Good afternoon. My name is Gabriel, and I will be your conference operator today. At this time, I'd like to welcome everyone to PayPal's Q2 2020 Earnings Call. [Operator Instructions]. Ms. Gabrielle Rabinovitch, please go ahead.

Thank you, Gabriel. Good afternoon, and thank you for joining us. Welcome to PayPal Holdings earnings conference call for the second quarter of 2020. Joining me today on the call are Dan Schulman, our President and CEO; and John Rainey, our Chief Financial Officer and EVP, Global Customer Operations. Please note that we are taking this call from separate locations. We appreciate your patience as we adjust to these new logistics. We're providing a slide presentation to accompany our commentary. This conference call is also being webcast, and both the presentation and call are available on the Investor Relations section of our website. We will discuss some non-GAAP measures in talking about our company's performance. You can find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the presentation accompanying this conference call. Management will make forward-looking statements that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include our guidance for the third quarter and full year as well as the impact of our acquisitions. Our actual results may differ materially from these statements. You can find more information about risks, uncertainties and other factors that could affect our results in our most recent annual report on Form 10-K and quarterly report on Form 10-Q filed with the SEC and available on the Investor Relations section of our website. You should not place undue reliance on any forward-looking statements. All information in this presentation is as of today's date, July 29, 2020. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

Thanks, Gabrielle, and thanks, everyone, for joining us on today's call. And I hope that all of you are safe and well. I'm pleased to say that PayPal just had its strongest quarter since becoming an independent public company 5 years ago. Simply put, our business has never been more relevant and important than it is today. In the midst of the COVID pandemic, we have seen substantial macro changes that we believe will have a lasting and profoundly positive impact on our business. The world has accelerated from physical to digital across multiple industries, including retail. Merchants are embracing a digital-first strategy, and these trends have fueled the rapid rise of digital payments. These are durable and meaningful tailwinds, and we are fortunate to have the scale, scope of services and brand reputation to capture the benefits of these trends and extend them to our customers. Consumer behavior has shifted in a discontinuous manner, and PayPal clearly has a unique opportunity to accelerate its path to becoming an everyday essential service. The strength that we saw across our business in April continued to gain momentum throughout Q2. Our transactions grew by 26% to 3.7 billion, consistently rivaling the volumes that we usually experience during the 5 days between Thanksgiving and Cyber Monday. Transactions on our PayPal Checkout experiences remained especially strong, growing almost 40% year-over-year. TPV grew at 30% on an FX-neutral basis, with a record $222 billion of processed volume in Q2. TPV accelerated throughout the quarter, and June marked our highest growth rate since our separation from eBay. We added a record 21.3 million new customers in the quarter, increasing nearly 140% year-over-year. To put this in perspective, this quarter's net new actives were greater than our total net new actives in 2016. Nearly 1.7 million merchants…

Thanks, Dan. I'd like to start by thanking the entire PayPal team for their efforts to serve our customers and execute on our priorities during these unprecedented times. Since our last earnings call, the encouraging business trends that we've called out have persisted, and we're reporting the strongest quarterly results in our history. As Dan discussed, in the current operating environment, our business has inherent advantages. By many estimates, the pace of e-commerce penetration has accelerated by several years in a single quarter. And there is greater demand for contactless payments than ever before. These shifts play directly to our strengths and will enable us to advance our competitive positioning. At the same time, there is ongoing uncertainty as it relates to both the progression of the coronavirus as well as the state of the macroeconomic environment. We are carefully monitoring the pace of recovery and these interconnected dynamics. This overall level of macro-related uncertainty has resulted in increased complexity in building our forecast. It is with this backdrop that we're updating you today on our business and our outlook for the remainder of the year. Our second quarter performance highlights the benefits of PayPal's diversification and scale and our resulting earnings power. We delivered 25% revenue growth on a currency-neutral basis, 49% growth in non-GAAP earnings per share and generated $2.2 billion in free cash flow. We did all of this while absorbing ongoing pressure from reduced travel and event spending and lower revenue from our credit products. I'll now provide the details of our financial performance for the quarter and then our expectations for the rest of the year. Revenue in the second quarter increased 25% on a currency-neutral basis to $5.26 billion. Transaction revenue grew 30% on a currency-neutral basis, the strongest growth we've ever reported. Growth…

[Operator Instructions]. Your first question will come from the line of Tien-Tsin Huang of JPMorgan.

Really terrific results here. Just trying to think about what to ask upfront here. But with -- you've got record new adds, volume, engagement numbers, all great. So is there a way to maybe hone in on what changed since April? What's driving the performance? If you had to rank the biggest factors, enough to give you confidence to reinstate guidance and call for sustainability in the third quarter in relation to what we talked about last quarter. I'm just trying to maybe summarize that, if you don't mind.

Yes, sure. I'll take the crack at that. So obviously, our best quarter by far, both on the NNAs and engagement, particularly, just to give you some color around it, Tien-Tsin, 21.3 million, you knew what April was, but May and June were equally strong in our net new actives, and these are high-quality LTV NNAs that come from our core markets around the world. Merchants were up about 3x what we typically see. This is really a reflection of industries moving towards digital-first strategies. We see that continuing. Honey, I talked about being up 3x Q1. It's got the perfect value proposition for these economic times. Venmo obviously had a record NNA quarter. Xoom, which we didn't talk about last time, Xoom, which has a great value proposition. Xoom NNAs were up over 600% in Q2 versus Q1. And because of all of that, we're beginning -- continuing to see substantial year-over-year growth, and we believe we'll add about 70 million NNAs, which is at least double what we typically do in a year. On the engagement side, I think it's possibly even better news than the NNA side. We look at 10-day engagement for our new cohorts. Like how many of our new cohorts are doing 4 or more engagements within the first 10 days. And that's up even further than what we saw in April. That's now up 20% to 30% versus previous cohorts. Our daily active user versus last year is up and consistently so by about 40% versus last year. And our churn, which is a really important number as we think about NNAs going forward, has also meaningfully declined as well. And so what -- why is all of that happening, I think? And obviously, volumes, I talked about very quickly, but I think…

Yes. So I'll just add one small comment, Tien-Tsin. I think for everyone, the sustainability of these elevated levels of e-commerce and digital payment trends is the big question. And I think one of the things that gives us a little more conviction is we're 3 months further along than we were on the last call. As you've seen, the elevated levels of these trends and particularly in regions that have relaxed some of their shelter-in-place or social distancing measures, and even when consumers are going back to somewhat normal activities like eating out at restaurants or shopping in grocery stores, the level of e-commerce penetration is still much, much higher than what we saw pre-COVID-19. And so I think that's one of the things that we've watched closely that I think is a fairly good indication of the trends going for the rest of the year.

Your next question will come from the line of Heath Terry with Goldman Sachs.

Great. Dan and John, really, really appreciate the level of detail in all of that. To dig into one area, with the eBay expiration, can you update us on the strategy and positioning in marketplaces, particularly how you're servicing some of the faster-growing ones, like Shopify, given what's going on there today. What does the strategic road map look like? And what does it mean for PayPal?

Yes. It's a good question, Heath. I'll start off with that. I'd say, first of all, eBay is going to remain a very important customer over the foreseeable future. Jamie and I have had good conversations about that. They've been quite positive. And I thought you saw that reflected in some of his comments yesterday about our partnership. It is what our mutual customers want. And the impact of managed payments has been forecasted by us for quite some time. John mentioned it's part of what we're putting into our guidance for the rest of this year. And honestly, on that front, from what we see with a very high share of checkout with merchants who have moved to intermediated payments, our checkout share can be from 50% to 75% depending on the country. And when we do research and we do a lot of it with merchants who use both PayPal and eBay, the difference in NPS in terms of how they think about an intermediated approach and the PayPal approach is quite substantial in favor of PayPal. And so we really have seen, obviously, some merchants move, but not a large number to date. And if anything, we're feeling better about our projections than we have, but we're just beginning the end of the operating agreement right now. So we feel comfortable that this is a very manageable transition going forward. I think your point is a really interesting one about other marketplaces. And if you look at the top 15 marketplaces that we serve today, Shopify being one of them; Etsy, for instance, being another, and you look at their growth rate, the growth rates of all 15 of those marketplaces we're quite close partners with approached 100% in Q2. Yes, it's just amazing growth to go and see that. It was 3x the growth of what we saw on eBay. If you look over the last a year or so, it's something like 7x the growth of eBay. And we have spent a lot of time working with those marketplaces to be quite close partners with them. From Shopify, some others that are just beginning but may have the potential of being meaningful marketplaces like Facebook and Google or Facebook or the underlying payments platform for Facebook Marketplaces and InstaShopping. We just announced a comprehensive partnership with Google, and we are working with other major marketplaces as a result of the expiration of the operating agreement. And so I think it's a huge growth vector for us. We are participating in that growth, and our road map is quite focused on providing additional value-added services for those marketplaces. But things like payouts, which we really have taken a good lead in and other things, are crucial as well as all the regulatory elements around the world that we can provide services and capabilities to those marketplaces because we are a global player. John, anything you'd add on that?

No, nothing to add, Dan.

Your next question will come from the line of Lisa Ellis of MoffettNathanson.

Dan and John, can you elaborate a little bit on the QR code strategy? Specifically, what types of merchants are you targeting? What steps are you taking that are going to drive consumer adoption of actually whipping out the PayPal or Venmo wallet at the physical point of sale? And then what's the monetization strategy for QR? Meaning, in which cases is it monetizable for PayPal versus being a pass through?

Yes. I think I'll take the first crack at that. Look, obviously, and you heard this in my remarks upfront, this is a key strategic priority for us. I think it's critical in driving daily use. And we will make the investments we need to do in order to be successful here. This is going to be an ongoing process. We say this doesn't happen overnight in the next quarter or 2, but we have the patience and we have the conviction that this can be a meaningful part of our business as we look over the medium term. Part of the reason for this is, this is really demand driven. In other words, consumers and merchants are reaching out to us. They are asking us, working with us to implement this, and I'll talk about why that is. But look, 70% of people have health concerns about shopping in person. And of course, they want to use touchless payments in store. Retailers realize that consumers want it. And we are not only rolling out to small and micro merchants across 28 countries. And by the way, seeing very expected but very encouraging growth. Expected because we know that the demand is there. But we are actively working right now, Lisa, with more than 100 large enterprise merchants across the U.S. and Europe. That doesn't mean that all 100 happened this year, but over 100 large merchants as well as quite a number of channel partners, and those range from terminal providers to point-of-sale providers, to acquirers, to networks to distribute our QR codes, all of that across Venmo and PayPal. And of course, we announced today our partnership with CVS. And those are the kinds of merchants that we want. Merchants where people shop there every day. They're highly…

Lisa, I would just add one other thing as we think about what this offering provides for our consumers but also the economic benefits of PayPal, it's not just in the direct unit economics that come through a point-of-sale transaction. Very importantly to us is what this will do to the overall level of engagement for consumers. So if you're using us in an off-line setting, you're much more likely to use us when you have the opportunity online. So there's a halo benefit that comes along with this usage that is very important to us as well.

Your next question will come from the line of Darrin Peller of Wolfe Research.

Nice, guys. Nice results. Look, just given the substantial incremental margins, we're seeing margins overall up to over 500 basis points. What -- can you just touch on your strategy on the balance between the investments you want to make in the business versus margin expansion? Just -- it's great to see the higher base. But when we think about we're hearing from clients that you guys really should be stepping on the gas in terms of the opportunities you can have. So just love to hear more in terms of where you're going to be putting those dollars and the balance.

Yes. Thanks for that, Darrin. I'll start off and John can come in. Look, first of all, just in general, we invest where we see opportunity. That's been what we've done over the years. I think it's why we've had the results that we have. We could always have higher margins without investing in the business. But that's not what I think all of you and our shareholders want from us. There is huge opportunity in front of us. I think probably more opportunity than we've ever seen before. And we have the opportunity to invest in new areas of the business that we think can be meaningful contributors to our growth as we look forward, but even more importantly, meaningful to our customers, merchants and consumers in terms of the capabilities that they are asking for us. And so as John said, plus or minus, just in the back half of the year, we're investing an incremental $300 million or so. And the places we're investing in is in-store. I just talked about that and why that's so important. But also, we want to invest in our digital wallet capabilities. We have an aspiration to be in every day use case and to be a central part of a customer's life in the digital economy. And so in the next several quarters, we plan to roll out quite a number of additional capabilities, not just in-store from QR, to tap-to-pay cards, but rewards capabilities. By the way, rewards are being used much more because people aren't being able to use their rewards for travel. We're seeing an uptick in people using their rewards points to check out using PayPal. Well, obviously, our -- pretty much now almost 100% complete with our Paymentus integration. The next step is bill pay…

Darrin, if I can just add quickly, you referenced our margin profile in your question. And I think that's pretty important to this discussion because what we're demonstrating right now is the real scalability of our operating model. And Darrin, like I frequently focus on the incremental margins in our business. How much profit did we bring in for every incremental dollar of revenue? And in the quarter, those incremental margins were the highest they've been for us ever at 50%. But actually, I think that a better way of looking at that is more apples to apples. And that's if you exclude the losses related to the credit reserve and you exclude acquisitions, that incremental margin was actually 70%, 7-0. And what that does is result in free cash flow like you saw us generate in the quarter at over $2 billion. And so as it gets to how we spend that, we've always been balanced between M&A, organic investment and returning cash to shareholders and we've also been opportunistic. And to the point that Dan was making, this is a time that we think it's very important to invest in a lot of these initiatives because, as I said on the last call, while these trends are seemingly changing right in front of us, we don't want to just want to be on the receiving end of that. We want to help shape the outcome here. And so we want to invest into that.

And your next question will come from the line of Bob Napoli of William Blair.

Congratulations on everything on the trends. On Venmo, I wanted to follow-up on Venmo's 60 million customers now. I think the last revenue number we've gotten was a $450 million revenue run rate, I think, is in 2019. There's a lot going on, the direct deposit strategy, commercial strategy, obviously, the QR codes, integrating Honey. What -- can you give an update on the revenue run rate? And then maybe a little color on the direct deposit strategy? Or which of these strategies are going to be the biggest movers? And I think direct deposit can be a game changer, but not sure your customer in Venmo is going to be easy to crack on direct deposits. So some color on Venmo and the different strategies and revenue trends would be really helpful.

Sure, Bob. It's good to speak with you. We don't provide an update on Venmo's revenue each quarter, and we don't have one this quarter. But I want to say that I think across the board, this was one of Venmo's best quarters ever. We saw growth on their platform reaccelerate from the dip in Q1 to where it's over 50% growth in volume. And I think what's notable about that is we all recognize that much of the Venmo usage historically has been around social experiences. And as those have, by and large, gone away for the most part, we're seeing new use cases developed with Venmo, which really demonstrates its relevance and importance to our customer base. I think, as good as anything. And so with respect to the monetization strategy, it's not just 1 strategy. It's a multifaceted approach that includes things like direct deposit to increase usage, include things like business profiles, include things like QR code. And then, of course, we're eventually launching the Venmo credit card later this year. And we'll continue our efforts as well around the pay with Venmo in an e-commerce setting.

Yes. I just had one quick addition to that, Bob. I would not underestimate how zealous the customers of Venmo are about living their financial life on the platform. I think each of these capabilities, whether it be direct deposit, whether it be business profiles, the credit card and a number of other things that we'll be adding, you are being rapidly adopted. The new use cases, as John said, are so interesting to see as millennials, instead of going to the restaurant, are now eating at home or outside or at the table, instead of going into a gym or doing fitness classes through streaming, instead of going to concerts or other entertainment, are now doing things online. And we're seeing all of that reflected in the usage of Venmo. And so I think, as John said, this was obviously its best quarter. But I think Venmo is -- we're continuing to invest in Venmo because it's got a really bright future and is really a crown jewel of ours.

Your next question will come from the line of David Togut of Evercore ISI.

Dan and John, could you drill down into the sequential tripling of the drivers of the sequential tripling and net new accounts for Honey? And any pull-through benefits you see on the -- for the PayPal ecosystem as a whole?

Yes. Well, I think, in this economic environment, frankly, and even before this because you had so many people struggling to make ends meet at the end of the month, and that's just and made even worse by the economic ramifications from the pandemic, but Honey's capabilities are a perfect fit for consumers and merchants at this time. And increasingly, I see the possibility to establish Honey as one of the most efficient market-making platforms for both shoppers and merchants. I mean consumers get the best price on the merchandise that they want, and then they receive rewards based on that, which incents them to do additional activities, build out their demand curves. And then merchants can customize offers right into that demand curve. So they know exactly what to do to get x amount of demand off of that. And it's really interesting when you think about -- we've always known the identity of people, and we've always known that they've made purchases. What we haven't seen is intent upfront, and you really have this perfect set of data that helps both sides of our two-sided network when you put all of that together. And it wasn't just at Honey's NNA grew 3x. By the way, their revenues were up basically triple digits or so, almost double as well. And I'd just say a couple of quick things on that. One, the integration is fully on track. There's been no delays in any of our initiatives. We will start to export through APIs, the Honey tool sets into our PayPal wallets and within QR codes. And this, to your point about part of the PayPal ecosystem, we hope to have a seamless one-click PayPal checkout experience when shopping at Honey merchants. I'd just say, all in, I'm really pleased with the integration so far. It's right on track, and I think we've got a real powerful set of capabilities ahead of us.

Congratulations.

Yes. Thank you.

And we have time for one last question from James Faucette of Morgan Stanley.

Dan, John, you guys have highlighted a lot of the strong trends and your increased confidence that those can sustain. If we look at your second half guidance and the strength you're anticipating there, how should we think about extrapolating that into the future in terms of what makes sense to think about from a growth and margin expansion and perspective going forward? And kind of what are the key things that we should be looking for in '21 and beyond?

Sure, James. This is John. I'll take that. There's still some uncertainty out there. I think macroeconomic uncertainty as well as how the overall path of the virus plays out. And so it's still a difficult environment to forecast in. We feel comfortable enough about the things that we're seeing in our business right now, though, to provide second half guidance. But I think the broader question is like, what does this do to our medium-term guidance? And I think it's very difficult to argue that there are not structural benefits to what's happening to our business. I mean there are definite secular tailwinds that I think are going to help us really rethink what that growth trajectory is over the longer term. We're obviously not prepared to provide that today. We're just updating that or reinstating our guidance for the year. But there are definitely compounding benefits that are coming to our platform. And some of the things that we've all talked about as being trends that would eventually take place like using contactless payments in store, they're happening right now. We've talked about the death of cash for years. Maybe this is that inflection point, that seminal moment. And so we believe that PayPal, given our position, is a structural winner in that scenario. And certainly, I think it's -- it gives cause to rethink that medium-term guidance, but it's definitely premature to do that at this point in time.

If I can just add into John's comments. I think it's clear that we've tipped into a digital-first economy. Look at the number of merchants that are coming on to our platform, 1.7 million in just 1 quarter. We have conversations with merchants around the world, large and small. All of them, all of them trying to figure out how do they implement their digital strategies in an accelerated fashion. If you look at market research that just came out from, for instance, the business roundtable that -- where 70% of consumers say they're going to shop online more frequently and expect to continue to do so because it's easy and convenient. And so I look at all the different industries. We are clearly becoming a digital-everything world. And that acceleration has happened, and it's going to continue to happen going forward. And there's sort of one market research study after another. And as John said earlier, when we look across the world, we look at countries that have opened, now 80% of retail is open, before there is maybe only 30% of retail open, we're still at very, very high levels and still high levels of daily active users compared to last year. So my view on our medium term is there way more opportunities than there are challenges around that. We need to see another quarter or 2, but it's likely that, that goes up. I mean that's probable, and we are investing into our growth as well. And when we invest, we expect a return on that investment. And so I would say we feel good enough right now that we've reinstated 2020. We feel great about the opportunities. We're investing in them. And give us another quarter or 2, and we'll provide updated guidance on medium term as well. Okay. Well, listen, I just want to thank everybody for your time today. I just want to say again that I hope all of you and your families are safe and healthy. And we sure look forward to being able to see all of you in person again. And so thank you for your time. Take care. Have a good rest of the evening. Bye-bye.

This concludes today's conference call. You may now disconnect.