Good evening. My name is Briana, and I will be your conference operator for today. At this time, I would like to welcome everyone to PayPal Holdings' Earnings Conference Call for the Third Quarter 2022. [Operator Instructions]. Thank you. I would now like to turn the call over and introduce your host, Ms. Gabrielle Rabinovitch, Senior Vice President and Acting CFO. Please go ahead.

Thank you, Briana. Good afternoon and thank you for joining us. Welcome to PayPal's earnings conference call for the third quarter of 2022. Joining me today on the call is Dan Schulman, our President and CEO. 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 our Investor Relations website. In discussing our company's performance, we will 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. We 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 fourth quarter and full year 2022, our preliminary framework for 2023 and comments related to anticipated cost savings, operating margin and share repurchase activity. 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 our Investor Relations website. You should not place undue reliance on any forward-looking statements. All information in this presentation is as of today's date, November 3, 2022. 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. I'm pleased to share that our results in the third quarter exceeded the guidance that we announced in August, marking the third consecutive quarter of delivering on our non-GAAP guidance. Before reviewing our results and operational progress, I want to share two exciting developments that we believe will enhance our long-term strategic position. First, I'm very pleased to announce that we are working with Apple to enhance our offerings for PayPal and Venmo merchants and consumers. Leveraging Apple's Tap to pay on iPhone functionality, merchant customers in the U.S. will soon be able to accept contactless debit or credit cards and mobile wallets including Apple Pay using an iPhone and the PayPal or Venmo iOS app. This will allow PayPal's merchant base to easily use their iPhone as a mobile point of sale without the need for a dongle or other payment terminals. We believe that this along with our other in-store initiatives will continue to accelerate our opportunity to seamlessly process payments in the physical world for our merchants. We are also adding Apple Pay as a payment option in our unbranded checkout flows on our merchant platforms, including our PayPal Commerce Platform. We are already in beta with several ecommerce platforms and merchants and anticipate a broader rollout in the coming months. And next year, U.S. customers will be able to add their PayPal and Venmo network-branded credit and debit cards to their Apple wallet and use them online and in-store wherever Apple Pay is accepted. We anticipate this to be available in the first half of 2023 expanding the opportunity for our consumers to transact in-store. This is a significant step forward in our relationship with Apple and we are excited to work closely with them to bring these…

Thanks, Dan. I'd like to start off by thanking our customers, partners and global team for helping us to deliver a great quarter. The strong results we're reporting today demonstrate the continued execution of our strategy to deliver long-term sustainable growth. Our teams are proving our ability to navigate a dynamic operating environment, while also staying focused on our key priorities. We once again demonstrated our results, combining execution and focus with growth in our core business. Our results reflect our operating discipline, diversification and resilience. The power of PayPal is the scale of our global franchise. Our investments in innovation are making us stronger. And we're excited by what we see as we execute against our growth opportunities. I share Dan's enthusiasm for our growing relationship with Apple and the rollout of pay with Venmo on Amazon. We believe we will continue to extend and reinforce our leadership in payments. And we are confident that our competitive positioning with unparalleled scale across our two-sided network will allow us to emerge from this period of economic uncertainty stronger. We're proud of the quarter we delivered. We surpassed the third quarter financial targets we shared with you in early August and delivered on our commitment of sequential acceleration in our revenue and earnings growth. We're also on track to build upon our operating margin performance in Q3 to deliver a non-GAAP operating margin expansion in the fourth quarter on both a year-over-year and sequential basis. Our teams are energized by the progress we have made. And by the increased operational rigor we're bringing to running our business and investing in our priorities. At the same time, the macroeconomic backdrop continues to be complex and we're focused on taking an appropriately prudent approach to managing our business for profitable growth at scale.…

[Operator Instructions]. Your first question comes from the line of James Fossett with Morgan Stanley. Your line is open.

Great, thanks. Exciting announcements for sure with Apple, et cetera. Just wondering, on the margins, though, can you talk a little bit about how you're approaching next year, obviously, there's -- as you indicated, Gabrielle, there's a big range of potential scenarios, especially around revenue, but you seem fairly confident in your ability to deliver that 100 basis points of margin expansion, which is a little more than we had modeled. So you can talk about, like, what's going into that, like, what levers you can pull to make sure you can deliver that and how that translates into that 15% EPS growth. Thanks.

Hey, James. It’s Dan. I will start off and then maybe Gabs can fill in around the edges here. First of all, we do feel quite confident in our ability to raise our EPS for the year. And then on top of that higher total, generated at least 15%, EPS growth, which gets you to about as a first step for us $4.70 next year. And this is really being driven by being taken very prudent approach to what could happen next year, from a macroeconomic perspective, there are a wide range of scenarios on that, and everybody has an opinion. But we think it's prudent to plan for a difficult economic cycle and have our cost structure, be in line with that, so that we can deliver robust EPS growth. Our cost and productivity initiatives are so well underway. I'm really pleased with the execution that we've had over the last several quarters. We've been anticipating a difficult economic environment, the team's taken a lot of action across non-transaction related OpEx. As we said, in our remarks, we expect in the fourth quarter, that's going to be flat, and probably slightly negative, as we look ahead, and then as you look into 2023, we see no reason why it will come off of those levels of being flat, to slightly negative. If you think about it, our non-transaction OpEx has traditionally been in the mid-single digits for a long time, during the pandemic that jumped up to 17% in 2020, and about 20% in 2021. So we have plenty of headcount, our headcount are going to be down at the end of this year from where we started at the beginning. We have a lot of efficiencies, as our processes get better and better. We are clearly leveraging our scale with our suppliers as well as whether it be our network partners, or others on transaction related expenses. And we feel very good about delivering at least 100 basis points of operating margin improvement next year. By the way, at the same time, investing in our high growth, high conviction areas, checkout digital wallets and Braintree. We think this is a time where market share leaders get stronger. We want to take advantage of this environment that we're in. We are already seeing some of the investments we're making in those areas, pay real dividends and our ability to satisfy our customers. And we think this is an opportunity for us to take share going forward. We're in a rising interest rate environment, that's a tailwind for us for many of our competitors, it's a headwind on and we just think there's opportunities for us to operate more efficiently and effectively and invest and continue to take market share. So really pleased with the focus and the commitment from the team making real progress on the cost side and the productivity front. And we'll continue to do so as we go into next year. Next question operator.

Yes. Your next question comes from Jason Kupferberg with Bank of America. Your line is now open.

Thank you, guys. I wanted to talk about the top-line outlook for Q4 currency neutral. We're looking at 9% revenue growth. I know last quarter, we were thinking more like 14%, obviously linked to the software TPV outlook. Can you just walk us through perhaps pieces of that bridge? What you thought that last quarter versus what you're thinking now for Q4, given the context of the softer macro? Thank you.

Yes. You bet, Jason. So you're right. We took down our full year revenue guidance by about a point and at the same time, of course, raised our EPS at the midpoint by $0.16. We had a strong Q3, and obviously, we delivered on all of our commitments. But at the end of the quarter, we started to see some slowing and that came right at the at the very end. In October, in addition, we didn't see the early start to the holiday season that we've seen in 2021. And so we brought down our internal forecast for U.S. ecommerce growth, commensurately with that. And so, in the middle of the year, we were thinking about U.S. ecommerce growth for the fourth quarter and the mid-single digits, that's now come down to low singles. That's pretty consistent with what we see from other third parties. And that really is the predominant driver of the change in our guidance. Now, in conjunction with that similar to earlier this year, when we took down some of our expectations around initiatives in conjunction with a lower growth environment, we've done the same. And so that's also contributing to the 9% FX neutral expectation on Q4. But of course, we're raising EPS overall. And in the quarter, we expect to deliver about 75 basis point of Op margin expansion. So we continue to deliver on our efficiencies, despite the slower growth environment.

I think you'll also be seeing any report that comes out on the macroeconomic environment, reaching all times high. The inflation report in the Euro Zone was not great. And you're seeing in countries like the Netherlands, which is so conservative, a 17% inflation rate, U.K., which is our second largest market, is really suffering. And our view is that we're still going into winter, energy costs are going to go up. And the low-end income levels and middle-income levels are beginning to cut back on their discretionary spend, they're spending so much more on food, on energy, on gas, on rent. And we're beginning to see that impact those segments of the market. The high end of the market, by the way, still spending quite freely. And we're seeing that also in our results. The other thing is, we did expect quite a number of live to site implementations on Braintree in the fourth quarter, almost a full point of growth that are being pushed into next year. So we'll capture that revenue, we just won't capture it this quarter. So I think as Gab said, there's certain things we can control, that is our expenses, where we're investing, how we're doing in those investments. And there, I think the team is doing an excellent job. And there's certain things like the macro environment that we can't control. But we need to be ready in a wide range of scenarios. And that's what we're laying out for you, firm commitment around at least 15%, EPS growth and operating margin expansion and continued investment in our high growth, high conviction areas.

All makes sense. Thanks, guys.

Yep.

Your next question comes from Colin Sebastian with Baird. Your line is open.

Thanks very much. Obviously, it's a fluid environment. But maybe following up the last question, I think it'd be helpful to know for context, how you're thinking about the overall ecommerce environment into next year. How that impacts the 2023 framework and including the underlying volume, the revenue growth assumptions that you have to get to those targets. Thank you.

So let me start off and Gabs can come in. So first of all, Colin, I think it's a little bit too soon to have strong visibility into what 2023 will look like. Typically in a quarter, when you're a third of the way through it, you have pretty good visibility into what's going to happen in the quarter. But in the fourth quarter, that's not the case. It's really all about the holiday season. And what happens in five- or six-week, period, that's still ahead of us. But based on what we're seeing right now, based on external reports, based on our conversations with other ecommerce players you saw, another very large ecommerce player take down their revenues in the fourth quarter that we think that ecommerce is going to be pretty muted in the fourth quarter. And right now, we are not planning that that comes back for any reason, as we look into 2023. I think baseline ecommerce growth will be subdued. But I fully expect that we will outpace it. We've got quite a number of Braintree live to site with very large merchants coming up. Our checkout and digital wallet improvements are quite strong right now. And I'm really pleased with the indications from those initiatives. Obviously, Amazon, we'll see what happens with that but we have a lot of hope for that. And our deal with Apple will certainly be meaningful over at least the medium term on that. So still too early to call, we're going to be very conservative on our top-line assumptions, but we're going to build a ton of resilience into our model. We will adjust to potential lower growth environments, we can keep our OpEx very well controlled. We've demonstrated that now and will continue to enable operating margin expansion next year so. And if the macro picture gets better, these numbers can improve dramatically, but we're anticipating a difficult economic cycle and preparing for that so that we can invest and deliver robust EPS growth at the same time.

Thank you very much.

Yep.

Your next question comes from Darrin Peller with Wolfe Research. Your line is now open.

Hey, thanks, guys. Look, it's really helpful to have the volume breakdown by PayPal Braintree more, I know you said I think you said 4% core PayPal growth. And you're saying you're expecting that it'll be in line with the market. If you could just touch on the assumptions and drivers of PayPal core engagement growth and what you can do there. It obviously looks like you're making progress around initiatives like passkey or the Venmo, Amazon partnership or obviously Apple. All that should help I assume on the checkout experience, but maybe we can have some more color on how much room there is to improve that experience and what that can mean.

Yes, sure. So, I will dive really quickly into both checkout and a little bit on what we're seeing on digital wallet. So as you know, Dan, we're already the leader in branded checkout, I mean, we have 8x the footprint of the next closest digital wallet. Consumers are twice as likely to spend online when they see the PayPal button, 80% of the 1500 largest online retail retailers across the U.S. in Europe, except us in our [half rate] [ph] right now is 600 basis points above the market average like for every 100 transactions, PayPal is going to approve six more than traditional card networks. But obviously, as we've talked about many times, we can do a lot more here and one, we've improved customer perceived latency by 40%. In the last 12 months, our uptime and availability has gone up by another nine, we are approaching five nines of availability. And when we're doing in -- our early indications from in app with the Mobile SDK, is that conversion rates increase between 3% and 10%. Again, it's early days on that but imagine how significant that improvement is. On the authentication side, passkeys is a very big deal. Passkeys are going to be accepted. Not just with Apple, we're integrating through iOS on passkeys initially. But Google and Microsoft are also enabling passkeys. And that basically enables authentication through biometrics fully embedded into the OS, it eliminates the need for like weak or reused credentials. It removes the frustration of having to remember, password. And like one of our recent surveys, like 44% of consumers have abandoned an online purchase due to a password issue. So that passkey could be a very meaningful piece of conversion uplift for us. And then of course, we're moving into [voting] [ph] and accelerated checkout. And I've mentioned this already on our digital wallet stats, but it's up 50% of our base now plus is using our digital wallets that's up over 13% year-over-year, we're seeing much reduced churn on that 25% to 33%, 50% greater ARPU, 60% more checkout transactions, we're seeing a lot of our new products in the wallet gained a lot of traction. I mean, savings is early, it's got a 3% APY. But we're seeing a 20% lift in ARPA for those come into our savings program, 30% lift in checkout. And even things like just like our new three-two card, because cards are important part of our strategy, that's off to an incredibly strong start. We've acquired more accounts in the first six months of that launch, than we did in the previous 22 months with our 2% cashback offer. So a lot of things to be excited about in terms of what we can do with our initiatives. And that's why we're investing heavily in them, as well as returning operating margin performance and EPS performance to our investors.

Understood. Thanks, Dan.

Yep. You bet.

Your next question comes from Lisa Ellis with MoffettNathanson. Your line is now open.

Hey, good afternoon, guys. Good to hear your voices. Dan, I just wanted to follow up on the Apple-related announcements that you made or highlighted on the call, certainly some good progress there. Can you talk a bit more about what you think that unlocks for PayPal in terms of better serving both your merchants and your consumers? Are there any aspects of this relationship that you could think could be more impactful perhaps over time, like where could it go? And then also could talk a little bit about how that relationship dynamic is? How collaborative this relationship is with Apple? Thank you.

Yes. Well, first of all, I think the agreement is quite important, strategically, and our two companies have been working on that together for quite some time. I think there are three areas that this really helps to unlock. I mean, first of all, enabling our merchants to use their iPhone without any incremental dongle or point of sale terminal around that all they need to do if they have a business profile on Venmo, or PayPal has given us three pieces of information, their mobile phone number, their birth date, and either their social security number or their tax ID, that's it, and then they're set up to receive payments in the offline world. And our payment rate there is 2.29% plus $0.09, that is a really competitive rate versus others in the market. And we think this can be really especially significant for the millions of customers that have Venmo business profiles and allow us to compete aggressively in an omnichannel world. And so I think there's a big unlock on that. Second, adding Apple to our unbranded flows. As you know, Apple's already on Braintree in our unbranded flows, but that's just going to make us well more competitive. As we go out and sell PayPal commerce platform further down into middle market and smaller businesses. It enables us to sell PayPal commerce platform more completely it enables us to offer more choice to our merchants, which is something we've been focused on for years and years now. And it also enables the very best integration of our PayPal branded and Venmo branded checkout buttons. And then, finally, the ability for our consumers to add their PayPal and Venmo credit and debit card into Apple Pay in the U.S., for the use that anywhere Apple Pay is accepted, is probably a bigger deal than most people realize. We've been doing this with Google Pay for quite some time. And we've seen, for instance, that Google Pay users in Germany, when they add their PayPal credentials there, there's a 20% increase in their branded checkout transactions. And so they also have the ability to create temporary digital cards that can even allow us to bring our Buy Now, Pay Later from branded checkout online, to everywhere consumer shops. So I think there's a lot of really nice unlocks. Apple and PayPal. I've been working closely on this. We're both excited to put these into the market, and dedicate resources to ensuring that they're successful, and just create a better value proposition for our mutual customers.

Terrific, thank you.

Yep.

Your next question comes from Tien-Tsin Huang with JPMorgan. Your line is now open.

Thanks, Dan and Gabs. Just any more clarity on the -- at least part of the 1.3 billion in cost efficiency next year is, I'm just curious if that's more likely to come from cost cutting or maybe less investing? How quickly also, can you pull the levers to deliver on the 15%? Thanks.

Yes, you bet. So when we talked last quarter about driving at least $1.3 billion in cost savings next year, nearly half of that was coming on the transaction expense side with the other half coming from non-transaction related OpEx. I'd say in addition to thinking we can do more, I think the balance weighs more in favor of non-transactional related OpEx than it does TE at this point. And some of that's based on the fact that with a slightly lower growth environment. Some of the benefits that we derive on the TE side are really volume based in nature. And those volume expectations come in a bit, we would be driving more on the non-transactional related OpEx side. That said, I think we see a lot of room to go in terms of our initiatives there. And so just sort of taking a step back. Last year, our non-transactional related OpEx grew by 20%. That was on top of about 17% growth in 2020, over 2019. And so this year, we're spending about $2.5 billion more in our non-transaction related OpEx buckets than we did in 2019. And we see an opportunity to be a lot more productive and drive more savings there. And so you'll see this year some marketing dollars coming down that came down again in Q3 about 1%, after coming down considerably more than that, in Q2. We will end up the year with low single-digit, non-transactional related OpEx growth and I’m expecting next year will do better than that. I'd expect it to be closer to flat, if not a decline year-on-year. So we're looking for the opportunities we can to continue to drive operating margin expansion even in a lower growth environment. And we think you know that the savings we're finding are really sustainable. And it's a lot more about productivity and using our scale to benefit us. And so, we think we emerge from this environment much stronger as a result of the work that we're doing.

Understood. Now that's all useful and thanks, got to you say thank you for Slide six, including the CAGR stuff. That's great to have. Is that a one timer and I'll jump off? Thanks, in terms of disclosure.

We will continue to provide updates. I don't know that we're committed to doing it on a quarterly basis, but we'll continue to update on the mix of our TPV as it's quite important to understanding the performance of the business. We'll take the next question.

We have time for one last question from David Togut with Evercore ISI. Your line is now open.

Thanks so much for squeezing me in. You've announced a number of new omnichannel initiatives whether it be the announcements with Apple today. The rollout recently of PayPal Zettle terminal in the U.S. and of course continue to expansion of your BNPL products. Can you help us think about what all the omnichannel initiatives might mean over time for revenue? And then, sort of broadly, what are the costs associated with expanding omnichannel? You've talked about freeing up investment dollars from your cost reduction initiatives. Thanks so much.

Yes. I'll start on that, David. So BNPL is an integral part of our checkout strategy. We know if we go into upfront presentment, Buy Now, Pay Later, somebody puts us on their product pages, as opposed to check out that our share of checkout goes up quite dramatically. And as you saw, and as you heard, from me, it's growing by leaps and bounds. We're approaching 300,000, upstream presentment. And we're one of the top players in any market two years after launch 150 million different loans. At over, by the way 2.2 million unique merchants. And what I didn't say in my script is, it drives a halo spend of greater than 20%. And 90 plus of that is incremental to us. And so not only do we have, a great value proposition, but we have a real competitive advantage in knowing our customers, 90% of the people that use Buy Now, Pay Later, we have history on. And so our loss rates remain low and stable. And today we're live in 8 markets. As I mentioned, when Lisa asked her question, we think that the ability to take Buy Now, Pay Later, anywhere you want to shop, whether that be online or in store, is a really exciting part, the evolution of Buy Now, Pay Later, as part of being able to put a branded debit or credit card, PayPal, or Venmo branded debit card into Apple Pay. We can also provision a digital, Buy Now, Pay Later, for somebody going in stores, they can pay in-store using one of our Buy Now, Pay Later solutions. And we are also now linking our card strategy, which is a very important part of our in-store. We are moving away from going heavy into QR and doing much more with cards. But imagine paying for something in store and then coming back into your PayPal app and deciding okay, I paid for that. But now I want to pay for that in four installments or split that payment with rewards or fiat currency. And so we're really trying to imagine Buy Now, Pay Later as being fully omni as a capability. And we think that will unlock quite a bit for us as we look forward.

Thank you.

I think thank you, David for that. And I want to thank everybody for the time, for your great questions. We look forward to speaking with all of you soon. And again, thanks for your time. Take care and bye-bye.

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