Transcripts
PayPal Holdings, Inc. (PYPL) Presents at Barclays Emerging Payments & Fintech Forum Conference (Transcript)
PayPal Holdings, Inc. (NASDAQ:PYPL) Barclays Emerging Payments & Fintech Forum Conference May 17, 2023 10:20 AM ET
Company Participants
Gabrielle Rabinovitch – Interim CFO, SVP of Investor Relations and Treasurer
Conference Call Participants
Ramsey El-Assal – Barclays
Ramsey El-Assal
Okay. Very honored to welcome Gabrielle Rabinovitch, interim CFO, SVP of Investor Relations and Treasurer of PayPal for a chat with us today. Gabrielle it’s always a pleasure to talk with you. And I hope you’re doing okay today.
Gabrielle Rabinovitch
Thanks for having me.
Ramsey El-Assal
Maybe we’ll just jump right in. As we gain a little bit of distance from the pandemic, obviously, macro trends are kind of tricky. It’s a noisy environment. You’ve got discretionary versus nondiscretionary services versus goods. It’s a tough time to get a really crystalized view of what’s kind of impacting the business. So what’s the latest view from you guys on just macro trends and maybe you can lean into like what’s kind of contemplated in guidance?
Gabrielle Rabinovitch
Yes, you bet. Well, great to be here. We reported our first quarter results last week. And what we really spoke to is that we saw a much stronger macro environment in the first quarter than we’d expected. And so on a branded basis, our business accelerated about 200 basis points to 6.5% branded checkout growth globally, and then our unbranded business actually also accelerated about 1 point, so grew 30% in the first quarter after growing about 29% in Q4. And so overall, we actually saw a much more benign environment than the one that we contemplated. And when we started the year, we talked about expecting to see some deceleration of top line performance in the back half of the year. Part of that was just some lapping of some impacts but it was also this idea that the overall macro continued to have some real visibility issues. What we said last week is that based upon what we were seeing, if macro conditions hold as they are, we actually expect to see pretty balanced growth and sort of roughly in line growth in the back half than the first half, which would be sort of mid to high single digit top line performance. That said, obviously, there are a lot of factors at play. And there are a lot of sort of dynamic factors that we watch and we feel very good about the things in our control. And so I think you’ve seen us deliver some sequential quarters of performance where the things that we can control, we’re doing quite well. That’s, to your point, the broader macro environment, inflation, the crowding out of discretionary spend, and overall, just the more immune e-commerce growth is something that we’re watching very carefully.
Ramsey El-Assal
One thing that I’ve been thinking about with PayPal is that you guys have kind of narrowed your strategic focus to some core capabilities, and it feels like the environment might be opening up a bit for you all in terms of your relationship with big platform folks. It feels like the Venmo implementation at Amazon, Apple, other big platforms. Has there been any change in terms of how the market is perceiving PayPal in terms of maybe being less more of a super app consumer focused competitor to sort of more of an enabler? Has that opened up any opportunities or is that overstating things a little bit?
Gabrielle Rabinovitch
I don’t think it’s overstating things. And I think this has been part of what we’ve done over the past eight years, right? And so if you look at our business and how it’s grown since separation, on average, the CAGR of our TPV is 25% a year. And so that process has really been about continuing to build these very strong relationships, both with the FI community, with networks as well as large technology platforms, and we brought Facebook marketplaces onto our platform many years ago. We obviously work very closely with a number of other large entities. And so I don’t think this is something new. I think this is really the continuation of what’s been really sort of critical to our success overall, which is we believe in ubiquity, we believe in interoperability, we think sort of connectivity and sort of network effects are very powerful. And with the scale of our size, we want to take volumes everywhere we can because we know, ultimately, that accrues to our benefit. Now all of them are going to have the same margin structure and that all going to have the same growth rates. But ultimately, last year, we processed $1.4 trillion of volume. Within that, it was about $1 trillion of commerce volume. And so this sort of very large platform that continues to grow at scale is a huge part of our strategy and partnership is just a piece of that.
Ramsey El-Assal
So sort of continuation of existing relationships…
Gabrielle Rabinovitch
And again, we can just do more right. And so this is something where we’ve talked about this relationship with Apple that’s developed over time and sort of how we’re moving forward even in a year, but we see greater opportunities to work with a number of partners in this space.
Ramsey El-Assal
Braintree, and really unbranded in general, but Braintree had a great quarter, another great quarter. Talk a little bit about the driver of sort of outperformance in that business. What’s the Braintree kind of secret sauce that allows you guys to keep putting up those types of volume growth numbers?
Gabrielle Rabinovitch
Yes, absolutely. And just to be clear, we talked about unbranded processing growing about 30%, within that Braintree actually grew faster. And so Braintree just had a tremendous amount of growth last year. I think we called out Braintree grew about 42% volume year-on-year. And so it just continues to grow. Peggy Alford, who’s essentially our EVP of Sales and our Chief Commercial Officer, was at another conference yesterday. And part of what she really spoke to was, our whole sort of sales team has totally transformed itself over the past few years. The way we think about serving our merchant that has also very much changed. And so some of that work we’ve done sort of on the strategy side to make sure that we’re serving our merchants in the absolute best way is really end to end with all of their needs. And so it’s not just about the sales function and the customer support function, like my treasury team has connectivity with the treasury teams at both large merchants as well. And so sort of we think about the relationship in total and sort of how we can serve those merchants. In addition to that, just given our legacy, given our heritage, we’re very good at processing tough transactions, right? So just because of the legacy of processing very idiosyncratic transactions, our ability to risk decision is best-in-class. And so op rates are incredible, our service levels are great, the stability of the platform is great and these relationships sort of beget each other, right? Because at the large enterprise level, people know that we are the primary or exclusive processor for a number of very important merchants in the space, and so that helps us just to win more business.
Ramsey El-Assal
The outsized growth in unbranded has kind of shifted the spotlight a little bit to transaction margins. Help us think through the key drivers of transaction margin, and maybe start there?
Gabrielle Rabinovitch
Absolutely. So maybe just sort of thinking about transaction margin and what it contains. The pressure you saw in the quarter and the first quarter, which we’ve seen some of this come through in prior quarters as well, comes from our transaction expense rate, which is really an expression of the funding cost on our platform. The funding mix of own branded processing is much more weighted towards card-based funding, which is the most expensive funding that we process. And so when we see this sort of outsized growth from unbranded processing, it has a disproportionate impact on the overall TE rate. And so in the quarter, our TE rate was about 92.6 basis points of the rate of TPV, but 5 basis points increase from where we were in Q4, or rather than Q1 of last year. And so you see this sort of increase overall on the funding cost. In addition, the other major component that contributed to the increased like volume-based expenses was really related to our loan losses. And so we’ve seen this tremendous growth on the Buy Now, Pay Later platform. I think we’re going to get to some of that later in our conversation. But Buy Now, Pay Later volumes grew about 70% year-on-year in the first quarter.
Now when Buy Now, Pay Later volumes grow, certainly, there are short duration loans that have performed very well, but we do provision for them. they’re on balance sheet today and so we’d have to provision for them. And so that increased provisioning on the loan loss side also contributed to some of the transaction margin pressure we saw. We also did call out that in just a very small part of our overall loan portfolio, we have a business called PayPal business loans, it’s about 17% of the overall volume in our portfolio. We did see some deterioration in that portfolio and that also caused some increased provisioning. And so all in all, that was about 130 basis points of pressure in the quarter just from the loan loss side. And so over time, we do see opportunity to sort of improve the transaction margin profile but it is dependent on some macro factors as well as some things we’re doing internally.
Ramsey El-Assal
Maybe following up on that a little bit. I think you also mentioned that there are some products and services and other trends where the unbranded that might alleviate some pressure from new products like PPCP, maybe overseas mix, I think they’re value added services. Talk a little bit more about what you guys can — what you can launch, what you can kind of — what you’re in control of in terms of the way to bring those transaction margins up on the unbranded a little bit?
Gabrielle Rabinovitch
Yes. Well, I mean our strategy is about accelerating growth of branded, which absolutely benefits our overall transaction margin profile, we can talk a little bit about that. And then the other piece of it is certainly increasing the higher profitable revenue streams in the unbranded business. So when we think about our unbranded business today, there are a number of value added services that we do simply today do not offer in the Braintree business. And so we need to add in these higher margin revenue streams to help support better transaction margin growth in that business. In addition, when we think about the other pieces of the strategy on branded, today, our Braintree business, which again is sort of this LE business that is predominantly in the US, we do serve some other markets and we do have some important customers in other markets. But today, it is heavily weighted to the US, which happens to be the highest cost market. And with an LE base, you have sort of a take rate that reflects the volume they bring to our platform. And so in addition to adding on more higher margin revenue streams, we are also looking to broaden the geographic footprint of our Braintree business.
And so those two parts of the business are sort of pieces that we see that we’re able to grow over time. And then you also mentioned PPCP. And so our PayPal Complete Payments platform is really taking the best in breed from Braintree and making it applicable to an SMB base and a channel partner base. And so we see this pretty significant addressable market on the SMB long tail, which, on the unbranded processing side, we’ve sized at about $750 billion. And so when we think about how we address that market today, the product that we have in the market today, which is called PayPal Pro, it’s been in our portfolio for about 15 years, and it really does not represent best-in-class. So it’s suboptimal in terms of what an SMB would need today, and what we would even view as competitive in the market. And so we’ve been working to bring to market an own branding processing platform that really is incredibly relevant for the needs of SMBs and channel partners. And so that’s beginning to launch. Launched in the US in the first quarter, we’ll launch in other markets as we move through the year. But that sort of — the unit economics of that business are just far more attractive than what we see on the LE side.
Ramsey El-Assal
Double click, I hate that expression, but double click a little bit on PPCP. And I think I’m going to start calling it PayPal Complete because it is a mouthful, but double click a little bit. I certainly get investors ask me like, what exactly are we talking about, how does it differ from PayPal Pro? You sort of started touching on it a little bit, but just talk about — expand on that a little bit.
Gabrielle Rabinovitch
So I think without going into some of how we think PayPal probing so optimal, what Braintree does is it provides incredible authorization rates, incredible access to alternative payment methods, great risk decisioning, great performance, great stability of platform, but it also provides things like payouts. And payouts are actually quite important to merchants. And so there is a whole set of services and solutions that we offer through Braintree today that simply are not part of the set in PayPal Pro. PayPal Pro does not have any of those products and services. I mean on the payout side, we have Mass Pay, which is really just payouts into PayPal accounts, that’s not competitive in the market today. In addition, sort of just the overall stack, less stability, the authorization rate sort of not the same as what we see on the Braintree side and the alternative payment methods are not as widespread. And so it’s just a much more sophisticated platform. And so what we’re doing is really bringing what Braintree does and the volume growth in Braintree is clear. I mean it’s just continued to grow at scale year after year, putting in sort of that set of solutions to a merchant size that’s smaller. We’re also — it’s much more standardized.
And so what we do on the Braintree side, at times, involve some customization just given these very large merchants and some of their idiosyncratic needs. And some of what we’re doing with the complete payment stack is we can just push it out. And when we do this, the other sort of critical part is these SMBs also have our branded button. And so our SMBs see tremendous amount of uplift when they put a PayPal checkout button on their Web site, that has been the case for years and sort of all the data continues to prove it out. I mean the PayPal checkout button is quite important, especially in the SMB space. And when one of these SMBs comes on to our latest integration and sort of the complete payments platform, we actually can push out updates to them in real time. So they don’t need to do anything to get updated integration, to get updated experiences. As an example, if a merchant has a Buy Now, Pay Later button upstream and we’re adding sort of an additional funding method or we’re adding sort of a different rewards program, they don’t have to do anything, right? They literally just get the best-in-breed updates by virtue of being on this platform. And so part of this benefit, too, is just it really speeds the integration process and it eliminates all the work for the merchant.
Ramsey El-Assal
And is there any distribution — any changes in sort of the distribution growth or distribution strategy or is it just sort of you just basically replace the PayPal Pro offering with this and whoever comes sort of get it, or are there any push or any way that you’re kind of getting that out there?
Gabrielle Rabinovitch
Yes. So I actually think about the addressable market for the complete payment stack is actually much greater and much more diverse than what we have with PayPal Pro. And so we’ll be using sort of some of the same strategies that we’ve used to grow Braintree. We have a very sophisticated sales force, we have inside sales, we have account management sales. And so we’ll be running through the same process that we would on the branded side and on the LE side.
Ramsey El-Assal
Okay. One topic that’s obviously comes up quite a bit is just the overall competitive environment and market shares and PayPal is such a large organization here in a lot of different products. There’s probably places where you’re gaining share, losing share, et cetera. How are you looking at that overall — how do you answer that overall question, what’s PayPal’s competitive moat environment, the competitive landscape as it pertains to you guys?
Gabrielle Rabinovitch
You bet. And so maybe it’s easier to talk about it on an unbranded basis than on branded basis, again, just to sort of that’s been how we discuss the business today. On the unbranded side, look, we’re clearly taking share without a doubt, and we’re taking share from legacy players. And we do quite well with the RFP against the more traditional online acquiring set as well. So you’ve seen those volumes just continue to grow. We called out that for 2022 unbranded processing overall was about 30% of our overall volume, probably about a really sizable piece of business that continues to grow at an exceptional rate. And so there, our market share continues to increase. On the branded side, sort of how I would position us is that, in the US, we believe we’re sort of holding share and that’s based upon all the data that we look at. And in Continental Europe, we would say that we’re gaining share. And we have some very strong markets in Continental Europe where we continue to do quite well, and that’s benefited us. There are other markets that are more competitive. And so I call out the UK as being amongst the most competitive markets that we face. In addition, the macro happens to be the weakest. And so that puts the most pressure on discretionary spend in that market. And so we continue to see the consumer under a tremendous amount of pressure in the UK. I think some of that will persist in part because of mortgage rates resetting so rapidly in that market and the interest rates. And so when you’ve got consumers having mortgages reset every three to five years, they’re now seeing probably a 50% increase in their cost of owning their homes. And so we’re watching that market very carefully. There’s some competitive dynamics but there are also just some macro factors where that market has been a tougher market for us.
Ramsey El-Assal
And in the quarter two, we saw that net active accounts fell a bit. How do we think about that metric going forward? I mean I know that one very bright spot in your reporting over the last many quarters is just engagement and the increased engagement, the growth algorithm of the business evolves. How should we think about net active adds? I guess, how should we think about it trending and also how important of a metric is it in a sense to track the business?
Gabrielle Rabinovitch
It’s a great question. And we sort of messaged for a while now that we’d expect to see a decline in active accounts overall in this year. And so our active account base today is about 433 million active accounts, it was down about 1.5 million in the first quarter. And we’d expect, as we move through the year that you’ll see a little bit of pressure as we move down. So the overall active accounts to be down in the sort of low single digits year-on-year. But honestly, like that’s not what we’re most focused on. Adding low-quality, minimally engaged accounts in markets is actually quite easy to do, right? Marketing dollars can take us wherever we’d like to be if active accounts were really what we were managing for. So what we’re really focused on is continuing to grow our monthly active unique user base. And so within that 433 million active accounts overall, you call it, you’ve got about 35 million merchant accounts, you’ve got about 400 million consumer accounts globally. And most of those fit in our core markets, which are the US, UK, Canada, Germany, France, Australia. Most of them sit there. And what we’re really focused on doing in our core market is continuing to increase the level of engagement we have across our customer base. And so we’ve called out that we have about 190 million monthly active unique users on our platform.
So it’s a very sizable number and our monthly active unique users are actually 20 to 30 times more valuable than an overall kind of average active account. And so what we’re really focused is on growing that number, because when we get someone to use us instead of 8 times a month, 16 times a month, the incrementality in our business is very, very significant. And so we think about like the best use of our marketing spend, the best use of our rewards programs, it’s really about more deeply engaging our base today so that we increase the monthly active unique user base relative to just sort of growing active accounts. And so that’s really where the focus is and that’s what we plan to do. In the first quarter, we did call out that we’ve seen some improvement and some growth in our monthly active unique users and we hope to see that continue as we move through the year.
Ramsey El-Assal
That makes a ton of sense. And then what about take rate performance in the quarter, what were the drivers there, how should we expect take rate to trend through the year?
Gabrielle Rabinovitch
Yes, you bet. So transaction take rate in the quarter was down about 6 basis points. The two main drivers of that were really our branded take rate declined in the quarter. The reason for branded take rate decline is that we saw merchant mix shift in the direction of larger merchants. Some of our branded checkout experiences that we’ve been talking about that have started to see improvement, we’ve actually sold into some of our largest merchants. And so we’ve seen our branded checkout grow and we’ve seen some of that growth come more from larger merchants, larger merchants, lower take rates. And so that had sort of just a volume mix. On a like-for-like basis, we did not see any pressure in terms of take rate. And then the other piece I’d call out just affected transaction take rate was really FX fees. And the rate environment and just the strength of the dollar continues to have a negative impact on some of our business, and so that also played a role in that take rate performance.
Ramsey El-Assal
And I wanted to ask about EBITDA margins and effectively I guess investors sometimes will ask once the current kind of cost takeout cycle runs its course, what happens as we move forward? I think some of the focus on transaction margins is really a sort of a downstream focus on margin margins. What should we expect as we move forward in terms of how you guys will — how adjusted EBITDA margins will trend, how you kind of match the cost base of the business to the new higher growth areas of the business?
Gabrielle Rabinovitch
It’s a great question. And we spent a lot of time over the past few quarters talking about the way we’re improving our efficiencies, the way we’re gaining productivity and just some of the sheer cost takeout. We are on that journey. We will not be complete with that journey in 2023. And so as we’ve gone down this path, we’ve seen more and more opportunity in certain areas to operate more efficiently. And so that’s certainly what we plan to do. I see the opportunity to drive leverage on our nontransaction related OpEx for a long time and we see the path to get there. It won’t be the same in every quarter but there’s a lot of opportunity to rationalize in certain areas, to your point, sort of make sure that the cost structure is reflecting sort of where we’re seeing the greatest growth and that we’re running our business as efficiently as possible. We also — I mentioned that we, on average growing our volume is 25% every single year since separation. With that kind of growth, we haven’t always scaled in the most efficient way. That’s just not how things work. And so now when we take a step back and sort of look at how we work today relative to before the pandemic, look at the footprint that we need, look at the vendor base that we use, look at the leverage that we have in the market, we’re a much, much larger entity with almost — we’ll have nearly $30 billion of revenue this year than we were even just a few years ago, even pre-pandemic.
And so how we think about vendor relationships, how we think about driving efficiency, even just the evolution and the maturity of how we think about productivity metrics as it relates to parts of our organization, we just continue to get more sophisticated. And with that comes the opportunity to have some cost takeout, but it really is a byproduct of providing better services to our customers and driving the business more productively. We also talked a little bit about sort of the PayPal Pro to PayPal Complete Payments migration. There’s some other product migration work that we’re doing as well to consolidate platforms and really to eliminate sort of duplicate stacks that, at this point, require maintenance, support, customer service that really is duplicative in nature. And so this year, we’re consolidating PayPal here in iZettle. Those businesses have run separately really since we acquired iZettle in 2018, closed in 2019. So we’ve had sort of a similar product and market and we’ve had to stand up two separate support units really on the engineering side, but also on the customer support side. Some of the work we’re doing on PayPal Pro also allows us to consolidate. And so there’s just a lot we’re doing that really is providing better service to our merchants and to our consumers, but also just allows us to naturally lead to more efficiencies.
Ramsey El-Assal
Is there a lower — is there more OpEx associated with the dollar of branded volume versus unbranded volume? In other words, it would seem with branded just, externally, there’s marketing expenses and customer service expenses, et cetera, relative to the unbranded perhaps. Is there the concept that as the mix shift between branded and unbranded kind of settle in that there’s a natural expense benefit, or is that maybe overstating things?
Gabrielle Rabinovitch
I think there could be over time and so we’ll have to see. And so — but yes, I mean the branded business does require a certain kind of CapEx or OpEx, certain kind of investment in the cost structure that we don’t see necessarily all the time on the unbranded side. That said, large enterprise relationships often do come with them sort of marketing programs where we’re doing joint marketing and other types of services as well. And so I wouldn’t sort of overgeneralize, but we do see opportunities as we’re continuing to see more growth come from our unbranded business to run that branded business in a much more efficient way.
Ramsey El-Assal
And back to Buy Now, Pay Later, which you touched on earlier. I mean that business seems to be doing quite well. You called out plans to externalize the portfolio. I guess, could you comment on timing there and on any way that we should be thinking about the impact? I also wanted to ask you about, there are some other credit portfolios that you haven’t externalized. Is that something that’s on the roadmap as well at some point?
Gabrielle Rabinovitch
Yes. So we want to operate the business as efficiently as possible. We want to be as disciplined about capital allocation as we can, and we want to be really thoughtful about what we use our free cash flow to fund. In the case of Buy Now, Pay Later, because we actually don’t generate sort of interest income on the vast majority of that book, most of those loans are six week loans, eight week loans, they’re interest free, we don’t charge late fees. They’re certain specific products, longer term installments as well as some other features that we add on where we do generate revenue. But for the most part, we’re talking about a product that really drives engagement, TPV growth, stickiness and really high value customers to merchants. And so it’s a very powerful business. At the same time, strategically, there’s no reason why we need to fund it on balance sheet. So when we think about sort of all the important things we’re trying to do, which does include capital returns, there are ways that we can fund that business that’s more effective and also can support this very strong growth in the business, right? And so we’ve had tremendous growth in Buy Now, Pay Later.
And we really want to find a partner to help us grow that business sustainably going forward and in a responsible way as it relates to our own balance sheet. And so what we’re looking to do is externalize part of that portfolio. We’ve talked about that we are looking to externalize the European Buy Now, Pay Later portfolio, that’s UK, Germany, France, Italy and Spain. And so it’s a really diversified nice pool of loans. It includes some new short duration, it includes long term installments. There are some products in there that do generate revenue. Importantly, Europe has been a core market of ours for a very long time. So we have incredible customer data. And so that portfolio just performs very nicely. And we have a tremendous amount of sort of user data, about 90% of the volume in Buy Now, Pay Later comes from existing customers. So our ability to sort of risk for and risk decision these loans is also exceptional. And so we’re looking to externalize European Buy Now, Pay Later. We, of course, have a back book on that so we have on balance sheet Buy Now, Pay Later today from Europe. And then, of course, we also originate on a daily basis of those loans.
And so the way I think about the structure of what we’re looking to do, we’ll be looking to do a back book sale and then some type of forward flow agreement where we’re originating and then we’re selling to a partner, call it weekly or biweekly and it could be a partner or a group of investors. We would look to be able to be in market with this by the back half of the year. So we think that’s a really important way to move forward. And I think, to your point, sort of what about the rest of the portfolio? You saw us externalize the US Revolve portfolio, that deal was announced in 2017, closed in 2018. Then we went through the pandemic, where our credit portfolio overall, just the mix changed pretty meaningfully in terms of how we think about the book. And now, of course, it’s been growing again with the advent of the Buy Now, Pay Later portfolio. And so I would say, yes, we want to be very thoughtful about how we externalize and we think that there are a number of partners in market that would be very interested in taking on some of our credit book.
Ramsey El-Assal
On a completely separate note, stock based compensation. How do you guys think about that in the context of moving forward percentage of revenue, also just in terms of hiring, maybe the labor market gets a little looser? How should we think about stock-based compensation to kind of trend over time? Sometimes people are focused on GAAP versus non-GAAP, et cetera, these days. So what are your thoughts?
Gabrielle Rabinovitch
Yes, absolutely. So look stock based compensation is a real cost of doing business, right? And it’s an important component of the way we think about compensation with our teams. Overall, stock based compensation has really grown with headcount. And so when we take a step back, we look at the average headcount growth sort of the CAGR on headcount growth pre-pandemic, it was about 8.5%, close to 9% a year from 2015 to 2019 and then stepped up to twice that growth rate through the pandemic. And now we’re sort of obviously in a little bit of a decline having done a layoff this year. So all that to say, sort of the number itself grows with the overall base. At the same time, we manage it kind of very closely. We also guided. And so we hold ourselves accountable to that guidance. Overall, our stock based compensation has been about 5% of revenue, that’s been relatively consistent over time. And the guidance we gave for this year is also about 5% of revenue. The CAGR on stock based comp over the past two years based upon the guidance we gave is 4%. And so you’re not seeing sort of a tremendous amount of growth in that number and it is certainly a cost of doing business. We disclosed it and we guide it. And so we’ll continue to provide that clarity and we think it’s sort of something that we need to manage very closely alongside all of our other costs.
Ramsey El-Assal
Fantastic. Out of time, what a great conversation. Thank you so much for joining us. Appreciate it.
Gabrielle Rabinovitch
You bet. Absolutely.
Question-and-Answer Session
End of Q&A