PayPal : Q1-23 Earnings Buyside Call Transcript

First Quarter 2023 Buyside Call | May 9, 2023

First Quarter 2023 Buyside Call | May 9, 2023

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

Dan Schulman, Chief Executive Officer and President

Gabrielle Rabinovitch, Acting Chief Financial Officer and Senior Vice President, Investor Relations and Treasurer

C O N F E R E N C E C A L L H O S T

Jason Kupferberg, BofA

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

Jason Kupferberg

Thanks, everyone, for joining us. We're pleased to be hosting the buy-sidecall-back this quarter. I'm Jason Kupferberg, the payments analyst here at Bank of America. We have Dan Schulman, CEO. We have Gabrielle Rabinovitch, acting CFO. We have Ryan Wallace from Investor Relations. And so appreciate all the questions and topics that people lobbed in ahead of this call. I'm going to try and get through as many of the key topics coming out of last night's earnings call as possible. But first of all, thanks to the team for spending some time with us today. We appreciate it.

Dan Schulman

Yeah, thank you, Jason.

Jason Kupferberg

I wanted to start with TPV [Total Payment Volume]. You know, each segment of your volume did see acceleration in the first quarter, but which TPV segment is actually outperforming your initial expectations by the greatest degree? Because then that will kind of segue us ultimately into the implications for revenue and transaction profit growth. So maybe if we could start there.

Dan Schulman

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First Quarter 2023 Buyside Call | May 9, 2023

So I'll start and then maybe Gabz will jump in. The good news is we saw acceleration [relative to Q4'22], as you mentioned, across each element of the business. International grew, cross-border grew, branded checkout [growth accelerated] 200 basis points. Unbranded [growth] was up 100 basis points from Q4.

So Venmo [growth] is up 550 basis points. So there's pretty strong TPV growth across the board. Obviously, when you've got unbranded growing, 30% [on an FX-neutral (FXN) basis] versus branded growing 6.5% [FXN], that puts the majority of TPV growth on that just because of the different growth rates, but all parts of the business accelerated.

We're pretty pleased with what we saw in Q1 as a start to the year. And I think part of that is we think e-commerce is probably growing a little bit faster than we expected in there. And honestly, over the long run, we expect e-commerce to really return to more traditional growth rates. It's still rebounding from the pandemic and is in the middle of an economic recession with high inflation that's pushing down discretionary spend, but that will normalize over time. But I think that's probably the best way to think about our TPV growth right now.

Jason Kupferberg

Okay. So let me pick up on your comment around the industry growth for global e-com[merce]. I think you said on the call last night you guys are now thinking low single to mid single digit versus down low single to up low single prior. So I guess hypothetically, if that industry forecast improves further, would that drive more upside to PayPal's revenue growth outlook for 2023?

Dan Schulman

Yes, certainly, of course it would. Conversely, you could say the opposite as well. If it slowed, that would also be a negative impact to us. But look, I think there are clearly more people moving into e- commerce. We thought it was going to be negative two to positive two globally. I think probably worst case is going to be low single digits. It could be as high as mid single digits. And you're beginning to see more of a return to some goods. It was really skewed coming out of pandemic towards services. People wanted to travel; people wanted to eat out. At some point people have to buy clothes again. And we started to see some of that, especially in January and February, we saw a pretty nice uptick in the fashion and other verticals that are more discretionary in nature.

I think in the US, people have a variety of opinions on as the Fed moving fast enough or too fast or too much, but inflation is coming down and when inflation comes down, we start to see discretionary spend start to rise on that. So if we see more of that happening, of course, it's tempered by increased chances of a recession, that tightening of lending going on. But in general, inflation coming down is a good thing for e-commerce.

I would also say we're beginning to lap and see improvements. China is definitely improving. It's still negative year over year, but really, actually, every single quarter we see that improving. UK started to stabilize as well and improve sequentially, which was encouraging to see. But I think e-commerce will be low to mid single digits. I think that's probably a good planning assumption for all of us. And to your point, there could be acceleration on that, but I see an equal mix of potentially negative things to impact that, too. So I think, being measured on that is probably the right thing. Over the long run, we clearly feel like e-commerce continues to accelerate.

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First Quarter 2023 Buyside Call | May 9, 2023

Jason Kupferberg

Okay, understood. And then if we look at second half revenue growth for this year, you mentioned last night, it's expected to be about in line with the first half. So is that in constant currency terms? Because I know you'll be trending to about 9% [growth] in the first half of 2023. And then if you can just comment on a related note, what gave you the confidence to effectively reinstate a full year revenue growth outlook, given that it's still somewhat early in the year?

Gabrielle Rabinovitch

Yeah. So, the revenue growth commentary that we expect roughly in line growth in the first half and the second half really relates to both spot and FX neutral. So when we look at the overall composition of 1H versus 2H, we see a relatively consistent growth rate. When we started the year, we did call out a little bit of lapping pressures that we expected to impact us in the back half of the year and that would contribute to some deceleration in the back half of the year. That was lapping some pricing initiatives that benefited us in the back half of 2022. It also related to some newer volumes that we saw in the Braintree business that came onto our platform in the back half of last year and that were chunkier larger merchants.

And when we started the year, based upon the pipeline and what we were seeing, we wanted to call out that in fact, based upon sort of what we were seeing at that point in time in early February, that we did expect to see some deceleration based upon both pricing as well as Braintree lapping. We're now in May. We have much clearer visibility to what that pipeline looks like, both in terms of our own initiatives across our business but also in the Braintree platform. And so based upon what we expect to see now in terms of new merchant volumes coming on, as well as increased volumes from existing merchant relationships, that results in a relatively stable growth in the first half and the back half.

Dan Schulman

Yeah. I think the other thing I'd add to Gabz's remarks, which I think are right on the money, is clearly we're seeing the impact of the initiatives that we've put into place. We've been working quite hard over the past year plus and a very focused, honed set of activities. And the team is making really good progress on it. I would say in general, our checkout team, everything they've been talking about, they've been delivering on. They have a really robust roadmap. They're hitting their marks quarter after quarter and we're seeing improvements.

And, as I said on the call, there's no one silver bullet. There's lots of small things that we need to go do. You've got to improve latency a second at a time. And we've made good progress on that. Availability, the same thing. Passwordless login, the same thing. But when you have our scale, there's some cumulative effect of those little things starts to really matter in the market. And I give that team probably a pretty high grade on execution and impact. And I also would say on the unbranded side, look, we spent the last couple of years really upgrading that platform, putting a lot of money into Braintree, getting ready to put out PPCP [PayPal Complete Payments] into the marketplace for the small [and] mid-sized business.

So we spent a lot of money upgrading the infrastructure, making sure we had the right availability, redundancy, the right basic feature functionality in place to win in that market. And the team executed extraordinarily well there, too. And as a result, you're seeing us actually win a lot in the market and get

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ready to move into a new TAM [total addressable market] as well. And we know what we need to do on that in terms of margin structure, et cetera. We have a game plan on it. But, as I've told the team, let's win in the market and we'll have the margin value added features because we know when they're coming out, we know what they'll do, just as we've known what checkout would do and what it would happen if we upgraded our infrastructure in unbranded as well. So I think we're feeling pretty good about our initiatives. To Gabz's point, we're further in the year and we see the momentum continuing.

Jason Kupferberg

Let's move over to transaction profit. Obviously, lots of questions there. It was up almost 1% in Q1. We know you don't provide specific formal guidance on this line, but is that the rough growth trajectory that we should be thinking about for the balance of 2023 just as investors try and reconcile the transaction profit growth with the broad-based acceleration in TPV that we saw in the quarter?

Dan Schulman

Yeah, I'm going to let Gabz talk about that in a second, but I just want to talk about what our game plan is. Our game plan for transaction margin growth is to not be in low single digits. Like that's not the game plan. Our game plan and we've had this over the course of our history, [has] seen transaction margin growth in high single digits, double digit growth and that is our aspiration for it. That's the game plan that we have. This year there are several anomalous things that we are facing on transaction margin growth, but clearly we know exactly what we need to go do and we've got a game plan to raise that pretty significantly as we look forward. We can talk about that later, but Gabz, if you want to talk about the year specifically.

Gabrielle Rabinovitch

Yeah, sure. As Dan mentioned, we view this as some transitory impacts on the business and not a structural change in the way we actually drive transaction margin dollar growth. So historically, when you look at the performance, as Dan indicated, there have been periods where it's been in the mid- teens. There've been periods where it's been in the high singles. But overall, historically it's been much stronger than this. And we really do think about what's happening in the business this year as much more transitory and nothing that is a structural change. This year, we are lapping some revenue benefits last year that do create some headwind to us. Some of that is based on some pricing.

Another piece of that is based upon some contractual benefits we got from merchants last year. That was part of some merchant cleanup that we did and that was just merchants that were behaving outside the parameters of our acceptable user policies. And we actually shut down some of those merchants and we collected from them. So that was predominantly coming in our Asia market, so APAC [Asia- Pacific] and China more specifically.

In addition, there's work that we're doing that's modernizing our platform. And Dan mentioned some of it. We talked a little bit about some of it last night [on Q1'23 the earnings call]. We're launching PPCP, we actually are not continuing with PayPal Pro and PayPal Pro is a platform that's been a PayPal platform for probably more than 15 years. The vast majority of our initiatives in terms of how we support SMBs [small- and medium-sized businesses] on the unbranded processing side is moving in the direction of PPCP. We're excited, of course, about what that means longer term. But as we transition, there are some impacts to us that actually are real headwinds to TM [transaction margin] dollar growth.

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In addition, we're deprecating PayPal Here. That's something that is in the market and kind of has been well documented. That too has a similarly negative impact overall this year to TM dollar growth. And the same is true for some upgrades we're making to invoicing solutions.

So these things really are transitory in terms of how they affect the profile of transaction margin dollar growth in year. I'd also just call out for FX [foreign exchange] fees can continue to be a headwind for us in Q1. This is something that we do expect to work its way out of our system as we move through the year. And in addition, in Q1, you did see the impact from higher loan loss provisioning, which did have an effect on TM dollar growth. And so that piece alone, if you were to uphold our loan loss level as a rate of TPV or rate of revenue constant from Q1 last year, would have been about an $85 million benefit to us. And so that was a hit in the quarter.

And so all that to say that transaction margin dollar growth was impacted in the quarter. We do expect it to be more muted for the full year based upon our expectations. And that's not coming from branded putting pressure on our business. We're actually seeing very, very nice growth from branded. We saw a 200-basis point acceleration in our branded checkout business in Q1.

We are expecting to see continued strength in that business as we move forward. And so that's really not the pressure point that we're seeing in some of these other pieces of the business. And then obviously the very outsized growth on the Braintree side as we're continuing to improve the margin profile of that business is affecting it as well. And so I'd say for the year, I would expect relatively similar transaction margin dollar performance as Q1, but this is not something that we view as structural. And as you heard Dan discussed, we sort of have many initiatives in place right now that we're working towards that will move this in a stronger direction next year.

Dan Schulman

Cleaning up our legacy infrastructure is exactly the right thing for us to do. Sure, there are some short- term hits on it, but like cleaning up our infrastructure to make it the most modern, cost-effective infrastructure is absolutely the right thing to do. So we're making some hard decisions to move, but there are clearly the right long-term decisions- I wouldn't even call them long-term like short-to-medium term decisions for us and I think Gabz did an excellent job in explaining the rest of it.

Jason Kupferberg

Right. So if we put the loan losses on the side because we can isolate that impact pretty easily, but we focus on the other pieces, like you mentioned, modernizing platform, you know, sunsetting PayPal Pro and PayPal Here, et cetera. How much of a headwind were those items collectively to the transaction profit growth? Just wanted to understand maybe the relative contribution of some of those pieces to the transaction profit growth headwind.

Gabrielle Rabinovitch

It was actually pretty material. The core branded TM dollar growth in the quarter was actually very strong. And so it was material in the quarter. We don't provide this kind of disclosure on this level and there are a lot of moving parts and pieces. But the things that we called out truly are drivers of the pressure in the quarter and [are not] strategic and long-term in nature. And it was material in the quarter.

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