PayPal Third Quarter 2022 Buyside Call — Goldman Sachs (November 4, 2022)

Summary

Transcript of the PayPal Third Quarter 2022 Buyside Call hosted by Goldman Sachs on November 4, 2022, with Dan Schulman, President and Chief Executive Officer, and Gabrielle Rabinovitch, Acting CFO and Senior Vice President, Investor Relations and Treasurer, and host Mike Ng. Ng notes the upgraded non-GAAP EPS guidance for the year and the commitment to at least 15% non-GAAP EPS growth in 2023, and asks about the changing macro-economic environment. Schulman says a rising interest rate environment is clearly a tailwind for PayPal and that 15% is a line in the sand. Rabinovitch discusses base case assumptions for next year's framework, and later questions cover the credit book.

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Third Quarter 2022 Buyside Call | November 4, 2022


CORPORATE PARTICIPANTS


Dan Schulman, President and Chief Executive Officer

Gabrielle Rabinovitch, Acting CFO and Senior Vice President, Investor Relations and Treasurer



CONFERENCE CALL HOST

Mike Ng, Goldman Sachs



PRESENTATION


Mike Ng

Great, thank you. My name is Mike Ng and I cover PayPal at Goldman Sachs. I have the privilege of
hosting Dan Schulman, President and CEO of PayPal and Gabrielle Rabinovitch, Acting CFO and SVP,
Investor Relations and Treasurer. First, I want to thank Dan and Gabrielle for making themselves
available today. It is deeply appreciated and we value your time. We have a long list of questions so I
will just get into it.

It was very encouraging to see the cost program coming in better than expected and the framework for
2023. PayPal has done an excellent job demonstrating cost discipline and that shows in the upgraded
[non-GAAP] EPS guidance for the year and the commitment to at least 15% [non-GAAP] EPS growth in
2023. First, Dan, can you talk a little bit about the changing macro-economic environment and how that
has affected PayPal’s strategic priorities.

Dan Schulman

Mike, thank you for hosting the call and thanks everybody for joining us. I think the environment that
we are in, as difficult as it is, is an opportunity for us in many ways. I’d rather the economy be booming
along but if you are going into difficult time, this is the time where market leaders have the opportunity
to improve their position coming out of a difficult economic cycle. You’ve got a rising interest rate



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environment. That’s clearly a tailwind for us [given that with higher interest rates we earn higher
interest on customer balances held on our platform]. It’s a headwind for many of our competitors.
Others in the market are struggling to make money right now. They are cutting back, they’re revamping
their business models. We are clearly seeing that in the market and surely some of them won’t make it
as we go through this economic cycle. We think there is an opportunity to emerge stronger from this
than from we went into it. That said, as you pointed out, and as Gabz will talk about in a second, we are
looking to control the things we can control. We cannot control the macroeconomic environment.
However, we can control where we invest in our high conviction growth areas and we can control to a
large extent our cost structure as well. You started to see that come into play. 15% [non-GAAP EPS
growth contemplated in our preliminary FY’23 framework] is a line in the sand for us. That is at least
15% EPS because we feel that we are thinking about the future in a prudent manner. We have a lot of
levers to pull on the operating expense side. We feel like the initiatives and efforts we have taken over
the last several quarters have put us in a good position as we look into what we think may be a difficult
economic cycle going forward.

Gabrielle Rabinovitch

In terms of our base case assumptions as we think about the [preliminary] framework for next year. As
a starting point, this year our expectation is that non-transaction related operating expense will grow in
the low single digits [percentage] and our base case is that next year it will grow at least a few
[percentage] points lower [year over year]. There are certainly scenarios where we could be flat to low
single digits, but we also have significant levers to pull and we can take that [non-transaction operating
expense y/y growth] negative in a tougher economic environment. Some of this is based on the demand
environment and what we see. Generally speaking we are focused on simplification, greater
productivity, increased market share. You have seen us identify meaningful [cost] savings this year, but
we think we can do more. We are taking a prudent approach to the environment generally and we are
committed to having a cost structure in place that is going to drive long term profitable growth and
really allow us to continue to invest in our high conviction areas. In terms of specific line items where
we see opportunity, we see continued opportunity on marketing spend. It’s a discretionary area. We are
holding ourselves to be more accountable in terms of the return on spend, where it’s going, how we
think about it supporting our business and our long-term objectives. That’s an area where you will
continue to see prudence. You’ve seen that [higher accountability] come in this year and I think we’d
expect to see further productivity initiatives next year. In addition, [we are] looking at headcount,
workforce planning, where we really need to be investing versus where we have opportunities to
operate more efficiently, location strategy and other support areas. I feel like we have a good amount of
room to go. We feel like we can operate a lot more productively and we feel like we can support the
business longer term in terms of achieving our growth objectives.

Mike Ng

Great. Thank you both. Just rounding out the discussion on 2023, perhaps you could talk about some of
the biggest swing factors that could affect revenue performance. What’s the macro or eCommerce
environment that you’re assuming, any color there would be helpful.


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Gabrielle Rabinovitch

I think the biggest macro factor is the growth in eCommerce overall and that will help define how we
think about the year ahead. Q4 is a very important one and we are going to be watching it very closely.
Discretionary eCommerce is under pressure for a lot of the reasons we all appreciate and so the growth
of our core business overall will be dependent on the growth of the market. That said, we would expect
to grow at or better [than the overall rate of eCommerce] from a core branded checkout standpoint and
that’s how we think about our business. On the Braintree side, we do have certain merchant
relationships, some of them are larger in nature, some of them chunky. So when we see those
integrations come in that does have a beneficial impact in quarter and then for the next 3 quarters post
that. Dan mentioned yesterday there were some “live to sites” that were a little delayed and when
those come online that will provide some tailwinds from that standpoint of TPV [Total Payment Volume]
growth and revenue growth.

Mike Ng

Great. While we are on the topic of industry eCommerce growth, can you talk about what you see as the
best methodology for measuring that? A couple of investors have pointed out that there are a slew of
options right? In terms of BofA [Bank of America] and card not present data, Visa, Mastercard or the
[U.S] Census [Bureau]. What’s your preferred way of measuring of what industry eCommerce growth is
compared to the branded checkout performance?

Dan Schulman

There isn’t a great proxy and that’s clear. The proxies that come out are usually wrong when you do look
back. If I look back on the various proxies for Q4 of last year and their predictions on US eCommerce
growth, for the most part they were off by 30% and 80% from the actual number. Unfortunately, you
don’t know for sure until there is a backward glance. In real time it’s quite difficult to get an assessment
on it. We have a pretty good view, but between Amazon and PayPal and maybe a couple of others we
are the eCommerce market. So, we have a really good view of what’s happening in the marketplace. We
see which segments are pulling back. We see what countries are under pressure. We did do 5.6 billion
transactions last quarter [Q3’22] alone across 400 million plus active accounts. We have a pretty good
view of that. In larger merchants where they’ve integrated through Braintree, and that would include all
wallets, cards, etc., we have a pretty perfect view of what’s going on with market share. It’s a really
difficult thing to assess in real time coming out of a quarter. We do our best to triangulate with the data
that we have, with that data we are seeing from external sources. But I would agree with a lot of the
investors out there. There’s no perfect source and those data sets do move over time as well.




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Mike Ng

Great, thank you. I guess while we’re talking about market share can you just talk to how the branded
PayPal product is gaining or losing checkout share in certain geographies or verticals. For instance,
apparel vs. marketplace vs. general merchandise, whether that’s in the quarter or in recent trends.

Dan Schulman

Again, the proxies are not great. But the best proxies are in the US and there are a number of them. We
can usually triangulate best in the US versus other markets at least real time. In the US, our branded
checkout [TPV] was up about 4% year over year in the quarter. We think that was ahead of where US
eCommerce growth was, especially if you exclude things like travel [and events]. I think we at least held
share if not gained some share. A lot of the share gain that we see on branded checkout comes from
the tremendous success that we are seeing in Buy Now Pay Later. We are moving upstream in more and
more merchants and important merchants. We have the opportunity I think to displace other Buy Now
Pay Later players in some major merchants over the course of the next 6-12 months as a real sense of
rationality is sweeping through the market in terms of the ability to pay for placement. Our value
proposition there is excellent and our competitive advantage in that space is meaningful. We know
90%+ of the customers that come into Buy Now Pay Later. That means just from an underwriting
perspective, we have much better views than our competitors. It is why our loss rates are we think the
lowest in the industry by a good amount and we are not really seeing any deterioration in loss rates
through the quarter. That is a competitive advantage for us. Things like password-less, we are making
reasonable progress in terms of more and more password-less experiences on the checkout side and it
has gone up by about 10% in our base. We are seeing appropriate conversion improvements as a result
of that. The digital wallet is having an impact for those who have adopted the digital wallet in terms of
their number of checkouts. These are our best experiences, but just our classic experience is quite
superior to entering cards. We have on average 600 basis points better conversion rate, [we are] 8x the
size, [and] better brand preference. We have a lot of opportunity going forward. It will take time for
that to play out over a 35 million active merchant base of a legacy integration, but year-over-year-over
year you are going to see continued improvement in that. That is why I am optimistic that in this more
difficult economic cycle, that we can actually increase the rate of our share gain as opposed to just
maintain it.

Mike Ng

That is great, that is very helpful. I want to go back to something that was mentioned earlier which was
the rising rate environment being a tailwind for PayPal. In the quarter, revenue came in as expected but
other value-added services [OVAS] obviously outperformed. Could you talk a little bit about the key
drivers of OVAS outperformance in the quarter, how you’re thinking about that line item for the rest of
the year and how important is OVAS growth as a contributor as you think about the revenue growth for
2023.

Gabrielle Rabinovitch


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We don’t guide revenue by transaction revenue growth and other value added services growth [OVAS].
That said, OVAS has performed better this year overall. When we started the year, we had some
conservative assumptions around how our credit business might perform in 2022. We thought
potentially the credit environment might be a little tighter, we could have seen originations get
impacted in the overall performance. As it turned out, our credit business has performed very well. The
Synchrony gain share and our own on-balance sheet credit activities have performed quite well, so that
has performed stronger than what we expected. In addition, we have had a nice tailwind from the
[interest] rate environment. As we moved through the year, that has supported stronger OVAS growth.
In the quarter [Q3’22], we grew [OVAS revenue] 6% and we were lapping the benefit from some higher
than normal servicing revenue that we recognized in [Q3’21]. We’d expect OVAS [revenue] to grow in
the mid-teens, that is our expectation for full year 2022. In terms of next year, it could grow around the
same rate or maybe a little bit faster than that. Again, it will depend in part on the performance of the
credit book which could offset some of the benefit we do get from the [rising interest] rate
environment. While interest rates are a tailwind, it is a rolling benefit on our book and that is based
upon how customers stored balance gets invested. There is a note in our [Q3’22 Form] 10-Q, note 8,
that gives you a sense for the duration. While we do have things that are maturing in the next 12
months and we can reinvest at higher yields, part of the book as well is going to be maturing over a
longer period of time. As a practice, we don’t realize losses to move into higher-yielding securities. We
let the book roll naturally and that has been the way we have run it over time.

Dan Schulman

Some of the newer cards we have put out, our [PayPal Cashback Mastercard], our new debit card, they
are beginning to get some real traction in the market. In the first 6 months of putting out our [PayPal
Cashback Mastercard], we got as many people signing up for that as we had in the last 22 months for
our 2% cash-back offer. Our quarter-over-quarter debit card approvals rose by about 40% with the new
debit card coming in. We are looking at in store in a card strategy perspective. We know we have a lot
of room to grow there and we are going to be very responsible around looking at our credit book. We
have a lot of experience in it, and we know these customers quite well. We are ready in a difficult
environment to tighten appropriately. We look at this quite carefully, week-by-week, month-by-month
on all of these different metrics. Right now, we are pretty pleased with what we are seeing in that part
of the business.

Mike Ng

Great, thank you, I just want to close out some of the discussion around the branded PayPal button. It
was helpful to get the TPV breakout and I think you guys said the PayPal branded checkout CAGR was
about 26% [FXN from 2018-2021]. I was wondering if you could help us think about the breakout of that
between US versus international and if you have any commentary around the US and international
performance might look going forward from here on out just given the challenges in places like Europe
and the UK?



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Gabrielle Rabinovitch

We did call out PayPal branded checkout [TPV] growing at a 3 year CAGR of 26% [FXN]. The US growth
was very in line with that. No meaningful difference between the US performance versus ex-US
performance. We have absorbed a period of pressure on our international revenue growth in part
because of the eBay migration. In addition, the stronger [US] dollar has had an impact on cross border
volumes for us. As we start to emerge from this environment, we’d expect to see international [TPV]
strengthen a bit in part due to the lapping. But we haven’t guided US versus international branded
checkout performance and we will continue to give updates as we go about how those businesses are
performing.

Mike Ng

Great, and just shifting to other areas of TPV. Braintree TPV was up 38% in the quarter. You announced
a new partnership with Live Nation. Dan, could you talk about Braintree’s go-to-market with these
enterprise partners and how this product is complementary to branded checkout. Could you just talk to
us about some of the wins that may have slipped into next year that you mentioned?

Dan Schulman

I am extremely pleased with the success that Braintree has seen over the last several years. We are
investing. It is one of our high conviction growth areas. It is one of the three places where we are putting
a lot of investment into. We are seeing the payoff from that. We have a dedicated, in person salesforce
that focuses on large enterprise and global accounts. They have had tremendous success in selling the
benefits of Braintree versus other competitors in the market. Live Nation is a good example of that.
Live Nation is one of the largest deals we have ever done. We already have a partnership with Live
Nation, but [we have continued to grow our relationship]. That is a big deal that we have been working
on. These deals can take 6 months to a year to come to fruition. We have other large deals in the
pipeline, they total $70 million - $100 million [of revenue] in the quarter itself that slipped into next
year. And understandably so. Those merchants have a lot of pressures themselves right now in terms of
what they are seeing in the economic environment. We got on top of the holiday season and they just
had freezes in their roadmap before we could fully implement. Braintree continues to go from strength
to strength. I expect we will continue to see more incremental wins. We have a very strong pipeline
there and the platform is just getting better and better as we invest more and more into it.

Braintree is one part of our unbranded [processing]. [Braintree] is really more our large enterprise and
global [merchant solution]. We’ve been investing in our PayPal Commerce Platform. That is ready to go
out in force this coming year in 2023. That is really focused more at middle market and smaller
businesses. PayPal Commerce Platform will be sold by our inside salesforce but also through our partner
networks as well. A lot of excitement around that. That is one of the places where we have now filled
out that capability with the addition of Apple [Pay]. On all of these unbranded checkouts, whether they
be at the higher end of the market, the middle or the lower end, what we like about the strategic nature
of the partnership when you have the full stack processing is that it puts our very latest integration of


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Pay with PayPal and Pay with Venmo into the merchant checkout flows. It’s sort of a one-two punch of
a benefit for us when we are able to establish a relationship with a merchant that includes full stack
processing.

Mike Ng

Great, and thank you for expanding on that. Just as a follow up on the PayPal Commerce Platform,
strategically could you talk about how that fits in relative to branded and Braintree. Is this something
that helps mitigate merchant churn or does this open up a newer market for you guys?

Dan Schulman

It clearly opens up a new market for us. We have had much older integrations that have been
unbranded. This is our newest platform targeted at middle and smaller market segments in terms of
merchants. It opens up that segment for us. It is a much deeper integration, much less churn as a result
of that, our best branded mark integrations, and also high margin as well because you are at the middle
and lower ends of the market. As you look across unbranded from small to large [merchants], the
margin structure is different, but the ability for us to fully understand share of checkout and put our
best foot forward in terms of branded checkout is without question superior as a result of that.

Mike Ng

Great, thank you. Shifting gears to Venmo. Dan, Venmo has made a lot of progress this year and there is
obviously a lot on the roadmap. In the past you have talked about product parity with PayPal. Can you
talk about some of the things on the roadmap that will be most meaningful over the midterm? Then
Gabrielle, I was wondering if you could talk about your expectations for Venmo revenue in 2022. I think
in the past you have talked about 50% growth prior. Thank you.

Dan Schulman

I am pleased with Venmo’s progress but I am not thrilled with all the progress that we’ve had. I just
want to be up front with that. I feel like we can do a lot more with that asset than we have been able to
do so far. There is a ton of potential there. The people who use Venmo, our customers love Venmo. It is
a beloved brand. They use it all the time. You can tell from our monthly active users [of 57M]. The
monthly active users are up by ~85% in the last 2 years or so. So, a lot of progress there. But I feel like
there can be more progress. John Kim, [our Chief Product Officer], is really leaning into this piece
because we see a lot of opportunity there. The places where we’re going to focus in on Venmo is
around commerce enablement. Business profiles have really taken off. The ability for us to leverage tap
to pay functionality [by working with Apple] I think [has the potential to] make a big difference in that
part of the Venmo revenue streams. I also think Pay with Venmo [has the potential to] become a much
bigger element of Venmo overall. I think the relationship that we have with Amazon - which is a
positive, constructive relationship, both companies are leaning into the opportunity - has the potential
to be game changing. There are a lot of other big companies who are implementing Pay with Venmo,


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from Tik Tok to Shein, to Twitch to Discord. These are some big merchants that are implementing Pay
with Venmo and I think we will see more. We are going to revamp the card strategy, we started to
begin to do that. We think that is one place that Cash App has done particularly well on, and there is no
reason why we should not with our scale and size be able to really tap into a revamped card
functionality. Over time, we will also begin to see more basic financial services there, savings and other
things come into the Venmo wallet. There is focus on things that have to get done right now. Amazon
and Apple are big opportunities, we want to make sure we take full advantage of those. We’ve got some
basic hygiene work to do there. Good progress, but I wouldn’t call it great progress right now. In terms
of revenue growth, we had anticipated that we would be about 50% revenue growth [for FY’22] and that
is where we are year to date. Q4, like the rest of the business, is going to be weaker than we expected.
That will probably take Venmo revenue growth into the 40%’s [year over year growth for FY’22]. That is
probably a good place for you to assume it will end.

Mike Ng

Thank you for all that color and then separately thank you for all the additional disclosures around TPV.
Given the disclosures around cross border volumes that you’ve given in the past and investor
benchmarking of US branded PayPal checkout, could you help us understand the cross border exposure
by TPV type. Separately could you just talk about whether you plan to give this as a regular quarterly
disclosure, why or why not?

Gabrielle Rabinovitch

Cross border for the past 4 quarters has hovered in the low teens in terms of overall mix [of TPV]. That is
coming down from a slightly higher mix several years ago. From the standpoint of where [cross border]
is more pronounced in the TPV disaggregation that we provided, it is more pronounced in branded
checkout, in P2P ex-Venmo and in eBay. Those are the 3 buckets where I’d call out that cross border has
a more meaningful impact. Venmo [is] US only. Unbranded processing is predominantly Braintree, and
Braintree is predominantly US. That is why you see that difference. In terms of how we think about
cross border over time, the eBay transition in conjunction with very outsized growth in Braintree over
the past few years has resulted in our overall cross border mix being a little bit lower than what you
have seen historically. I would also call out the stronger dollar, which does have a distinctly negative
effect on our overall cross border activities. We see the stronger dollar reducing some cross border into
the US from Europe and other corridors. We do not see a commensurate increase in US cross border
activity buying cross border goods from non-US sellers when the dollar is strong. That said, facilitating
cross border commerce is a very important part of our value proposition to our consumers and
merchants. It has been a very important part of our business and it will continue to be. We feel very
good about the overall opportunity in international markets and we are going to continue to focus on
the markets that are most important for our business going forward. I would not expect us to be making
this [TPV disaggregation] disclosure quarterly. I think we will update it from time to time to make sure
people are understanding the mix of our business as we move forward.

Dan Schulman


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There are 2 sides to that story in my view. One, supply chains are getting better. I think China, which has
put a lot of pressure on us over the last couple of years, will likely be opening up more. We’ll see where
they stand on their Zero COVID policy. From a lapping perspective, you could assume things would
move up for us as well. There are some pros in terms of what we can expect from cross border. On the
con side, there is still a lot of geopolitical tensions in the air. You’ve got China-US relations, you’ve got a
war that really shows no end in sight in Europe which is putting a depressive element into a lot of cross
border and a lot of inflation as well. I think we look at this and we try to be quite even handed [with]
both the opportunity we see as well as some of the risks around cross border. Probably a little bit more
on some opportunity sets for us, but clearly some macroeconomic and geopolitical risks that we’ve got
to navigate.

Mike Ng

Great, excellent, thank you for that. I was wondering if we could talk a little bit about transaction
margins. What are your expectations for transaction expense rates, loan loss rates and transaction loss
rates for the rest of the year and into 2023. Obviously there are a lot of moving parts there with the loan
book continuing to grow and also it seemed like transaction loss rates came down quite a bit in the 10-Q
that was filed overnight.

Gabrielle Rabinovitch

Our TE [transaction expense] rate [as a percentage of TPV] in Q3 was 89 basis points, up 6 basis points
year on year. That was predominantly driven by Braintree mix in our business as well as from a funding
mix standpoint, a little bit more normalization of credit relative to debit. We can [expect to] see a little
bit more of that next year as well if we think about what the historical mix of credit and debit was on our
platform. When we think about the year [FY’22], I would expect the year to actualize around 90 basis
points. That would contemplate a little bit higher of a TE rate in Q4. We see a seasonal increase in credit
[card funding for checkout transactions] in Q4, so that would be consistent with historical trends for us.
Next year [for FY’23], I would expect maybe a slight increase from there, so maybe a basis point or two.
So much of this is volume mix dependent. If we just think about the trends we are currently seeing and
we are getting some cost benefits from scale in relation to our network agreements, that is how I would
think about the increase next year. You are right from a transaction loss standpoint, transaction loss
came down in the quarter. Sequentially, it came down by about 4 basis points [as a percentage of TPV].
Year on year it came down about 1 basis point. As a reminder, Q2 of this year was a little idiosyncratic,
we did have a single merchant issue where we had some increased reserves that we called out in the Q2
10-Q filing which was about 114 million dollars in reserves. This quarter was a very normal quarter for
us. We managed our merchant losses very successfully and that high single [digit basis points as a
percentage of TPV] is how I think about the [transaction] loss performance next year. On the credit
book overall, some of this will be dependent upon the general credit environment. If we see a
continuation of what we’ve seen this year and nothing particularly draconian from the standpoint of
increased macro risk, I would expect to see the credit book, the loan loss rate, maybe tick up 1 or 2 basis
points next year.


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Mike Ng

Great, thank you for that. Gabrielle, I was wondering if you could talk a little bit about your Forex
hedging strategy. What is the duration of that typically look like?

Gabrielle Rabinovitch

Hedging [gains recognized in international revenue] in the quarter [Q3] were 156 million dollars. That’s
in relation to 44 million dollars of losses in last year’s 3rd quarter. That did benefit our take rate by
about 6 basis points. In terms of how the book is positioned right now, as of the end of September we
had about 500 million dollars of gains that would roll over the next 12 months. Generally speaking the
book has maturities of 12 months or less. We use that to reduce the volatility of cash flow to our
business from our international business. We disclose the overall impact of FX on our business. While
we did have a difference between our spot and FX neutral revenue growth rate, if you look at the impact
on operating income from FX in the quarter it was 11 million dollars. We really look to manage the
operating income impact from our FX exposures. We only hedge in core currencies relative to our
business which is why we see transactions in many more than that.

Mike Ng

Great, thank you. Dan it was encouraging to see the new Apple announcement with initiatives that
seem like they should all drive TPV, including tap to pay and Apple Pay for unbranded checkout flows
and being able to add the PayPal and Venmo cards to Apple Wallet for Apple Pay. Could you talk about
some of the implications for this deepening partnership and what you have seen in other OS or handset
integrations outside of Apple?

Dan Schulman

I think it [has the potential to] drive incremental TPV and revenues and margin for us in all of them. It’s
a big step forward in our relationship with Apple. We’ve been partners with them for quite some time
and we have a good relationship at the very senior levels at both companies. They’ve been on Braintree
for years and years now. When Apple Pay first came out we put them on Braintree right away. PayPal
has been accepted in the Apple store and the App store and they’ve rolled that out internationally as
well. We’ve been partners for quite some time but this was a substantive step forward. I think we are
going to be very competitive in the small merchant base and the micro merchant base with this offering.
The ability for these sellers to seamlessly do omni between online and offline right now is going to be
extremely simple for them. Three pieces of information - tax ID or social security depending if you’re a
gig or small business, your phone number and your date of birth - that’s it and you’re accepting
payments. The payment rate that we are charging here is 2.29% plus 9 cents. If you look at the biggest
competitor out there right now, they charge 2.6% and 10 cents. They’ve got a base to protect and we
have a lot of green field opportunity. We are going to aggressively go after this and both Apple and
PayPal are quite excited about this opportunity. We’ll be doing trials with Venmo [Tap to Pay] this


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quarter, we’ll roll that out more substantially in the first quarter of next year and PayPal merchants to
come later in the year. Unbranded is very important to both of us and to our merchant customers. In
our PayPal Commerce Platform, without having Apple Pay there, it is less than a competitive offer and
that’s a win for both companies. It enables us to deepen our relationships with merchants, put our best
branded mark out there and enable merchants to have full choice which is just an extension of our
choice strategy that we’ve had in place for years. Enabling our consumers to put their network branded
Venmo [and PayPal] credit and debit cards into the Apple Wallet. They’ll [be able to] use those in store
or online, wherever Apple Pay is accepted in the US. This is a big step forward for us. It opens the
opportunity for PayPal customers to be able to shop in store with their cards. Cards are a much bigger
part of our strategy, going into store. We also can provision one-time tokenized digital cards into the
Apple Wallet that will enable things like our buy now-pay later proposition to be used anywhere that a
consumer wants to shop online or offline. We’ve been doing this around the world with Google Wallet
and Google Pay, embedding our card instruments. We’ve seen pretty impressive results as a result of
doing that. In Germany for instance, where we have quite a bit of share on Google Wallet in terms of
offline, we also see a 20% lift in branded checkout experience. These are consumers who are using
PayPal more and more and we see a lot of halo effect as a result. We are quite excited about it. It’s a
first step, it’s not the final step in terms of everything that we could possibly do with Apple. But it’s a
very substantial step forward and a big step forward in the relationship and partnership between our 2
companies.

Mike Ng

Great. Gabrielle, I was just wondering if you could talk a little bit more about capital allocation. You will
do another billion dollars of [stock] buy backs in the 4th quarter. I believe and you’ll be generating
greater than 5 billion dollars of free cash flow. How are you thinking about capital allocation and
repurchases going forward and how much does repurchases contribute to the earnings growth in 2023 if
you’re willing to quantify that, thank you.

Gabrielle Rabinovitch

We’ve anticipated a similar level of [share] repurchase activity next year as this year. That is the baseline
assumption. Returning capital to our shareholders continues to be our single biggest priority from a
capital allocation standpoint and I think it will continue to be. In Q4, our anticipation is that we’ll buy
back an additional billion dollars [of stock] on top of what we have already done this year. That will take
us to about $4.2 billion on the year for buybacks. The longer term capital allocation framework that we
had given contemplated about 35-40% of free cash flow being returned to shareholders in the form of
repurchases. We’re at 2x that this year and I expect that to be consistent next year, within that range.
We are continuing to very much prioritize capital return programs. I would point out what we’re doing
on the credit externalization standpoint, in terms of how we think about funding our credit business,
part of that is so we have more capital that we can return to shareholders over time and we can have
more flexibility. I would also highlight that Q3 was a fantastic quarter for us from a free cash flow
standpoint. Free cash flow reached 1.8 billion dollars in the 3rd quarter. Very strong performance there
and we continue to expect our business to have strong free cash flow as we move forward.


                                                     11
                                                      Third Quarter 2022 Buyside Call | November 4, 2022



Mike Ng

Great, Dan any closing remarks as we wrap up?

Dan Schulman

The only thing I would point out is we are taking an appropriate and prudent outlook on what could be a
difficult economic cycle coming up. We are putting into place firm controls over the things that we can
control, in order to number one, invest to take advantage of the opportunities that we see in this
environment and we see quite a number of them, and number two, assure that we can drive our
operating margin and generate robust EPS growth for our shareholders. We think we can do all of those
even in a difficult economic cycle and we are very committed to that. We look forward to everyone’s
input and thoughts as we move along in this environment. Mike, again thank you very much for hosting
the call. Thank you everybody for taking the time and we look forward to more individual one-on-one
conversations with many of you. Thank you.

Mike Ng

Great. Dan, Gabrielle, I thought this was a fantastic and productive session. For investors listening in, I
hope you felt the same as well. Really appreciate everybody’s time, thank you for dialing in.




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