PayPal : Q1-21 Earnings Analyst Call Transcript

First Quarter 2021 Analyst Call | May 5, 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 Erica Gessert, Senior Vice President, Finance, Planning & Analytics

Gabrielle Rabinovitch, Vice President, 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

Jason Kupferberg, Bank of America Merrill Lynch

Ashwin Shirvaikar, Citigroup

Timothy Chiodo, Credit Suisse

James Faucette, Morgan Stanley

Harshita Rawat, Bernstein Research

Tim Willi, Wells Fargo

Craig Maurer, Autonomous Research LLP

George Mihalos Cowen & Company

Josh Beck, KeyBanc Capital Markets

Bob Napoli, William Blair

Dan Perlin, RBC Capital Markets

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First Quarter 2021 Analyst Call | May 5, 2021

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

Operator

Good afternoon and welcome to PayPal's Q1 2021 Analyst Follow-up Q&A Call.

I would now like to turn the conference over to Mr. John Rainey. Sir, you may begin.

John Rainey

Thank you very much. Good evening everyone. We're looking forward to being able to address your questions. As usual, I am accompanied by Gabrielle, Head of IR and Corporate Finance, as well as Erica Gessert, our Senior Vice President of Finance.

With that, I'll just turn it back over to you, Operator, for the first question.

Operator

Thank you, sir.

For our first question we have Jason Kupferberg from Bank of America. Your line is open.

Jason Kupferberg

Okay, thanks. Good afternoon. Hi John, how's it going?

John Rainey

Hey Jason, it's going well. Thank you.

Jason Kupferberg

Good, good. Just a couple of quick things. First I wanted to just pick up on the commentary regarding transaction expense. I think coming out of last quarter the thought process was maybe we'd land around mid 80s [basis points] or so for the full year, but obviously you're starting the year right at 80, so is low 80s or low to mid 80s kind of a more realistic assumption based on how you see the business unfolding?

John Rainey

A lot of that is going to be influenced by travel and events, so that tends to be a little bit more card processing, which is going to carry a little bit higher transaction expense. As we see a resumption there, that's going to put some inflation in that number.

As a comparison, the decline in that vertical year-over-year in the first quarter was 24%, and that's an improvement from roughly two times that , a 50% decline that we were seeing last year [in 2020]. As that

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First Quarter 2021 Analyst Call | May 5, 2021

resumes there will be some inflation there, but again, we're also on the other side of that seeing benefits from more bill payment volume which has a very low transaction expense, and just the overall sort of shift to debit mix.

To be very clear there, if I could use this opportunity, Jason, when I on the main call talked about the 82% funding mix, I was referring to Buy Now, Pay Later, not the entirety of our platform.

But as we think about how that unfolds for the year, look, I think 80 to 85 bps is probably a good range to think about. Again, with some of that being unpredictable based upon how volumes are shifting.

Erica, is there anything that you would add to that?

Erica Gessert

No, I think you covered it. I did say the things that are kind of counterbalancing are kind of the regrowth of travel and then the one thing that continues to surprise us is the persistence of debit usage in the core, which you covered on the call.

John Rainey

Yes, okay.

Jason Kupferberg

Just a follow-up, I'm curious just in the context of your second quarter revenue guidance, do you assume some softening in year-over-year growth in May and June versus April? Just based on how the year-over- year comps kind of lay out. Have you built that into the assumption for the full quarter?

Erica Gessert

This is Erica. I think like many organizations, what we observed last year was the biggest height in growth within Q2 was really in the kind of early May timeframe; call it last week of April and then early May where we were seeing huge surges in digital spend, kind of pantry packing. At the same time, we started to see early stimulus come out. And so we do expect to see a little bit of normalization as we hit the back half of Q2.

Jason Kupferberg

Yes, okay. No, it makes sense. I just was curious if you kind of built that into the forecast. It sounds like you did. Thank you, guys.

John Rainey

Yes.

Erica Gessert

Yes.

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First Quarter 2021 Analyst Call | May 5, 2021

John Rainey

Thanks, Jason.

Operator

Our next question comes from the line of Ashwin Shirvaikar from Citi. Your line is open.

Ashwin Shirvaikar

Hey John, how are you?

John Rainey

Hey Ashwin, hope you're doing well.

Ashwin Shirvaikar

Yes, thank you. Thanks for asking.

I guess my first question was, very impressive cash flow performance in 1Q, and it continues at a pretty high level, but in terms of conversion tails off just a bit. Were there any one-time factors in 1Q?

John Rainey

You know, Ashwin, nothing that really jumps out to me. I can go back and look at that a little more closely, but as we think about our business, there were no sort of one-time items that I think affected that.

We do have a little bit of seasonality with our cash flows, but even that shouldn't really drive any outsized performance there. So, nothing that I can think of right now.

Ashwin Shirvaikar

Got it, okay.

Then in terms of just to clarify so we have the numbers straight on eBay trailing off, is it sort of ratable to 2Q, 3Q and then we are down to basically the competitor portion, or how should one think of that?

John Rainey

It is fairly linear as we move throughout the balance of the year. Effectively, our assumption right now is that by the end of the year they will have virtually all of their geographies, maybe save for one, that have transitioned to managed payments. We likely will exit the year at a place where we're not going to be talking about any additional transition to managed payments.

Now, obviously we'll have the lapping of some of this next year, but we think that they'll effectively be done by the end of the year.

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First Quarter 2021 Analyst Call | May 5, 2021

Erica Gessert

Hey John, can I just add a couple of points on this, which is I think the other thing-the numbers on the call that we quoted, the kind of 6 percentage point headwind to growth rate, that's really the intermediation impact. We also obviously are lapping outsized growth of eBay's core business in Q2 in particular, which also is quite a large headwind, and so there's also that kind of factor right now in Q2 and actually even as we persist through the year that also has a little bit of a headwind on our growth rate.

Ashwin Shirvaikar

The additional 2 percentage point headwind includes what you just mentioned, right?

John Rainey

It does not, no.

Erica Gessert

No, it does not.

John Rainey

What we called out on the call was just the intermediation piece.

Ashwin Shirvaikar

Okay, I understand now. Thank you.

John Rainey

Yes.

Operator

Our next question comes from the line of Timothy Chiodo from Credit Suisse. Your line is open.

Timothy Chiodo

Thanks a lot. One a little bit more mechanical and then one modeling one.

On Pay with Venmo, realize the button is already out there, it's live. You have revenue from it, and it's in lots of major apps. But as the button rollout starts to progress in the back half of the year, how can we think about the approach there? It might be different for large merchants and platforms. How might it be different for small businesses? How are you rolling that out in terms of advertising or salesforce for the

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