PayPal First Quarter 2022 Buyside Call (Wolfe Research, April 28, 2022)
Summary
A transcript of a Wolfe Research First Quarter 2022 Buyside Call with PayPal dated April 28, 2022, hosted by Darrin Peller of Wolfe Research with Dan Schulman, President and Chief Executive Officer, John Rainey, Chief Financial Officer, and Gabrielle Rabinovitch, Senior Vice President, Corporate Finance and Investor Relations. Schulman says the company has honed in on two main initiatives, checkout and the digital wallet, and is de-emphasizing certain parts of the international expansion. Rainey says guidance changed because things had gotten worse, citing the war in Ukraine, supply chain issues in China and a first-quarter contraction of the economy. Rabinovitch says the guide contemplates revenue growth of 14% to 18% in Q4. Schulman says the platform exited last year with $1.25 trillion of total payment volume.
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First Quarter 2022 Buyside Call | April 28, 2022
CORPORATE PARTICIPANTS
Dan Schulman, President and Chief Executive Officer
John Rainey, Chief Financial Officer, and Executive Vice President, Global Customer Operations
Gabrielle Rabinovitch, Senior Vice President, Corporate Finance and Investor Relations
CONFERENCE CALL HOST
Darrin Peller, Wolfe Research
PRESENTATION
Darrin Peller
Good morning and good afternoon to everybody joining us. We're really privileged to be able to host the
team here on this post first quarter call with Dan the CEO, John the CFO and Gabrielle head of IR and
incoming interim CFO. When we think about the questions we're getting, there's been so many that I want
to really get right to the point. And first of all, thank you guys for joining us. Really appreciate it.
John Rainey
Of course.
Darrin Peller
Dan, having you on, I think it probably makes most sense just to start with the strategy of the business
and obviously a lot has happened in the business and the overall retail and e-commerce landscape over
the past year. If you could just start with your current strategy and the evolution of that strategy relative to
the past six or 12 months, I think it'd be a great place.
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Dan Schulman
Sure. Starting with the easy question, Darrin. I think the main parts of our strategic thesis remain
consistent. I think the world continues to digitize, that the secular growth of e-commerce and digital
payments will remain persistent, and will continue to grow.
Consumers, at least based on our surveys of them, want a digital wallet that goes from upstream
shopping - kind of get me the things I want, the best deal on those - to the transaction itself. And there
they want maximum flexibility on how they pay, now or later, or the ways that they pay for that to post
purchase, tracking my orders, any returns that they may have, any refunds.
And then put that on into an integrated view of their financials. How do they control their budget? We view
our “super app” as a digital wallet that brings all these elements together so that people can live their
financial lives in a simple, easy format.
We are honing our focus though. In the past, we had a very wide range of things we were focused on –
but we’ve now honed in on really two main initiatives that we need to execute extremely well against. One
is checkout - which I'm sure we'll probably talk about later. Second is everything we’re doing around the
digital wallet. If we do well in those two things, then we will continue to grow our share [of payments and
commerce], going forward.
We are de-emphasizing certain parts of our international expansion. Engagement is all about multiple
services and consumers moving into more and more [of them]. We will continue to support cross-border
commerce in many of the international markets we already operate in. [But when we think about
expanding beyond cross-border commerce in some of these international markets], right now it is just too
expensive [to roll out, support new services, and build awareness] in some of these markets. […] We
have a lot of room for growth in our core markets and we're focusing there.
Finally, we've also thought a lot internally over the past several months, just about our organizational
strategy.
[We have been thinking about] how do we drive end-to-end accountability and ownership of metrics. We
are moving much more P&L focus to our product teams, organizing around both merchant and consumer,
and a focus on productivity. How do we streamline? How do we grow more efficiently and get product out
quicker? Those are the main themes of our strategy [and areas that we want to optimize for].
Darrin Peller
Thanks, Dan. Let me shift to the numbers now. With the revision [reduction] to your 2022 revenue and
EPS guidance - can you walk us through again, how you're thinking about the macro environment and the
assumptions embedded in that relative to when you gave guidance in February? I know you beat Q1 by a
bit, does that imply April's off to a rough start? Could you give us more color on the assumptions?
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John Rainey
Sure, Darrin, I'll start and others may want to chime in just as a reminder, we've said this several times,
but when we gave guidance at the last quarter's call, we very clearly said that if things don't improve, we'll
come in at the low end of that guidance. And since that point in time, clearly things have gotten worse,
right?
There is the war in Ukraine that has exacerbated inflationary pressures across the globe. Supply chain
issues in China are more pronounced now. And then the latest read this morning is that the economy
contracted in the first quarter [based on Q1’22 GDP in the U.S.]. And so that was the primary reason for
changing our guidance. The approach that we've taken for the balance of the year is different than what
we did before.
We're basically assuming that things continue to get worse. We've been trying to predict the return to
normalization coming out of the pandemic. And it's been a little bit like catching a falling knife. You've got
sort of two things happening here. One is consumers, obviously going back to more in-store experiences,
as well as more services versus goods, both of which are sort of contrary to what our platform provides,
or is not where our strengths are.
At the same time that is happening, there is the effect of a weaker economy [and] more inflation putting
pressure on disposable income [for consumers]. One of the things that we've seen on our platform [during
the pandemic] is certainly a shift to more discretionary items versus non-discretionary. And again, the
non-discretionary items, think of things like gas, food, energy, those are not necessarily where all of our
strengths are.
When we look at the first quarter [of 2022], we always knew that the back half of March was going to be a
very pivotal point for us to understand how those trends played out because we were comparing to a
period in the prior year where there was a lot of benefit from stimulus, and we made certain assumptions
about that. The back half March was weaker than what we expected and that has continued into April.
That’s what caused us to really reframe our guidance and just take a much more conservative stance
right now, so that we can get back into a position where the company is meeting or exceeding
expectations. Fundamentally, we're not immune to the vagaries of the economy. We're doing over a
trillion dollars of [total payment] volume on our platform [on an annual basis], and we're going to see the
impact of the economy.
But this is a moment in time and we're going to go through economic cycles, but that does not take away
at all the fundamental secular tailwinds that we're going to benefit from long term, which are the
increasing proliferation of e-commerce and digital payments.
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Darrin Peller
In terms of assumptions for your new annual outlook [2022], it sounds like you're assuming more
conservative macro assumptions than before – is that right?
John Rainey
That's correct. We're basically not assuming that we see any inflection back to what I'll call more
normalized trends throughout the year. There's maybe some modest benefit in the back half of the year,
but that's more from initiatives that we control and product launches that we're going to have.
And obviously the lapping of eBay makes the sequential growth comparisons a little bit easier [as the year
progresses], but from an overall macro outlook, we're assuming sort of a continuation of trends or in some
cases, even things getting modestly worse.
Darrin Peller
Okay. Sticking with recent trends and current volume growth, non-store government data suggests e-
comm growth of about 10% [in Q1’22]. I think Amazon talks about 5% given more discretionary spending
there. What do you see the market growing at now? And how is Core PayPal branded performing in
comparison? We’ve been receiving a lot of inbound questions on the strength of Braintree versus Core
PayPal.
Gabrielle Rabinovitch
Absolutely Darrin. So non-store e-comm in Q1, I think grew about ~10% based on U.S. census data.
We've actually seen estimates come out that lower than that and closer to sort of mid-single digits
consistent with what you said, Amazon said. Also the read on the UK, which of course is an important
market for us, is expected to grow in sort of the mid-single digit range [this year].
Based on all of the work we do, and of course we see a lot of payment volume through Braintree [where
we are processing 100% of merchant volume in many instances], we can get a good sense of overall e-
commerce growth in the market with at least the merchants on Braintree. We then do a fair amount of
work triangulating on the rest of our merchant base to estimate how fast e-commerce is growing. We use
this work to estimate that mid-to-high single digit rate of e-commerce growth in in the U.S. in Q1. This
level of growth is pretty consistent with what we've seen and Core PayPal [i.e., PayPal branded volume
which does not include Braintree/Venmo/eBay/P2P] grew in line with that approximate mid to high single
digit rate of growth.
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Darrin Peller
That's really helpful. I know there's a lot of questions on that. Guys, if we look at the medium-term
guidance and exit growth rates, understanding you withdrew the medium-term guide, if you could just give
us some more color on the mid-teens revenue, exit rate, you discussed on the main call yesterday.
Is that how you're thinking about both revenue and EPS exiting the year, or is it just revenue and are
these good starting points for how we should be thinking about starting into 2023?
Gabrielle Rabinovitch
Absolutely. In terms of starting points for 2023, we're really focused on executing 2022. We’ve got a big
year to get through and we're going to go quarter by quarter. We want to hit our targets that we're putting
out quarter by quarter and we'll get to 2023 from an exit rate standpoint.
The guide that we gave yesterday does contemplate a revenue growth rate ranging from 14% to 18% in
Q4. There are some natural factors that help us accelerate through the year, eBay clearly is a big one of
those in terms of just the drag eliminating and the comparisons from the back half starting to normalize.
As John indicated earlier, we're not assuming the macro improves. The range that we're giving does have
some deterioration on the downside.
We’ll continue to watch and see how we perform relative to those expectations. On the [non-GAAP] EPS
side, the 2022 guide that we gave from the low-end to the high-end of range, contemplates mid-single
digit to around ~10-11% [non-GAAP] EPS growth in Q4. That said, Q4 of last year had a structurally very
low tax rate. Our non-GAAP tax rate was around 9% in Q4 last year – and this year we’re expecting our
[non-GAAP] tax rate to be in the range of ~16-18%, which is consistent with what we saw in Q1.
The increase in tax rate alone is about a 10 percentage point headwind to growth in Q4, and last year we
did have a small reserve release as well – though it was pretty de minimis. It’s worth considering those
two factors when thinking about Q4 growth. We do have a heavy growth agenda going forward. We
talked a lot about how we're investing long term to continue to scale efficiently. And so we're not putting a
point on how we think we start Q1 2023.
Darrin Peller
Although the comp obviously get notably easier in Q1 2023, right?
Dan Schulman
One thing we did say Darrin, is that we believe we will continue to grow above the rate of e-commerce
and take share. If we look at our track record for the past five years, we've consistently done that. And if
we look at Q1 whether it be across breadth of our portfolio, we believe we did that same thing.
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Darrin Peller
Okay. Thanks Dan. Listen, on the topic of investments that I know Gabrielle you just touched on, how
should we think about the potential for operating margin expansion in future years? Just what are some of
the drivers that we should be thinking about again, just given the mix dynamics - it's become a little more
challenging to really see it now.
Gabrielle Rabinovitch
Sure. Well, I think as a starting point, the Q1 mix of our business is a function in part of last year and sort
of some of the normalization. We’re continuing to watch the mix in our business and we continue to have
strong conviction in both the unbranded and the branded pieces of our business.
I don't know that I can call the Q1 mix as the go-forward structural mix, there were some things happening
in 2021 that also affect the mix in 2022. Longer term, our intent is to expand operating margin. We have a
strong track record of doing that over time. But yesterday [on the Q1’22 earnings call], we did talk about
actions we're taking to streamline the business, and those are really actions taken to scale efficiently over
the longer term. They will over time allow us to keep our non-transaction operating expenses in control
and allow us to continue to invest in our strategic initiatives.
I think long term, we feel very good about the continued ability to scale efficiently, but clearly we're not
guiding 2023 yet. From the standpoint of margin expansion in 2023, it is a little early to put a point guide
on it.
Dan Schulman
One other thing I'd add on to Gabrielle’s remarks, we exited last year with $1.25 trillion of total payment
volume on the platform. When you have volume like that, there's leverage that can be driven when you
work back into your supplier base and partner base. We think that unit cost economics of some of the key
drivers will continue to improve as our scale continues to grow as well.
Darrin Peller
Okay. Thanks Dan. Guys, just shifting for a minute to NNA [net new active accounts] guidance, it went
down from 15 to 20 million, down to 10 million now. Maybe just expand a little more on the main drivers
behind the cut. Is it more to do with churn than initially expected or is it gross adds?
Dan Schulman
It's in keeping with the same philosophy that we do with revenues and EPS where we assume things get
worse - there's no real difference in churn or top of the funnel. It's just setting ourselves up to win.
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First Quarter 2022 Buyside Call | April 28, 2022
John Rainey
I will say, just to add to that though, Darrin, there's a lot of questions that we received just around top of
the funnel versus bottom of the funnel, as we talked about on the last call, the pressure is on the bottom
of the funnel. We are still having a large number of activations and reactivations, but we've got a very
large number, very large amount of churn as well.
Dan Schulman
On John's point, Darrin, the way to grow NNAs is to increase engagement, right? When you have 429
million active accounts, even at a constant churn rate and to John's point, based on what we saw last
year, we're not going to invest marketing dollars with very low ROI.
I'm not trying to reengage low engaged customers who make one more transaction and then don't do
anything. We're not a subscription business; we're a transaction-oriented business. We’re going to have
increased churn this year pretty much throughout most of the year, and we're going to let those lower
engaged customers roll off.
The fact that we're actually positive in our NNAs really shows the strength of the top of the funnel and this
whole idea, well, you're shifting to engagement […] engagement is also going to grow NNAs. This is what
works on both the growth of NNAs and your transactions per active, your monthly active accounts, your
ARPA [average revenue per active account], it's all around that engagement piece of it - and that's the
way to drive growth in this is business, and healthy growth in this business.
Darrin Peller
Is the churn impact on the lower active users going to be more first half? Or is it really equally spread
throughout the year and then it gets better? Can you touch on that?
Gabrielle Rabinovitch
I really think the vast majority of the pressure is in Q2 and Q3, so that's sort of how we're thinking about
the year. We did call out that we expect Q2 to be the low in terms of NNAs and that's because of the
churn, not because of the growth.
Darrin Peller
Okay. Dan, just given how important ARPA is for the business model, especially now, if you could just talk
about some of the biggest drivers of ARPA growth going forward now?
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First Quarter 2022 Buyside Call | April 28, 2022
Dan Schulman
Sure. Online checkout is clearly one of the biggest opportunities to drive ARPA. Checkout is our strength.
We have a lot of competitive advantage there and a lot of scale. We have a lot of user and merchant
preference for PayPal, but again, we can do a lot better at checkout. We're going to do a lot better at
checkout.
Only 50% of the time when a PayPal user goes to a site that has PayPal, do they transact using PayPal.
We have a lot of initiatives around checkout, and it's obviously a piece that drives ARPA growth. Venmo,
in terms of all the monetization efforts there which we discussed on the call yesterday. We’ll talk more
about that later as well.
And then the digital wallet is a huge area of opportunity for us. Digital wallet users have two times the
ARPA of those in the rest of the base. When people interact with the app, there's so much new
functionality and things they can do there. Buy now pay later is a great example, which we're investing in
and continuing to create additional functionality. Buy now pay later has a 21% halo there in the U.S. [U.S.
BNPL users see a 21% TPV increase compared to non-users].
Crypto, we are leaning forward on all the things that could happen as you move into a digital dollar and
into a DLT [distributed ledger technology] world. [..] We're also really putting a lot of emphasis this year on
revamping debit and credit. I think that's a real good way to move offline, fully integrated into the app,
being able to access, buy now pay later, both in store and online.
And then we're doing more and more on our shopping hub inside the app because that's what customers
expect from us. All of those are big opportunities, but we're very focused on just those because we think
they can drive the ARPA and the engagement that we need.
Darrin Peller
That's really helpful, Dan. Speaking of engagement, you had 19% [transaction per active growth] ex eBay
as of this past quarter, which obviously continues to trend, I think similar to 18% of the quarter before, if
you could just touch on how that trended across the business, whether it's Braintree versus Core PayPal?
And I imagine churning out the less engaged customers is also going to help sustain that, or at least
somewhat stronger growth over time.
Gabrielle Rabinovitch
Longer term having that churn of less engaged customers will clearly lift that engagement metric overall. I
think given sort of how we need to move through the year, sequentially we should see some of that
benefit. In terms of the drivers in Q1, Braintree clearly was an important driver and core PayPal ex eBay
was the secondary driver. Both of those contributed.
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Darrin Peller
So core PayPal's engagement was strong. It just, obviously wasn't as strong as Braintree this time
around?
Gabrielle Rabinovitch
That's correct. Part of the growth is also impacted by comparisons. Because core a year ago, Q1 of 2021
was probably core PayPal’s single strongest quarter in history. And so lapping that level of growth is
driving some of the difference in engagement growth rates, but core PayPal ex eBay also saw good
engagement.
Darrin Peller
Got it.
Dan Schulman
You're also seeing that through the wallet metrics that that we’ve shared with you.
Darrin Peller
Okay. Just following up on engagement and just the ARPA comments that you were making before Dan.
For the digital wallet, could you talk a little more about the roadmap there, since I know that's a key part of
the story obviously, and what are some of the things that could be improved on? What's the next gen
checkout experience and digital wallet experience? And maybe just, if you can give us a little glimpse on
what are some of the product releases you're most excited about?
Dan Schulman
Oh, I talked a little bit about some of those when I talked about the ARPA increases, I'm excited about
what we're doing in the shopping hub right now. There's going to be a lot of focus. We have a lot of
merchants who are very interested in working with us so there'll be a pretty complete revamp there.
I do think all the things we're going to do on credit and debit is going to be meaningful. That’s a big
opportunity for us. It's a big opportunity in and of itself because the halo effects when somebody uses
credit and debit with us are quite large, but it really enables us to tap into offline in a very seamless way.
Clearly over time, people will move to using the mobile phone more and more at point of sale that's going
to happen, but it's a long, tough slog over time to get people to change user behavior.
Apple Pay has been at it for a long time and QR codes still have very low share. We're making slow,
steady progress on that, but people find it easy to use their credit cards and debit cards. We’ve put out
our 3/2 rewards credit card that has a lot of enhancements and better integration. We think it's a fantastic
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value proposition and eventually you'll be able to tap that 3/2 card at the store, get 2% off in store, 3% off
using PayPal.
But then when you come back into the app, you’ll then be able to figure out how you want to fund that
transaction. Do you want to pay for that immediately? Do you want to buy now pay later? Do you want to
use some of your rewards points in there? It's a really beautiful way to seamlessly tie in online and offline.
We'll continue to make some pretty significant progress on the crypto side as well. I'm not going to talk
about any of those right now though because we're working hand in hand with regulators on some of
those initiatives. And then obviously all the things that we're doing on the Venmo side, which mirror a lot
of what we're doing on the PayPal side, but have some unique emphasis because of the base that we're
serving there.
Darrin Peller
Dan you talked a lot about areas you're focused on, but you mentioned yesterday also potentially de-
emphasizing some areas so that you can really focus and lean into more of the key opportunities.
What are some of those areas? Just, if you could revisit some of the areas that you may want to de-
emphasize versus the key opportunities, what are you most focused on? And it sounds like checkout and
digital wallet obviously are the ones you're really leaning more into?
Dan Schulman
Checkout, digital wallet and investments in our core technology base, right? Those are the three things
that we're leaning into. We've got to have basic hygiene that is second to none, that's “five nines”
availability, that's latency, single digit in terms of seconds, constant cybersecurity enhancements.
And that is where we are clearly focused. We also are de-emphasizing a lot of the international stuff that
we did, and that's quite important. We had a lot of dollars and efforts spread around on a number of
different markets. We have a lot of room to grow in our core markets, a lot of room.
You look at kind of our penetration in our core markets, you look at whether that’s our user base,
penetration of engagement on how much people use online services and how much they use us. It's 25%
of the time they use us for online services. We still have a lot of room to grow. We need to focus and
make sure that the things we do well, we do in excellent fashion and execute against them with
excellence.
I think that honing of our focus, making sure that we're not trying to do everything, I think it sets us up
much better.
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John Rainey
If I can just jump in there too, Darrin, there's such a huge addressable market and so many opportunities
in our space that it's very easy to get distracted. And fundamentally what Dan is saying is, we just need to
focus on the basics. We need to nail checkout. We need to make sure that we have the very best digital
wallet that's out there.
We need to be the number one digital wallet in our core markets versus trying to be all things to all
people. If we get the basics right, the opportunity for us is tremendous. Dan mentioned less than half the
time that a PayPal customer has the opportunity to use us, they actually take advantage of that. We can
double the size of our business with our current user base if people just use us when they can.
We need to have the very best product and experiences for our customers, so that they'll want to do that.
There’s a very sharp focus on these things that are most important, that are the things that we believe
that are in the space that we should win.
Darrin Peller
Thanks guys. Just shifting back to the financials for a minute. We're getting a lot of questions from
investors on transaction margins as obviously credit and debit mix and losses normalized. If you could
just give us a sense of transaction expense, it was for the quarter, it was 87 basis points.
Is that the right number to think about for the year? And what in your view would stop transaction expense
from returning to pre-pandemic levels?
Gabrielle Rabinovitch
I think 87 basis points is a fair way to think about the year. A fair way to think about it longer term. I think
Dan pointed out the benefits we have from scale and that's really critical and it helps in our most
important cost buckets. One of which, of course the transaction expenses are our single largest line item.
We expect over time, our scale will continue to benefit us in terms of containing the inflation of transaction
expense.
It's also important to recognize parts of our business like Venmo, the commerce volume is continuing to
grow at a really healthy rate and over time will help from a mix standpoint because funding costs on
Venmo on the commerce side are structurally lower today. We will continue to manage this with
discipline.
Darrin Peller
Okay. And then if we take that a step further and just looking at transaction expense and overall gross
profit take rates, obviously another big one we get, if you could just touch on how we should think about
the take rate for this year embedded in your guidance? What the individual drivers will be, both
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headwinds and tailwinds, maybe deconstruct a little bit more detailed granularly, the 11 basis point drop
off by whether it's Braintree or eBay or other factors. Thanks guys.
John Rainey
Sure. I'll start. And you jump in if that's okay. The 11 basis point decline in take rate in the quarter, seven
basis points of that was related to eBay and the balance really is mostly attributable to FX fees.
Everything else is kind of there's some puts and takes that are one or two basis points higher or lower.
Notably though - Venmo was again a contributor - it was a two basis point favorable contributor to take
rate as we continue to monetize Venmo. We’ve been talking about this for a long time, Darrin and talking
about, there's been a lot of noise in the numbers. The last couple of quarters, last three quarters, I think
are a better reflection of what's happening in the core business from a take rate perspective.
And as we get past this first half of the year and we lap some of the eBay pressure, you're really going to
see some pretty modest pressure, if not kind of a flattish take rate. And importantly, you see some of the
benefits of the pricing change that we made last year, and we always have pricing initiatives that help
influence that.
Darrin Peller
Okay. No, that makes a lot of sense. I imagine Braintree though, just one kind of quick follow up on that,
had some impact, even the growth rate there and the yields there now?
Gabrielle Rabinovitch
A few points of mix impact overall, but not meaningful.
John Rainey
The Braintree has a bigger impact on transaction experience versus take rate because the Braintree's
sweet spot is a lot of that, those middle market merchants that we're actually able to price more in line
with what our sort of core PayPal take rate is.
Darrin Peller
That's really helpful. And I guess the funding mix on the Braintree side's going to be card based, right?
Versus the pre-funded or ACH in some cases?
John Rainey
Precisely.
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Darrin Peller
Makes a lot of sense. Listen, while we're on the topic of Braintree, I know there's some questions coming
in. Braintree obviously had phenomenal growth, if you could just remind us what the value proposition is
to SMBs of using Braintree versus platform partners out there? Whether it's Adyen or Stripe or someone
else? How does Braintree stack up and what's the value prop you pitch to clients?
Dan Schulman
Sure. I'll start and then you guys can jump in, obviously Braintree growth was strong the fast quarter, but
stronger last year, I think we grew somewhere around 79% in terms of Braintree [volume] growth last
year. It’s very much holding its own against any of the larger peers out there. And some of the largest,
most sophisticated apps use us. We talked about some of them it's Airbnb, Uber, Live Nation, DoorDash,
it's TikTok, Spotify, etc.
These are some of the most demanding and sophisticated merchants, and we've got a couple of really
big wins that will be coming on board over the next few quarters as well. It spans a host of verticals as
Gabrielle talked about yesterday. Why do people choose Braintree? It's a fully native integration across
our tech stack. It drives, enhanced conversion, higher authorization rates, and it's a seamless customer
experience.
You seamlessly integrate in PayPal and Venmo into that very high reliability and uptime, ease of use, a
ton of trust between those partners and us, and importantly and actually that leads into some of the things
on checkout.
Our vault of financial instruments in PayPal, we vault billions of instruments [], that amount of data and
information, being able to look at that across partners, that ability potentially, as we look at next
generation checkout going forward is a huge competitive advantage for us and a real reason that our
partners trust and choose us.
Darrin Peller
Okay guys, can I shift for a minute while we're on the topic of transaction expense and take rates, just
transaction loan losses for a minute? I know pre pandemic was around 20 basis points. I think it's average
around 10 basis points or five to 10 basis points of volume, the last few quarters.
How do we think about that from a modeling standpoint? Is that sustainable given the macro backdrop
and the build and credit reserves? Is that the right amount that we have now? Or should we think about
that differently?
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Gabrielle Rabinovitch
It may be helpful to think about transaction loss and then credit loss, the sort of separate components on
the transaction loss side. Historically we were seeing around 17 to 19 basis points as a percentage of
total payment volume as a range for transaction loss. We brought that down pretty successfully over the
years. In the past 18 to 24 months, it has been closer to 10 or 11 to 12 basis points. We think that's
relatively sustainable, the 10 basis point rate we saw in Q1.
On the loan loss or credit loss side, it was one basis point as a percentage of TPV in Q1. Obviously, last
year we did have a fair amount of reserve release[s], about $312 million during the year. Structurally, the
credit loss was very low. We are building more originations but remember, a lot of what we're building is
shorter duration and so I would expect loan loss that to potentially be low single digits, call it something
like three to five basis points, though obviously it is a little early to call because the book is just starting to
originate more loans. But with the shorter duration, we think that's pretty manageable in the kind of low
single digit range.
Darrin Peller
All right. That's helpful. Just shifting to Venmo now, I know we touch on it before, but while the Venmo
growth rates accelerated a bit, you seem to still be accelerating revenue growth. If you could just talk
about the drivers of that increased monetization, what do you see as being the main drivers of Venmo
revenue going forward?
Dan Schulman
You're right that Venmo’s volume growth was 12% in Q1 - but remember that is on top of 63% growth a
year ago. I think that's important to put into a perspective. I think the other thing though, is that 1099 tax
confusion, that impacted us and we've done lot of customer education around that. We've seen a lot of
the MAAs [monthly active accounts] come back from that. I think we've done a pretty good job on
explaining that, but it did impact us for sure.
Look and also just even core functionality of Venmo, we're revamping P2P [peer-to-peer payments], we
can make things better there, searchability needs to improve and we've got focus on that, need to have a
persistent send, receive capability on the app as we expand the app and you go into different sections if
you want to send, receive, which is what people most do there. We want people to be able to do that
simply and easily straight from the app.
With Venmo, we've also got a big emphasis on the debit card refresh like we do on the PayPal side.
We're woefully underpenetrated versus where we should be on the Venmo side with debit cards. We've
got a lot of initiatives underway there that I think will make a real difference. The business profiles has
been quite successful in moving that even more to storefronts.
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We think there's a way for Venmo to open up its aperture, even more with teen accounts. And we're
looking at that, and then obviously Pay with Venmo continues to expand. Right now we're on track to
launch with Amazon in the back half of the year. There are a lot of initiatives happening on the Venmo
side and I'm encouraged by how well the team is performing there.
Darrin Peller
Okay. Just very quickly, there's one quick follow up on take rate. I think you talked about modest pressure
flattish take rate in second half. Someone's just asking you if that's year over year or sequential.
Gabrielle Rabinovitch
For the year, I expect take rate relative to last year to be sort of a basis point decline of mid to high single
digits.
Darrin Peller
Okay. Thank you. Let's shift gears to the competitive dynamics, which is obviously still one of the most
common questions we get around the industry and PayPal, no exception. There's clearly questions on
whether it's browser or mobile and the checkout is getting more and more competitive.
If you could just touch on your view on PayPal's share of checkout trends recently and through the
remainder of the year. I think that would help a lot of investors.
Dan Schulman
Sure. Let me just start off, we've got a lot of very positive assets. In the market, we're clearly one of the
most trusted brands with consumers. There was a recent survey done by one analyst that looked at
consumers, what's their favorite choice of a digital wallet to do online? 60% of consumers chose PayPal.
The next most popular option was 8%. There’s a clear preference for consumers to use PayPal. They
trust it, merchants trust it, small businesses when they put PayPal on their site, consumers tend to shop,
even if they don't know that merchant because they know we give them protections and they trust us.
People are two times more likely to shop when a PayPal button is present. With huge network effects, we
are something like eight times larger than the next wallet button out in the market.
When I look at our risk and fraud capabilities most of the time people are making a tradeoff between
either high authorization rates or loss rates. We have the lowest loss rates in the industry and the highest
authorization rate. For every hundred checkouts, we process six more than the industry average. This is a
huge advantage for merchants and obviously the breadth and depth of the products that we offer make a
difference.
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First Quarter 2022 Buyside Call | April 28, 2022
I think as a lot of people have recently seen checkout is really hard, it is essential, you do it extraordinarily
well with every merchant because if you don't, they lose tens of million, if not hundreds of millions of
dollars, this is 99.999% uptime. This is low latency. It has to work all the time. And we are very focused on
building on these advantages by improving checkout, by the way, there's been a ton of competition all the
time and that intensity remains, so.
But I would say, from the beginning that I've been here, we've had competition against all the wireless
carriers coming together, all the merchants coming together, Visa, MasterCard, startups with new tech.
We pay attention to every single one of those things. But we think that our checkout right now is holding
or gaining share.
We just did a study just a couple weeks ago of the top 55 publicly traded merchants because we have a
view of kind of their full checkout and there were five of them that we were losing a little bit of share, 17
that we were gaining share and the rest we were the same. It gives you a sense of kind of where we are.
We can talk more and more about checkout by the way, if you're interested in Darrin on all the things
we're doing there, but we know we need to continue to advance our position in checkout.
We are far from perfect in checkout. We've got a lot of things to go and do to improve it. We’re also
thinking about the next generation of checkout as well, but we're more than holding our own right now.
We’ve got a lot of things to just get better at both the basics and some really important things going
forward.
Darrin Peller
Okay. When we think about your focus on mobile versus in-browser checkout experience, I imagine you
really are focused on both, but is there some sort of areas that you think are really in the most need of
revamp or change?
Dan Schulman
In terms of checkout - it depends on what tech stack they've integrated onto for us, Braintree's our latest
that's predominantly mobile apps that people are using on that. That's a seamless integration in checkout,
and with high availability, low latency. I think if I just quickly would go through the things I think are most
important for us to do with checkout, one is basic hygiene - uptime, availability, latency, we have to be
great on all three and we can improve in all of them.
We're working hard to go and do that. A lot of that is removing legacy code that we have in there and we
have a number of things well underway to address that. Second is, I would just call it sort of UX [user
experience] simplification, whether that be on a browser or in mobile, we do not want to force a separate
popup window on web or native apps.
You want it to be in context - we've got a lot of work on what I would just call UX simplification. I think we
can do more in moving towards what I call industry standard integrations so that you don't have to do a
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complete separate integration for PayPal. If you're doing card integration, you should be able to use many
of the same things when integrating PayPal.
We also want to optimize login success more, we're moving more and more away from username,
password which people can forget. We can do a lot more of identity biometrics and actually improve all
the rates and improve signability into those apps. When you incorporate those things, you can more
easily use one click checkout, which is really important as well.
These are basic hygiene things that we need to do better and better. We’re working on this next gen of
checkout, which is about how do we really solve the issues for retailers, which is not do people convert
50% or 80% when they get to checkout - but how do we get people when they come to a retailer's
website to go all the way through to checkout, they are less than 5% of the people who go to a merchant
website actually check out.
If we can use all of that data and information on our vast scale of consumer accounts that we have, and
basically surface to the merchant who this customer is, again, not PII [personally identifiable information],
but who this customer is so that they can target kind of what webpage do they want to show?
What offers do they want to show so that we can help drive conversion on entry into the website, not at
product pages or checkout, that's going to be a multiyear process, but we have a lot of merchants quite
excited about that. Nobody has the scale of data and information we do to be able to drive that next gen.
Darrin Peller
That's helpful. Guys, we're at the 45-minute mark, but and I've tried weaving in some of your questions on
the investor side into this, but if we have time we'll, if we could just ask a few more given there's a number
of them, one of them is do you have any plans to reinstate at some point medium term targets? At some
point down the road?
Gabrielle Rabinovitch
We withdrew our medium-term targets yesterday. I think we want to continue to execute each quarter of
the year. Clearly we have some thoughts about how our business can grow over the longer term, but right
now we're going to be focused on doing the work and sort of blocking and tackling.
And then at some point we'll have a full-time permanent CFO that will come in and we'll have another
investor day and we'll give some longer term thoughts about what makes sense. But I think right now we
really want to pace ourselves about the process we're making and the progress of the business.
Darrin Peller
Okay, understood. Maybe just on capital allocation then. If you could touch on how you're thinking about
capital allocation from here, the stocks trading, where it is? Would you say it's safe to assume that the
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First Quarter 2022 Buyside Call | April 28, 2022
company will be more aggressive with buybacks in the near term or any thoughts on higher leverage or
dividend or anything else in this environment?
Gabrielle Rabinovitch
You’ve seen us be more aggressive on buybacks the past few quarters, I'd expect that we would be
buyers at this price. Clearly, we think the intrinsic value of our business is far in excess of where we trade
today, but we also have taken a pretty balanced approach to capital allocation and we've got important
organic investments to make in the business.
And in addition, we want to have the flexibility to make sort of the prudent types of acquisitions that will
continue to help us advocate capabilities and be both sensible inside the company and of strategic
importance.
Darrin Peller
Okay, guys.
Dan Schulman
Darrin, thank you so much for leading this call. We really appreciate it.
Darrin Peller
Thanks Dan. Guys thanks very much for the incremental color. I know there was a lot of thirsty investors
looking for some of this information so thanks for spending the time.
Dan Schulman
Of course. Thank you.
Darrin Peller
John, once again to you though. Good luck on the next plans.
John Rainey
Thank you Darrin. I appreciate it.
Darrin Peller
All right guys. Thanks again. Be well.
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