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 Holdings Earnings Conference Call for the Fourth Quarter and Full Year 2020. [Operator Instructions] I would now like to introduce your host for today’s call, Ms. Gabrielle Rabinovitch, Vice President, Corporate Finance and Investor Relations. Please go ahead.

Thank you, Gabriel. Good afternoon, and thank you for joining us. Welcome to PayPal’s earnings conference call for the fourth quarter and full year 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 a 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 first quarter and full year 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-Quarter 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, February 3, 2021. 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 today. I’m pleased to report that PayPal just completed the strongest year in our history, achieving record growth in net new active customers, volume, revenue, operating income, earnings and free cash flow. Consumers and businesses of all sizes have embraced a new digital era, erasing the distinction between online and offline. A digital-first world is no longer our future. It’s our current reality, and it will forever change the way we interact across almost all elements of our lives. At the beginning of the pandemic, consumers in lockdown had no choice but to do all of their shopping online. Today, the vast majority of consumers state that post pandemic, they will continue to shop online at their current elevated levels because it is more convenient, easier and saves time. Retailers are rapidly adapting to a new landscape, adjusting their strategy from encouraging consumers to visit their stores to optimizing for home delivery. The pandemic has accelerated a digital wave of change across almost every industry by three to five years, unleashing a profound and permanent structural transformation. Our results in Q4 highlight these strengths. In the quarter, we added 16 million net new active customers, including an incremental 1.4 million new merchants. For the year, we delivered a record 73 million net new actives, ending the year with 377 million active accounts, up 24%. And we now have over 29 million merchants interacting with nearly 350 million consumers. In 2021, we expect to add another 50 million net new active accounts. Equally important, our daily active users remain elevated versus a year ago, up 29% from Q4 of 2019. Our expanding scale and increasing engagement drove a record 4.4 billion transactions in the quarter, up 27%. Our total payment volumes in Q4…

Thanks, Dan. I want to start off by thanking our customers, partners and employees for helping us deliver a record-breaking year. 2020 was pivotal for PayPal and the broader payments industry, marked by rapid acceleration in digitization, cash displacement and e-commerce adoption. These secular trends have been shaping our sector for some time. That said, the rate of change we experienced last year, resulting from the widespread implications of the COVID pandemic, was profound and transformative. Crisis, which has led to hardship and suffering for so many, increased the urgency across our organization to serve our customers in new and innovative ways. Notably, the isolation defined by lockdowns and working from home actually resulted in greater collaboration and brought our teams closer together. We’ve entered 2021 energized by a greater sense of purpose and responsibility and ready to build on our strong momentum. Now, to our fourth quarter results. Total payment volume grew 36% on a currency-neutral basis. This is the strongest quarterly growth we reported in history and represents 14 points of acceleration from 2019. Our merchant services volume grew 40%, another record for PayPal, accelerating each quarter in 2020. Volume contribution from eBay Marketplaces continued to decline. We exited December with eBay representing less than 6% of our overall volume. Revenue in the fourth quarter increased 23% on both a spot and currency-neutral basis to $6.1 billion. Relative to the fourth quarter of 2019, U.S. revenue grew 18%, and international revenue grew 29% as the U.S. has a greater proportion of revenue from credit and the travel and events verticals. Transaction revenue grew 25%, representing 8 points of acceleration from last year on a spot basis. This growth was primarily driven by strength across our core PayPal business, including strong cross-border activity. Our core payments platform continues to…

[Operator Instructions] Your first question will come from the line of Jason Kupferberg of Bank of America. Please go ahead.

Good afternoon, guys. Congrats on the results. I wanted to ask about the new growth initiatives, and two-part question here, maybe one for John and one for Dan. First part is, does your guidance assume that the aggregate revenue contribution of these new growth initiatives will be enough to offset the 4% eBay headwind in 2021? And then, the second part is, among the various new growth initiatives, which have surprised you the most to the upside so far, and which did you perhaps think would be seeing a little bit more adoption to date than they have been to date?

Hey Jason, I’ll start with the first part of your question and turn it to Dan, if that’s okay. With respect to offsetting the headwind from eBay, the fact that we’re expanding, or better said, that our projected guidance suggests that we’re expanding our operating margins, would certainly indicate that we think between the momentum in the business and the additional initiatives combined that we can offset the pressure related to eBay. Certainly, the initiatives -- all initiatives take a while to ramp up. The bulk of our new initiatives are really, we would expect the financial impact to be in the second half of the year. But, when you combine that with the momentum in the business, it certainly allows us to offset that headwind.

Jason, I’ll try and answer your second question there. So, that’s like asking me to choose, which of these are my favorite kids. And none of the product managers that are hanging [indiscernible] answer. So, look, we put out a couple of big initiatives into the markets. Our in-store to our crypto, to our Buy Now Pay Later, and honestly, all of them surpass our internal projections and they all are creating a halo impact that is really pleasing to see. I talked about kind of QR having a 19% halo effect. Crypto, yes, started off with a bang and just kept going and is continuing to go. But, in a surprise winner, if I had the envelope, I would talk about Buy Now Pay Later, honestly, as surprising me most to the upside. Since I’ve been here, I’ve never seen a product launch with that kind of scale so quickly. I mean, we talked about moving into the U.S. in October, we announced, and we had almost 3 million customers using Buy Now Pay Later, hundreds of thousands of merchants. By the way, that’s not the total number of transactions. We already saw in the quarter a 40% repeat rate on that as well. And so, it’s not just that you had customers in it. I mean, they’re just voting with their feed and moving forward. And we think that we have a value proposition that is second to none out there. First of all, we’ve got 350 million customers that we can bring their trust to PayPal. We know them. And so, our approval rates are higher we think than anybody else out there, when people sign up for Buy Now Pay Later. Second, it is no incremental cost to the merchant. I mean, all of the other competitors charge a pretty significant incremental cost. And for us we’re just charging the same take rate that the merchant had. It’s very, very light integration, which is why we saw well over 10,000 merchants integrate Buy Now Pay Later up the funnel really on the product pages and not at checkout. We’re beginning to see more and more of that as we come into the year. Another thing that is really interesting to me -- oh, here, the halo effect, by the way, very early days, it’s the halo effect. It’s about 15% increase in TPV. And we think all of that TPV so far is incremental TPV for us. But the other thing is we’re seeing a meaningful double-digit reduction in the cost of those transactions as well. And so, when you look at kind of the scale and you look at the value proposition the take up of merchants, and that’s continued on into the first quarter, this is clearly a home run for us and a winner. And it is not to dismiss any of my other favorite kids because they all had great years, but Buy Now Pay Later was probably the biggest surprise.

Okay. Well, thanks for all the commentary.

Yes, you bet.

The next question comes from the line of Tien-Tsin Huang of JP Morgan. Please go ahead.

I really enjoyed the presentation here. I wanted to ask on M&A, if that’s okay. I just wanted to check your appetite on acquisitions, and especially at this point of cycle, given that so many of these digital assets have been inflated in terms of valuation during the pandemic here. And any change in your thinking around M&A? I saw on the slide you had some great detail on your strategic investments, but how about M&A?

Tien-Tsin, I’ll start and maybe Dan will jump in. But, I think, there’s two really important points to consider when we think about acquisitions for PayPal. The first is that we are somewhat unique in the FinTech ecosystem, and so far, as we enjoy outsized growth rates, but we also are extremely profitable. And that results in the type of free cash flow generation with 20% plus free cash flow margins. And that uniqueness that allows us the ability to have this effectively an asset where we can go out and look at inorganic opportunities to complement what we’re doing organically. So, I think that’s one important point to think about. The second, and it really gets to your point around where some valuations are. But, we exercise a tremendous amount of discipline in the way that we look at this. And from an overall capital allocation perspective, our view is, every dollar of capital has to compete with the other alternatives out there, whether that be organic or that be returning cash to shareholders or going out and acquiring a company. And so, we will remain disciplined and really view our acquisitive strategy over a multi-year longer term timeframe.

Yes. I’d just add to that, Tien-Tsin. If you think about our need for acquisition, that -- what is our pace of organic innovation? And in 2020, we put out more product and services than we’ve ever put out before. I said, in my remarks that we’re going to step up that pace in 2021, and we’re going to go do that. When I look at all the investment we’ve made over the past five plus years in our tech infrastructure and our compliance and risk management, what that’s enabled us to do now is pretty radically accelerate the amount of software releases that we have. We put out last year, between config release and software releases some 60,000 releases. That was up 30% year-over-year at the time where we’re all working from home. So, our productivity has gone way up. Our developer toolkits are much improved, using modern programming language, you have a service oriented architecture. And by the way, all that’s happening while the number of bugs has gone down 25% in all of our releases from 2019 levels. And so, I’m really happy with the pace of organic innovation and our ability to deliver products. And that takes away a lot of our need to do acquisition. I would just build on John’s point. We obviously had a strong balance sheet, strong cash flow. We will be acquisitive going forward. But we’re going to look at that and as John said, in a very disciplined manner, we’re going to look at talent, types of acquisitions, where can we do maybe a smaller acquisition to bring in great talent in a particular area. We’ll look at geographic types of acquisitions where we may want to go after geography and there may be a player or two there that could help us leapfrog into that market, and we’ll look at that carefully. And if there’s a real capability that not that we can’t develop and do, but it’s going to take us too long to get there. Because what we’re trying to do on our roadmap, then we would take a look at that as well. Those are kind of the basic areas, I would say. So, I think we’ve got a good one-two punch between what we can do internally and what we can do from an inorganic perspective.

Yes. It’s very clear. It’s going to be fun to track the organic products for sure. Thanks a lot guys.

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

James, are you there? I won’t be the first one to say this, but are you off mute? Why don’t we go to the next question and we can put James back in the queue little bit later, Gabriel?

All right. So, your next question will come from Darrin Peller of Wolfe Research. Please go ahead.

All right. Hey guys. Thanks. Congrats on the year also. With your expectation for adding 50 million net new actives in ‘21, which was clearly an impressive number when looking at the 72 million you guys just added, and then the pre-pandemic normalized level’s around 35 million, I think per year, right? Does that -- I guess, first, does that underscore the incremental adds -- you’re confident that the incremental adds in 2020 were really not pulled forward, but they’re just new demographics. And so, looking off of last year, if you could walk us through the different drivers, whether it’s geography or product, giving you the competence and adding 50 million net new actives in ‘21 versus, the pre-pandemic 35 million or so levels would be great?

Yes. Darrin, I think, when we look at the cohorts of net new actives from last year, which clearly incremental people coming on, over 50 demographic, 50 years old demographic, one of our strongest growth vectors that we’ve had. So, you’re really seeing new demographics come on to the platform. But, what’s really interesting to me is the engagement metrics of that cohort are also up substantially. We have double digit increases in a value per net new active, our 90-day engagement rates are up 13% plus over traditional cohorts. If you look at a normalized transaction for active spend, because this kind of gets a little bit lost because we’re including Honey net new actives in the denominator, and we also -- as you said, we put on 72.7 million net new actives last year. If you normalize that for 37 million that we would put on a typical year, because when you put somebody on to the platform, they don’t have all the transactions. They all didn’t come in on January 1, they come in throughout the year. And so, that puts pressure on it. But, our TPA, which is a real measure of engagement, normalized basis was grown 11.5%. That’s above any trend line that we have up to about 45.1 times a year. And so, our churn rates in general, because of that, are coming down. And when you have a base as big as ours right now, it is as much, maybe even more about the churn rate than it is the new adds coming in. There is plenty of demand to come onto our platform. But, when we see churn reduction, like we’re seeing right now, because of increased engagement, and that increased engagement is coming I guess again people who are just moving online, and because of these new products that are out right now, that people are just using a ton more, like crypto is a great example. Everyone has signed on for crypto. So, it is opening up their wallet at 2 times the level of what they did previous. And so, I think, that 50 million is a real good guide right now. We’ll obviously update, as we go on. But, we’re seeing a lot of really encouraging trends in the underlying cohorts that we’re bringing on, which gives a lot of confidence to that 50 million number.

That makes sense. Really helpful, Dan. Thanks.

Your next question comes from the line of David Togut of Evercore ISI. Please go ahead.

Thank you. Good afternoon, Dan and John. Could you discuss the drivers of operating leverage, both at the transaction expense and the other OpEx level? And in particular, are you seeing the sustained volume mix shift toward the branded PayPal wallet versus Braintree and P2P benefiting transaction margin, as well as the continued funding mix shift toward debit?

Sure, David. You packed in a lot in that question. So, let me just -- I’ll take them in reverse order. We still are seeing elevated levels of debit, and that’s consistent with what others have said across the ecosystem, although not at the levels that we saw in 2Q, and likely driven by the impact of stimulus measures at that point in time. Braintree continues to perform very well for us. But, it really suffers the brunt of the impact from the travel and events vertical, which was down 50%, five-zero percent for us. And so, that’s a pretty meaningful impact when you consider that that’s in excess of 10% of our volume. But, when you look at the areas of leverage for our business, so I think we will continue to see strong core PayPal trends, PayPal volume. And those tend to come at a higher transaction margin. At the same time, we’ve seen record performance in transaction expense and transaction losses. And those -- transaction expense will be impacted more by the mixes in our business. But, we expect those will be below the levels that we entered this pandemic with and we expect transaction losses to stay at these levels. So, we’re performing very well there. But, if you think about the remainder of our income statement, if you will, and all the other sort of non-volume related expenses, we’ve invested a lot obviously in the back half of last year and our guidance assumes that as well. But, we also demonstrated the ability for our business to scale very efficiently. And so, if you just -- we don’t give expense guidance for the year, but you can back into it based upon our revenue and earnings growth. And, that expense growth that we’re assuming in…

Thanks so much. And congrats, John again.

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

Hey. Thank you very much. And I’m really starting to feel clumsy with my phone. I wanted to ask John. And Dan, obviously chime in where appropriate. But, you alluded and mentioned specifically, John kind of your guidance and that kind of thing for this year. If you think back and just over the last few months, even of the fourth quarter, there’s been just a huge amount of volatility in closures and what consumers were doing or could do or couldn’t do, et cetera. So, how are you trying to think about, like all those puts and takes, as you formulate your full year ‘21 outlook today? And what are the things maybe that you’ve seen as we’ve gone through, particularly the latter few months of ‘20, that kind of give you confidence in our forecasting methodology is pretty sound, at least from where we stand right now?

Sure, James. The revenue guide of 19% growth for the year, we sit here in February of 2021, and there’s still uncertainty. There’s uncertainty with the level of stimulus measures, the pace of the vaccine rollout. But there are some things that we’ve seen that certainly give a lot more confidence than where we stood nine months ago, sort of at the peak of the, concern and trepidation that people had around what could happen to the economy and the impact on everyone’s respective company. Some of the trends that we’re seeing that Dan talked about in his prepared remarks, they’re definitely sustainable. And there’s this movement to digitization and the pull forward of e-commerce that certainly stands to benefit us and others in this space. But, we provided sort of an approximate number, right? We said approximately 19%. There is not a range around it, like we normally do, because, quite frankly, that range would be somewhat artificial or arbitrary. It’s -- there are a wide range of outcomes that could happen. But, we feel pretty good about what we see in the business. And I think, it’s important to note that we are a pretty diversified portfolio of products. And so, we’re not just reliant on one thing. And I’ll give one example before I close my answer, but the travel and events vertical. So, I mentioned that in an earlier answer, like our baseline assumption on that 19% revenue growth is that as the -- as people begin receiving vaccines, there is pent-up demand for travel. People want to take that summer vacation in 2020 that they missed. And so, we’re assuming that we start to see a rebound in travel and events in the second quarter. And that certainly stands to benefit the Braintree side of our business. But channel things aren’t, if that’s not the case, then likely there’s been other concerns that result in people sort of lacking mobility that still stands to benefit us on the core PayPal business. So it’s -- I know it’s 11 months out that we’re projecting here. But, as we’ve moved through this, we’ve got more confident with some of the trends that we’re seeing and feel really good about that guide.

Your next question will come from the line of Colin Sebastian of Baird.

Great. Thanks, guys. Good afternoon, everyone. A lot of good stuff here, but hoping you could provide a little more color on the strategy to build out the presence in China? How you see the combination of GoPay and PayPal position from a competitive standpoint, both within the country as well as the cross-border perspective?

Thanks for the question, Colin. So, obviously, we’re really pleased that we now own 100% of GoPay. And we’re the first and so far the only foreign payments company to operate a full domestic payments business in China. And that, obviously, gives us a very strong legal foundation for the business we have there and for the business that we intend to drive. Very recently, Deputy Governor Pan from the PBOC, an article in the Financial Times that was really kind of this clear statement of China’s commitment to trying to strike the right balance between innovation along with prudent regulation. And that plays right into what we want to do inside the market. We really want to work with the regulators there on both of those objectives and assure that we’ve got both, safe and secure digital commerce. And we really have three goals over the next couple of years in China. So first, obviously, is to make sure we invest to have the right compliant infrastructure inside China. The second is to really leverage all of our cross-border expertise, and that goes in two directions. First, we want to significantly increase the amount of cross-border that Chinese merchants can get from the 350 million consumers we have outside of China. And we also want to work inside China that Chinese consumers purchase from the 29 million merchants that we have outside of China. Both of those are already growing elements, and we think that those can grow quite nicely in the years to come, and it really plays into our strengths. The third thing, though, is that we do want to work within the ecosystem inside of China with companies like China UnionPay, with the banks there, with the tech platform companies there as well to drive new types of payment services or incremental payment services inside the domestic market, like that could be payouts could be some unbranded full-stack processing. It could be QR codes. For instance, I’ll just give you an example. China is holding the Olympics in the next couple of years. There’s going to be a tremendous amount of visitors going into China. And we want our QR codes to be deployed so that people coming in to China don’t necessarily have to download WeChat Pay or Ant. They can use their PayPal wallet inside China to make purchases at merchants. And I think, there’s a lot of ways that we can leverage our strength, the strength of our partners inside China and our strong regulatory relationship that we have right now to both grow cross-border and then to start to slowly, but surely add incremental services into the domestic market as well.

Your next question will come from the line of Dan Dolev of Mizuho. Please go ahead.

A question for Dan, really kind of looking into the long term. It looks like PayPal is increasingly becoming sort of, in my view, the world’s best super app, especially now that you’re offering bitcoin, QR, Buy Now Pay Later and counting. Can you maybe talk a little bit what you’re seeing in terms of engagement that brings PayPal closer to becoming an everyday super app? Maybe touch on your broader engagement strategy given 73 million accounts that you added in 2020? And what are your long-term digital wallet ambitions as you introduce traditional functionality and services? Thank you.

Yes. Dan, that’s a great question, kind of goes at the heart of a lot of our strategy. And we’re going to be talking a lot about that at our Investor Day next week as well. So, let me just very quickly say that we are seeing engagement levels already. I talked about it. If you normalize for Honey and all the incremental net new actives that we brought in that are bending our traditional curves. We’ve never really been above 9% or 10%. Normalized, we’re at about 11.5% of growth. Our churn rates are down. All of the new functionality that we’ve put into place, whether that be crypto or that Buy Now Pay Later, the Venmo card, QR codes, are adding to usage. They’re adding incremental TPV, they’re adding incremental transactions, ones that I didn’t mention is that people who use a PayPal product in-store. And again, these are early days on this, but those that are using it in-store, we’re seeing, Dan, 54 incremental transactions that are just in-store that don’t displace the online. It’s just -- it’s basically doubling the number of transactions we have. And so, as we start to build out our digital wallet really into the super app, that transcends across payments, commerce and financial services, all of that on a common platform, all of that leveraging common data elements and machine learning on top of that to give next best recommendations. I think we are going to see, as I mentioned in my opening remarks, a real bend in the historic rate of engagement. And it’s going to be all around that super app functionality in that digital wallet, moving well beyond just payments. So, I think, Dan, thank you for that great closing question. And I want to thank everybody for your time today. And I really hope that all of you and your families are safe and healthy. And we are looking forward to speaking with all of you again next week at our Investor Day. So, thank you for your time. And everybody, take care. Bye, bye.

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