released an investor update which detailed the trajectory of volume over the course of the first quarter. And so, it gives one an idea of the comps that we're up against for the first quarter. As we get into the second quarter, the reverse is true, that was sort of the peak of shelter in place. And everyone being locked down and all the pantry packing and things that were taking place. And so, we've got much more difficult comps in that quarter. But then as we get through the back half of the year, well I should check before I go there.

Also, with the eBay impact is more pronounced in the first half of the year as well. They made bigger strides in their movement to manage payments in the back half of 2020. And so, we're lapping sort of a period in the first half of the year where, they did not have as much volume moved over there. So, the roughly 400 basis point impact we highlighted for the year will actually be greater than that in the first half of the year.

But as we get to the back half of the year, this is where I think we get to more normalized growth rates and you know we have a number of things working there, but I think underpinning assumptions is the launch of several new products. We have a lot of our initiatives that are going live either at the end of the second quarter or in the early part of the second half of the year. And we're dependent upon the execution of those to really drive some of the results that we're seeing.

Timothy Chiodo

Excellent, thank you John. All right, in the interest of time, why don't we move on to take rate topics so we can perhaps recap some of the dynamics from Q4 and touch on some of the cadence puts and takes over the course of 2021. So, for Q4 2020, take rate came in at about 2.05% which was as mentioned about down 20 basis points year over year. That was maybe a tad lighter than what we had modeled

and some of the dynamics called out there - obviously P2P and BillPay, less eBay, [currency] hedge loss swinging maybe four basis points or so year over year. Maybe you could break down some of the components of that 20 basis points and try to maybe put some rough sizing on the various impacts. And perhaps, if there was anything else there. Is there anything with maybe large merchants or cross border?

John Rainey

Sure Tim. Happy to do that. So first let me address I think that the concern that everyone has when they look at unit revenue or take rate is it's somewhat an indication of the health of the revenue stream. And so first let me allay any concerns that from a same store sales basis, our take rate is essentially flat, there's no decline related to merchants pricing or anything like that. The results are several fold, but it's primarily a result of the mix change in our business. And so, let me point to two or three examples which I think will shed some light on that.

So, you noted the hedges, whether you're taking the 21 or 28 basis point decline depending upon which take rate you're looking at. They're about 5 points to that related to the hedge losses. It's roughly a $100 million change in the hedge loss verses the hedge gain last year. And we all know that's around from the gain to a loss from one period to the next. So, I don't think that's really indicative of sort of the overall health of the revenue that we're generating.

We also saw really outsized growth in P2P again. So, our P2P payment volumes grew 46% in the quarter. And you know that's basically increasing that denominator with virtually no increase in the numerator in that. But to be very clear these are customers that are paying one another through a digital wallet which is displacing cash. We absolutely love that. That's the kind of engagement that we want.

We've often said that our biggest competitor is cash, not any of the other players in this ecosystem. And so, what we'll take that decline in take rate all day long because we see that a customer that engages with us this way has a much higher lifetime value than one that doesn't. And then lastly, I would just generally cast everything else into the bucket of mix changes in our business. And those included things like the growth at bill payment. It also includes the decline of eBay, that we talked about in the new year with eBay representing about 6% of our volume.

But you know these are all things that we talked about. eBay is something that we believe we can easily transition through without any major impact to our revenue and margins. And from Bill Pay, I would say you should want us as investors to continue to diversify our platform. This is a great thing, because what we see as we add additional products like this, and we give our customers additional opportunities to engage with us in a different manner than just shopping online, there's a stickiness to those customers. And the lifetime value of those goes up much more. And I know there's a lot of fixation on take rate, but if you just take Bill Pay as an example, Bill Pay comes at a very low take rate.

It also comes at a very low transaction expenses. So that's why we often try to point people to the transaction margin in our business. And as we noted on the call yesterday, the incremental transaction margin that we had in the fourth quarter was three quarters of a billion dollars in the quarter. That's 2x what it was [in the same period] last year. And you know that's the kind of strength that we want to continue to see in our business, and that's why we don't overly focused on just Take Rate without looking at the rest of the picture.

Erica Gessert

Hey John, this is Erica. I'll just add in. Particularly on the Bill Pay point, I just want to emphasize this which is, you know Bill Pay is like a subscription for our consumers essentially as they adopt Bill Pay they're vaulting us and it becomes like a monthly subscription. [W]ithin our [current] ecosystem our subscription customers are some of our absolutely most valuable customers. And so again to the point, you know maybe lower take rates but these are by far some of the stickiest customers we've got.

Timothy Chiodo

Thank you, Erica and John. Great points, I think well taken that the take rate is all about mix components. And thank you for breaking those down. The underlying pricing is very stable, it's these mix components. That's very helpful. Why don't we just move quickly to the take rate cadence as we think about the rest of the year, simply because we have crypto revenue rolling into some extent, beginning in

Q1 which goes into transaction revenue, but the trading volumes do not add to TPV. But then also as you mentioned earlier John, the eBay headwinds are a little bit more first half weighted in terms of their impact. So how can we think about the cadence of take rate over the course of the year implied in the guidance?

John Rainey

I would say the fourth quarter is probably the best proxy right now. We're going to have with a weaker dollar, we're going to benefit from the translation of those international revenues back into the U.S. But at the same time, we hedge for the bottom line, so we'll have hedge losses related to that. We'll see again the mix changes related to eBay, as we wean ourselves off of them as a large customer. And then Bill Pay will continue to ramp up through the year. So, you know I think the fourth quarter is probably a pretty good proxy for how to think about the trajectory of take rate throughout 2021.

Timothy Chiodo

All right, excellent. Thanks a lot. Okay, let's move on, you touched on this earlier John. So maybe this is a good point to do a quick follow up here. So, the eBay migration, of course you called out the 400-basis point headwind for this year, which actually was a little bit better or slightly less impact than what we had modeled originally. So, on that, maybe you could talk about before we get into the numbers and the volumes versus repricing. That 4% headwind, should we think more about that pace of the migration changing or is it just the fact that eBay as an underlying business is doing a little bit better?

Erica Gessert