Good afternoon. My name is Gabriel. I will be your conference operator today. At this time, I would like to welcome everyone to PayPal’s Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Thank you. Ms. Gabrielle Rabinovitch, you may begin.

Thank you, Gabrielle. Good afternoon and thank you for joining us. Welcome to PayPal’s earnings conference call for the third 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. 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. In discussing our company’s performance, we’ll refer to some non-GAAP measures. 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, the impact of our acquisitions and outlook for 2021. 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, November 2, 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. I hope that all of you are safe and well. I’m pleased to say that PayPal had a very strong quarter across all of our key operating and financial metrics. Our performance is particularly noteworthy given the macroenvironment. We are battling a pandemic that shows no signs of slowing down. Economies around the world are still quite fragile and the next six to 12 months will be defined by the timing and amount of additional fiscal stimulus and progress towards a widespread and effective vaccine. And obviously, we sit here on the eve of one of the most important elections in our country’s history, and I hope that all of you, who are U.S. citizens have already voted or will tomorrow. This is the landscape we face as we go into the last quarter of 2020. At the same time, PayPal is at an exciting and meaningful inflection point in our history. Our mission has never been more important. The pandemic has brought focus to the stark reality that billions of people across the world are struggling to get by. In fact, in the past nine months, over 100 million incremental adults moved into extreme poverty. The current financial system is just not working for most people. It’s inefficient and expensive for the underserved. Today’s environment demands new ways of thinking about our economic system, emerging technologies combined with mobile phones and financial platforms like PayPal can drive a future of inclusion and financial health. PayPal is in a strong position to help shape a future, where everyone, not just the affluent, can participate in the new digital economy. As the use of cash continues to decline, new and innovative financial technologies are rising. For example, central banks around…

Thanks, Dan. I’d like to start by also thanking the entire PayPal team for their efforts to serve our customers and execute on our priorities. PayPal’s third quarter was one of the strongest in our history. The sustained momentum in our business allowed us to outperform. our results demonstrate the strength of our diversified platform, our global reach, the scalability of our business and our sustainable earnings power. Notably, we delivered these outstanding results against the backdrop of eBay’s managed payments transition, continued weakness in the travel and events verticals, and the decline in other value-added services revenue. relative to our expectations going into the third quarter, eBay’s payments intermediation proceeded faster than we had anticipated. In addition, the recovery and travel volumes were slower than our forecast, travel and events volumes, which represented slightly more than 10% of our TPV last year, were down 40% year-over-year. While this is an improvement from the decline in the second quarter, it makes our overall volume growth even more remarkable. Now, I’ll discuss more details of our financial performance for the third quarter. Revenue in the third quarter increased 25% on a currency neutral basis to $5.46 billion. Transaction revenue grew 29% on a currency neutral basis, representing 11 points of acceleration from the third quarter last year. This growth was primarily driven by strength across our core PayPal business, including strong cross-border growth. notably, transaction revenue, excluding revenue from eBay grew 31% in the third quarter, accelerating approximately four points from Q2 and approximately seven points from Q3 last year. Other value-added services revenue declined 10% on a currency neutral basis. reduced interest income on customer balances from lower interest rates and less credit revenue contributed to this decline. Honey contributed approximately one and a half points of growth to total…

[Operator Instructions] Your first question will come from the line of Darrin Peller of Wolfe Research. Please go ahead.

All right. Thanks, guys. I know you’re all holding off at this point on guidance, given the macro variability. but coming off a year with 70 million net new actives, which at least 30 million more than you would have expected, a lot of these are new demographics rather than a pull forward, as you guys are talking about. Can you just talk, maybe, touch on the types of NNAs you’d expect for either 2021 or even longer-term, kind of additions you can add and really thinking about that in context of 32% growth in daily active users. what are we talking about in terms of opportunity there and really what are the drivers of it? Is it international? All the partnerships? It seems like there could be a long runway, but a lot of people, I think just want to hear where – what the sources are? Thanks, guys.

Yes. Hey Darrin, it’s Dan. Thanks for your question. So, we had another strong quarter for NNAs, our second highest organic quarter for net new actives. by the way, interestingly, the shape of that is very consistent, approximately 5 million net new actives each month coming in, no fall off, no pull forward, just consistent growth in that metric. And as you know, we’re still targeting and feel comfortable with a 70 million number that we gave last quarter for NNAs for the year. I think a couple of important things to point out here. first of all, the number of new merchants that are coming on the platform remains quite elevated over 1.5 million merchant accounts. This quarter, our run rate pre-COVID was somewhere around 500,000 to 750,000. So now, we’ve got 28 million merchants on the platform and 361 total active accounts. in many ways here, scale begets scale. As we grow as more and more merchants, have PayPal, you probably have noticed as well, more and more merchants are putting PayPal front and center. We’re creating new and more compelling ways to buy our Buy Now Pay Later has exploded into the marketplace. We’ve just rolled that out to the vast majority of our consumer base. We’re seeing huge take-up in that and incremental halo as a result of it. And so my view on net new actives is we’re going to continue to see good growth on that for a couple of reasons, one, our checkout experience and the number of products that we’re putting out there is just increasing. You heard me say in my remarks; we are very focused on expanding our digital wallet capabilities, both on Venmo and to PayPal. We are very serious about driving towards being in everyday use case. Why is it so important when somebody uses two or more of our products, say checkout and P2P, their churn reduces by 50% and think about as we approach 400 million customers on our platform, every basis point of churn reduction matters a ton in terms of our NNAs going forward. And so I think, you’ve got a continued drive, every industry towards digitization, more and more merchants coming on, more products, more functionality, and reduce churn. And I think, as we looked forward, I think NNAs will continue to remain elevated, versus pre-COVID levels.

All right. Thanks a lot, Dan.

Yes. You bet.

Your next question will come from the line of Tien-Tsin Huang of JPMorgan. please go ahead.

Hi, thanks so much. here, I wanted to ask on the – on some of the KPIs, I think they’re related, if you don’t mind me just putting them all together. So, TPV accelerated while transaction revenue growth held pretty constant. And I know you talked about the take rate here, John, but can you maybe, unpack it for us a little bit more and help us on how it might trend in the fourth quarter, and maybe, even in 2021 with eBay and Paymentus and PayPal and everything else, and then separately, but somewhat related, just looking at the fourth quarter guide. I know you're assuming some deceleration from the third quarter. I heard that eBay being a point and a half incrementally weaker here, any other call-outs beyond conservatism. I totally get why you’re not giving 2021, but I know a lot of moving pieces going into the end of the year here. Thank you.

Sure, Tien-Tsin, it’s good to speak with you. So, we did see a strong acceleration in TPV in the quarter. and aside from just growth overall in the business, there’s a couple things to call out. I think notably P2P volume was up almost 50%, 47%, I believe is the exact number. And then we saw a lot more volume from bill pay with the 100% ramp of Paymentus and the quarter and so good strong growth there. As it relates to revenue, we had a $17 million hedge loss in the quarter and that relates to a $70 million hedge gain in the prior year. So, you’ve got the difference there that really put pressure on the revenue side relative to TPV. on take rate, there’s a couple of dynamics to think about too. You’ve got – while P2P and bill pay tend to have lower take rates, they also have lower transaction expenses. And so what we consistently focus on in our business is not necessarily take rate, but the incremental transaction margin dollars and a way to think about our business in the quarter, Tien-Tsin, like for every dollar of revenue of incremental growth that we brought in, in the quarter, almost $0.70 of that fell to the transaction margin line. And so it shows that there’s a good balance between those items that maybe have a lower take rate, but also have a lower transaction expense. So, we’re very focused on the margin profile of those different elements of our business with respect to the fourth quarter. the only thing I’d call out in addition to eBay, which we talked about in our prepared remarks, the travel and event vertical, as I also mentioned, has been slower to recover, to recover than we anticipated. Again, we saw some green shoots back in June and July and those haven’t persisted to the extent that we mentioned. but again, I’ll point out both of those things are transitory and they really in terms of the long-term impact to our business, it’s not going to matter for us. We’re very excited about not only what next year holds, but each year thereafter, the math of each of those is that, yes, it’s a tougher comp for next year. But when we laughed out, we’ll be at a place, where we actually have accelerated growth from that time period.

Yes. And I’d just add to that giving a wider range in Q4 just makes sense to go do it’s the prudent thing to do. It in no way, takes away from the underlying strengths in our business. I mean, our core remains extremely strong, core PayPal growing at 30% plus in revenue, October was a good month for us. But you’ve got everything from the virus numbers, lockdowns, which probably have the benefit of helping us as more people are at home spending online. But we balance out with what is consumer confidence kind of look like, what’s the economy due to stimulus payments, what’s the holiday shopping season going to look like? We’ve got an election coming up tomorrow, potential social unrest. When we put all of that together, it just is prudent to give a wider range. And so that wider range to us does nothing to take away from the strength we see in the business, but we felt it was the right thing to do.

Great. Makes sense. Thank you, all.

Yes.

Our next question will come from the line of Jason Kupferberg, please go ahead – sorry of Bank of America.

Hey, thanks. Good afternoon, guys. So, just wondering as we think about the puts and takes for 2021, I mean, is it fair to assume that the eBay headwind of 3.5% in Q4 20 is a decent proxy for next year, and then how we should think about some of the other puts and takes, whether it be the ongoing travel headwind, or obviously, you’ve got a whole host of new initiatives like paying for an in-store, et cetera. So that’s the first part of my question. And then just on the second part regarding this notion of acceleration in the core business, due to COVID, any way to give us a rough idea of that, I mean, if you just take eBay out of the equation, how much do you think your revenue growth profile has structurally accelerated with a multiyear view again, excluding eBay?

Thanks for the question, Jason. I appreciate trying to kind of parse out what 2021 would look like. Let me just say this. There are a number of puts and takes for our business next year. On the sort of headwind side obviously, eBay will continue to be a headwind next year, as they ramp through the year. We’ve been pretty consistent though with our expectations around the pace of that, and we have long thought that they would be largely complete by the end of next year. And at the same time, we are still maintaining a share of checkout, which is north of 50%. And so this has been very consistent with our expectations from the onset. travel and event is going to be largely tied to the path of the virus. It’s an overused term, I know, but that’s largely outside of our control and when the world regains mobility, I’m sure we will see a resurgence in that, but the other area that I think people perhaps haven’t quite taken into account yet is the ongoing headwind that credit should be next year. And so those would be on the headwind category in terms of things that we’re excited about that can help you get that or completely offset that there’s a number of things that that we’re doing that we’ve called out. But the continued monetization of Venmo, the launch of paying for is something that we’re very excited about and then expanding the consumer wallet with things like bill pay and subscriptions and so forth. So, it puts us in a pretty good position as we look at the new products that we’re rolling out, which I’ll say is like our product and technology team has never rolled out more products at the rate that they are at any time in my five years here. So, we’re exceedingly pleased about the progress there.

Yes. I mean, I think we’d expect our core business to remain strong, maybe even get stronger throughout 2021, as we add more and more capabilities. we’re seeing really nice adoption, very early obviously, in what we’re doing in the offline space the crypto announcement and just the very early reactions to that are well beyond our expectations are Buy Now Pay Later value proposition is a great one. I mean, for merchants, it’s no incremental costs just increases sales to them. It is and we get to leverage, the large base that we have right now and as I mentioned, we’ve got a host of new services, coming on board, next year. And as Darren talked about, we have 70 million, net to actives that will ride on increased transactions with each of them, counterbalanced by what we always knew was eBay, which is, as John mentioned, a transitory event, it will play itself out next year and we’ll accelerate out from that. So, I think the really important thing to emphasize here is that, when we come into our Investor Day, in February, we will be raising our medium term guidance. We feel quite confident about that. Given everything that we’ve seen 2021 was always going to be a year that we would transition away from eBay, frankly, I’m happy that that’s going as well as it is right now. And as fast as it is, so that as John mentioned, we take that part of our business that is the slowest growing part of our business. And when we replace it, it’s a faster growing parts of our core business and other marketplaces. And so for us, this really couldn’t come at a better time, the transition from eBay and all the things that we’re doing to build our business and shape the future, gives us a lot of confidence as we look out at over the next several years.

Thank you.

Yes. Your next question comes from the line of James Faucette of Morgan Stanley. Please go ahead.

Great. Thank you very much. I wanted to just build on some of the questions particularly around next quarter and that cadence, it looks like, it sounds like John, from what you’re saying is that there’s going to be going to be some incremental spend in the fourth quarter, maybe, they got started late in the third quarter and that is going to impact margins. Can you talk a little bit about, I guess, the contributors to the very strong margins in the third quarter, a little more color on how to think about the spending and impact on the fourth quarter and then how we should think about what that margin trajectory looks like beyond that, and particularly as we head towards a normalized world.

Sure. Well, first James you’re exactly right. The balance of spend of that $300 million that we earmarked on the last call is going to happen in the fourth quarter. And that’s – that really gives you the different margin profile from the third to the fourth, but looking out on a more sustainable level or run rate basis whether it’s 2021 or beyond, there’s a data point in the – in our third quarter results, which I think really illustrates the potential that we have and that’s the incremental operating margin that we had in the quarter. And so what I mean by that is for every dollar of growth that we had in revenue, how much of that fell to the bottom line and if you normalize for acquisitions, it was roughly $0.50 – $0.48 fell to the bottom line. And that demonstrates two things, which I think are relevant and hopefully answer your question. But one is just the trends that we’re seeing around our core check-out and we have an expectation that those persist at a higher level than we entered this pandemic period. And so certainly, that has implications on our business, but the second and equally as important is what it says about the scalability of our business. We, in the past, have not always done the best job of growing at a low marginal cost. And for the past two or three years now, we’ve demonstrated very well our ability to do that. And ours is a platform that performs very well in growth environment, because we can do it at a very low marginal cost. And so that’s what you see in that operating margin performance. So, I would say that there’s a natural tendency as we grow that margins are going to want to increase. that said, we also recognize that we have a tremendous opportunity in front of us with the change that’s happening, and we clearly want to invest into that, but it’s the right thing to do in the fourth quarter and it will be the right thing to do going forward. I think fortunately, given the financial profile of our business, we’ve been able to demonstrate that we can both do that and expand our margins and we anticipate doing so going forward.

Thank you very much.

Your next question will come from line of David Togut of Evercore ISI. Please go ahead.

Thanks so much. Could you dimension the impact on PayPal’s ecosystem from introducing cryptocurrencies, both to buy, sell, and hold and to use as a funding mechanism in the PayPal wallet, and if it’s used as a funding source, can you help us think through the impact on transaction expense, would that be similar, let’s say to ACH or debit funding?

Yes. Hey, David, I’ll take that question. So, I’ll just take a step back clearly, the world is rapidly moving from physical to digital on that, so true for payments and financial services. My conversations with central banks, with the regulators, with a number of folks in the crypto field, there’s no question that digital currencies are going to be rising an importance, having increasing functionality and increasing prominence CBDCs, from my perspective and all my conversations, are a matter of when and how they’re done, not AF. And I think that our platform with its digital wallets and the scale that we have right now, can help shape the utility of those currencies that can range from interoperability, between wallets, between the currencies themselves, and importantly, into our network of merchants for commerce. And I do think that our platform and all the new digital infrastructure that we’re putting in place right now can help make that management and movement of money more efficient, and less expensive and faster. Just in terms of what we’ve introduced with BioXcel, we did a lot of research on that. Our base is very eager for us to offer these capabilities. It really came up very high on their wish list and we are seeing that come in to fruition very quickly. Now, we’ve only rolled this out to 10% of our base. We did that a couple of days ago, but our waiting list was two to three times of what our expectations were. We’re going to take up our $10,000 limit per day to $15,000 per day, based on the demand that we’re seeing and we’ll roll out to 100% in the U.S. in the next two weeks to three weeks. They’re going to expand internationally and we’ll expand into Venmo…

Thanks so much.

You bet.

Your next question comes from the line of Heath Terry of Goldman Sachs. Please go ahead.

Great. Dan, you’ve done a lot over the last year in terms of product development between crypto and pay later. So, I realize it’s a bit of a greedy ask, but when you look at the size of the point-of-sale opportunity and the success that some start-ups are having and taking share against the incumbents, I’m curious where your in-person payment strategy stands at this point and how much of a priority it is for you?

Yes. So, I think the best way of thinking about this, Heath, is that every five years to seven years, there’s a replacement cycle for point-of-sale and we are really entering a period of change right now, where the operating models for POS have kind of literally changed overnight. Payments clearly need to now reside in the cloud, not at the physical or retail location. They need to be fully omni; they need to reside on a full platform experience across channels. And I would say that being an incumbent, this space does not add any advantage. In fact, they will need to change fundamentally the way that they think about point-of-sale. And clearly, the tailwinds are moving towards mobile-oriented point-of-sale and we want to capture what is a huge in-store opportunity, be one of the first movers to move to an online, full omni solution, and then set that up to take advantage of our two-sided network. And we have a number of plans underway with our eyes that will and PayPal here teams really to try and become a market leader over the longer term that could be five years to seven years, but you’ll start to see us make moves in that. I think that really compliments all the things we’re doing, as we move in-store with our consumer base, our QR codes, our contactless payments, and if see inside our app, as well as embedding ourselves and other star pays. But we’re beginning to see, as I mentioned, a lot of early traction in our move in the offline space, and I think there’s a really huge opportunity and we are – as I mentioned last quarter, we are being pulled into that space by retailers and by consumers, and the faster we move, the more opportunity I think we can gain there.

Great. Thanks, Dan. Really appreciate it.

Yes.

Your next question will come from the line of Brian King of Deutsche Bank. Please go ahead.

Hi, guys. Just want to ask about the new products in particular, the BNPL, just trying to get a sense of how much incremental volume opportunity is there versus replacing other PayPal payment options. Just thinking about are you going to be able to gain share or checkout at the merchant site? And then secondly, on the Venmo monetization, I heard the $900 million revenue number, any sense of how that breaks out next year with growth rates for Venmo credit card, is that a big percentage of that versus pay with Venmo, et cetera? Thanks so much.

Yes. So, starting out with Buy Now Pay Later and then quickly go into to Venmo. I’m extraordinarily pleased with the success that we’re having with Buy Now Pay Later. We rolled this out in France several months before we introduced this into the U.S. and then into the UK and the uptick that we are seeing in the French market is well beyond any of our expectations. And we just rolled out in the U.S. and the demand is tremendous. And you probably, if you’ve opened up your PayPal app very recently in the last couple of days to pay for something on a merchant location, you’re probably seeing, paying for a pop-up as a option. I think our value proposition there is second to none and the reason I say that is it is a beautiful experience in terms of the ability to simply easily from a consumer to take a larger purchase and divided in four payments, interest free. We know our consumers; we have a very high acceptance rate as a result of that. And for merchants, unlike any of the competitors that are offering Buy Now Pay Later functionality. We are offering this as part of our service. There are no incremental fees except for the basic transaction fees that we charge merchants today. And so what we are seeing is just use of it, that’s well beyond our expectations, I think is going to be one of our big growth drivers as we go into next year and into 2022. I’m quite high on the potential of what we – what we’ll see with Buy Now Pay Later. And by the way, there’s a ton more we can do on that too and we’ve got a large roadmap around that on that. On Venmo,…

Great. Thanks so much.

Yes. You bet.

And we have time for one last question from Lisa Ellis of MoffettNathanson. Please go ahead.

Terrific. Thanks, guys. Thanks for squeezing me in. And Dan, so you’ve highlighted a number of times on the call that transformation underway with the PayPal and Venmo consumer apps to add all these new use cases like bill payments, paying for crypto, Honey, et cetera. Can you just talk a bit more about how we should think about the operational and financial rollout of this transformation, meaning what’s sort of the roadmap or timing of when new functionality would be rolled out? How are you going to be driving adoption? How should we think about monetization et cetera just as we look out over the next 12 months to 18 months?

Yes. Hi, Lisa. good to hear your voice. happy to do so. This is probably one of our, not probably – this is one of our top focus areas; this is building out a comprehensive and compelling digital wallet for our consumers. I don’t think there’s any question as we move into the digital economy that – apps that provide a comprehensive suite of interlinked functionality around financial services, payments, shopping identity management will be an essential part of our customers’ lives. I mean a daily part of their lives. Now with the wallet, the capabilities that we’re talking about are both online and in-store. So, that’s sort of, online, offline shopping capabilities, rewards management, being able to use rewards points, translate those, the fiat to pay, at any one of our merchants and also incorporate that in-store as well. All sorts of financial services you mentioned a couple of them bill pay increasing focus on direct deposit, check cashing, savings, goals, investments, PFM and then integrating all of our Honey shopping tools, crypto capabilities Buy Now Pay Later. And by the way, Lisa importantly, not just putting all that functionality out into our digital wallet, but creating a UX, a user experience that enables somebody to simply and easily move from one experience to another and have each of those experiences build on each other. And so we will start to roll out bill pay, this month we will – towards the end of the month, we’ll start to roll that out. I think you can expect kind of at end of the first half of this year for us to have a pretty large UX completion design in our customers’ hands with a lot of functionality coming out in my view in the second quarter and the back half of the year. But I expect that the predominance of what I’ve just talked about in place by the end of next year. And as John said, we’re investing behind this. I’m really pleased, as John mentioned with the delivery – on-time delivery and the excellence of the applications that are coming out into our market. And so expect to see a step functionality in the back half of Q2 of this year and then to build on that as we go into the rest of the year.

Very exciting. Thank you.

Yes, it is exciting. Okay. I want to thank everybody for all of your great questions this would really – I’m glad we had a chance to talk about all those things and look forward to talking to each of you more in the weeks and months ahead. So, thank you very much. Everybody, have a good day and we’ll talk to you soon. Bye-Bye.