Good afternoon. My name is Sarah, 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 First Quarter 2023. [Operator Instructions] Thank you. I would now like to introduce your host for today's call, Ms. Gabrielle Rabinovitch, Senior Vice President and Acting CFO. Please go ahead.

Thank you, Sarah. Good afternoon, and thank you for joining us. Welcome to PayPal's earnings conference call for the first quarter of 2023. 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'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. 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 second quarter and full year 2023, our planning assumptions for 2023 and our comments related to anticipated foreign exchange rates, operating margins 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 the 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, May 8, 2023. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

Thanks, Gabs, and thanks, everyone, for joining us today. We had a good start to the year with stronger than expected growth across our key financial metrics. And I'm particularly pleased to see the TPV from our branded checkout meaningfully accelerate to 6.5% growth FXN, up 200 basis points from Q4, while our unbranded TPV growth also accelerated from Q4 to post year-over-year growth of 30% FXN. Even with the strong start, there remain many challenging issues to navigate as we look forward. Both the macroeconomic and geopolitical environments are complex and difficult to predict. In these times, the strong message I'm giving the PayPal team is to focus on the things we can control. We know that job number one is to invest and innovate to improve our value proposition to our merchants and consumers. Since we honed our strategic priorities last year, we have consistently executed and delivered against our road map. And this work is beginning to reflect in our results. Of course, we still have room to improve in multiple areas, but we are making large strides in upgrading our merchant and consumer experiences, which are both significantly strengthened from a year ago. We are focused on executing in the most cost-effective and efficient way possible. As you can tell from our non-transaction-related OpEx performance, we are more than delivering against our plan. As encouraging as these early results are, I would point out that we are just at the beginning as a multiyear efficiency journey. For several years, we've been at the forefront of advanced forms of machine learning and AI to combat fraud and to implement our sophisticated risk management programs. With the new advances of generative AI, we will also be able to accelerate our productivity initiatives. We expect AI will enable us…

Thanks, Dan. I'd like to start off by thanking our customers, partners and global team for helping us to deliver a great quarter. Our results demonstrate the relevance, diversification and strength of our payments platform. We are reporting healthy volume and revenue growth. This solid top line performance, in conjunction with expense management and efficiency gains, resulted in outstanding earnings growth. Notably, we accelerated our revenue and earnings growth on both a year-over-year and sequential basis. Relative to the first quarter targets we shared with you in February, both our revenue and EPS outperformed. The foundation we established last year for cost discipline and to realize productivity gains allowed us to expand operating margins and deliver profitable growth. Before discussing our outlook for the second quarter, I'd like to review our first quarter results. As Dan mentioned, revenue increased 10% on a currency-neutral basis and 9% at spot to $7.04 billion. This represents a three-year revenue CAGR of 15% and 20%, excluding eBay. Transaction revenue grew 6% to $6.4 billion driven primarily by our unbranded processing volume. Other value-added services revenue grew 39% to $676 million, predominantly due to higher interest income on customer store balances and, to a lesser extent, solid performance from consumer and merchant credit. In the first quarter, U.S. revenue grew 13%. International revenue grew 3% spot and 7% on a currency-neutral basis, accelerating both year-over-year and sequentially. Transaction expense as a rate of TPV came in at 93 basis points, 5 basis points higher than Q1 last year. This increase was primarily driven by 30% growth in our unbranded processing volumes. These volumes grew approximately 3x faster than our overall TPV growth. As a result, transaction expense dollars grew 17%. Transaction loss as a rate of TPV was 8 basis points for the quarter, a…

[Operator Instructions] Your first question comes from the line of Tien-Tsin Huang of JPMorgan. Please go ahead.

Hi, thanks a lot. Nice performance here on revenue. So I'll ask one question there. Looks like Q1 clearly had -- like you talked about the second quarter revenue growth is in line with what we have in the model. It's 3 points lower than what was just reported here. And then you're calling for second half in line with the first half, which is better than what we modeled and better than what you guys talked about before. So my question is, how much of this change is macro-related versus maybe some momentum with some of the new products and integrations that, Dan, you're talking about as well as curious on share gains, if your thinking is different there. And we've been curious if you've seen any sort of benefit from flight to quality with all the stresses in the banking system. Somewhere every work suggests that. So love to hear your thoughts on that, if you don't mind. Thanks.

Sure. That was one question?

Yes. No, it's a lot. Sorry.

So let me start with that and then Gabs can come in. First of all, obviously, we had a real strong start to the year, was stronger than our expectations, but we just missed around 11% FXN revenue growth at 10.4%. It's still 150 basis points better than our expectations on that. And I think what really pleased us on that is all parts of the business accelerated. You had TPV gone up 300 basis points sequentially from Q4 to 12%. Branded grew by 200 basis points to 6.5%. Growth unbranded just continues to fire on all cylinders at 30%. And even Venmo was up almost 600 basis points. And so it's a good strong start. And the other thing that we didn't mention is our Net Promoter Score, which is kind of how do our customers feel about us, is at a 5-year high this quarter. So obviously, a lot of things are going the way that we hoped they would be. I think if you look at second quarter coming down, third quarter and then fourth quarter, we're lapping some onetime events in Q2 and Q3. That put pressure of about 1 point to 1.5 points on our growth. Normalized, you'd have Q2 off of those onetime things growing 8.5%, 9% or so. So that's kind of the normalized growth in the quarter. As we look out to the rest of the year in the back half what's changed in our outlook, first of all, we're one-third of the way through the year as opposed to just coming into the year. And there are two things that we think are happening right now. First of all, our initiatives are taking hold in the market. There's no silver bullet on any one thing that comes in. These are a…

No.

Thanks so much.

Yes. You bet.

Your next question comes from the line of Lisa Ellis with MoffettNathanson. Please go ahead.

Terrific. Thanks for taking my question and thanks for all the detail on the unbranded strategy. Just a couple of follow-up questions there, Dan, for you. One, can you elaborate a little bit on what's driving the 30% growth in unbranded TPV and how sustainable that is? Meaning, like, is it a couple of large clients that will eventually lap? Or is this more broad-based growth? And then second, can you just talk a little bit more about PayPal Complete Payments competitive positioning downmarket and where exactly you think that's going to win and what -- how quickly that will ramp? Thank you.

Yes. So Braintree continues to do extraordinarily well. And it's not just winning incremental clients, but we are growing our share of the overall PSP volume in our largest clients as well. Look, we did expect Braintree and we do expect Braintree to moderate its growth, lapping some big deals last year. But honestly, we're working on some big deals this year, too. And we've got a lot of momentum in Braintree. And I think its success -- it's differentiated. It's driven by an open architecture where we are perfectly willing to orchestrate transactions to third-party services and other PSPs. And we've got our integrated servicing. We've got our availability. I think now it's amongst best-in-class. I think we've got the lowest loss rates fraud in the industry, some of the highest loss rates may be up to 390 basis points better than others. And we've got a number of great value-added services that others have, but we're expanding to, whether they be APMs or vaulting real time card updates on payouts, and we're adding more and more that are really valuable to clients and also are very high margin like FX-as-a-Service. If you look at audience results and you see how much comes from their profits come from FX-as-a-Service, you can see why we're eager to add that. On the PPCP side of it, there are obviously some benefits as you move into the small and midsized market. First of all, you obviously have a higher margin structure than you do with your large enterprises. And we clearly see that even in the PayPal button dynamics that we have. It's a really flexible, simple integration. It's fully featured as well. It's got all the APMs, including Apple Pay. It's got vaulting IP plus, real-time account update or it's got…

Thank you.

You bet.

Your next question comes from the line of Darrin Peller with Wolfe Research. Please go ahead.

Hi guys, thanks. Braintree growth and mix obviously were a factor on the take rate in margins. But if you could just help us understand the dynamics of margins in the second half. I know you're lowering incremental margin guidance by 25 bps to 100 basis points despite with obviously very strong expense management results? Maybe you could just help us understand how much of that is related to either the Braintree mix versus, any other variables in the second half we have to keep in mind. And just as a quick add-on to that, when would we expect the strength of the Braintree volume, we're seeing to actually translate to some higher-margin offerings at a faster pace? Thanks again guys.

Yes, you bet. I'll start. You're right. So, we have some margin dynamics that are worth calling out, as it relates to first half versus second half performance, specifically as it relates to operating margin. Our Q1 operating margin performance was very, very strong with about 200 basis points operating margin expansion. In Q2, our expectation is actually that it would be ahead of that from an expansion standpoint. And so, we're really delivering the vast majority of the margin expansion on the year from an operating margin standpoint in the first half of the year. The back half, we actually have some lapping dynamics and some nuances that will result in much more modest operating margin expansion for 2H overall. Within that, I'd say it's worth highlighting that Q3, I'd expect to see some pressure on operating margin, maybe some slight pressure. And then in Q4, we'll see expansion again, but more modest expansion than you're seeing in the first half of the year, and really sort of what the drivers of that are, and Dan highlighted a few of them. We do have some lapping dynamics in the back half of the year. In Q3, specifically, there were some benefits on the TE side. We're also beginning to really lap, the benefit from increased interest rates. And the increased revenue that we earn on customer store balances, that really starts in Q3 continued in Q4. So as we lap that, don't expect to see as much operating margin expansion in the back half. In addition, we began to really lap a lot of the cost savings work that started in the back half of last year. And so, while we do expect to see a meaningful decline in non-transaction-related operating expenses in both Q3 and Q4, from a percentage decline standpoint, it will not be as great as what we're seeing in Q1 and Q2. And so, all that taken together will result in that differential between the first half and the back half op margin expansion for the full year. Again, we do expect to see at least 100 basis points of op margin expansion. That change that you called out between the 125 and at least 100, that is predominantly driven by the fact that when we're talking about our revenue being slightly ahead. A lot of the benefit that we're seeing is coming from the Braintree business and having a lot more visibility in that pipeline, and that's contributing to our top line, but also having some margin impact. Dan, do you want to talk a little bit about the strategies in unbranded?

Yes, I think maybe I'll take a step back for a second. I mean I think, look, our strategy on average and over time is to deliver double-digit EPS growth year-after-year-after-year. And we've had a good track record in general of doing that. We've got a well thought through strategy and a set of actions that's going to deliver increased transaction margin dollars, along with OpEx reductions, to make sure that we do that. We've talked a lot about the initiatives that we're focused on, and we've been focused on the same thing for over a year now. Its drive branded checkout that's our #1 priority. All of our initiatives are linked to that. It's our highest margin service. It's our bread and butter, and we're absolutely determined to have that be best-in-class. We want to drive unbranded, because of all the things I talked about in my remarks. It helps us on branded share of checkout. It helps us in our data collection and all of the things we can do with those, unique sense of data. In unbranded will be a new source of margin generation for us, without question. We are beginning to put those services already into place. Many of them will go into place by the fourth quarter, and I expect to see the majority of those things start to take effect in 2024. And then clearly, we're managing our OpEx extremely well. And I can talk with more detail on that if anyone has a question on it. But we said - we thought it would be, negative high single-digits this year. It's likely to be 10%, negative 10% plus. And if anybody thought costs were going up, they'll go down again next year as well. I can talk more about that. But we've got a real set of initiatives and strategies focused on this. We're executing against it, I'm confident that we'll be able to deliver on what we set out to do.

It's really helpful guys. Thank you both.

You bet.

Your next question comes from the line of Jason Kupferberg with Bank of America. Please go ahead.

Thanks guys. Good to see the improved revenue outlook here. I actually wanted to switch over to the branded side of TPV growth. As you mentioned, you had a couple of points of acceleration there. Wanted to understand which countries or verticals or other drivers, what was behind that? Would you attribute any material amount of the improvement through the rollout of advanced checkout? And then just any directional comments on how branded checkout TPV growth may trend during the balance of the year in support of the revenue outlook you talked about? Thanks.

Yes. Thanks, Jason. I think maybe I'll grab that one. So if I just take a step back for a second, like we're the market leader in online checkout, right? We've got 35 million merchants, except those 80% of the top 1,500 online retailers in the U.S., except as there's no other is wallet that comes close to that acceptance. Yes in general, our auth rates are about 600 basis points better than the industry average. It means every time a hundred things that a consumer does to buy from a merchant we approved six more of them. And we've got consumer trust and brand trust in that when a smaller midsized merchant puts PayPal on their website. They see a 44% conversion lift by doing that. So these are really strong advantages that we're going to leverage going forward. But obviously, there's a ton of stuff we can still do, right? We're optimizing presentment. We're making sure that our best-in-class integrations are out there, whether that comes through our branded checkout, whether that comes through the new SDKs and APIs that we have, whether that comes through PPCP, going into channel partners. So - because we know when we have our best-in-class integrations, we either have stable share or growing share of checkout. Our availability, as I mentioned, is closing in our 5 9s of latency, improved it by 40%. We'll improve it up to 50% better, makes a giant difference in conversion rates. Our passwordless login improved by 10 full points last year. We intend to grow that again this year, whether that be through pass keys or other ID or forms of biometrics. Buy Now, Pay Later, we're taking share there, and we are intending to continue to take share there. Our auth rates are higher, we…

Thanks Dan.

Yes you bet.

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

How are you thinking about the opportunity for cost savings and OpEx reduction beyond 2023? And in particular, if you could maybe weigh that against potential transaction margin dynamics as well to the extent those will continue next year based on the trend we saw in Q1.

Yes. I'll start off, and then Gabs can attack the last part of your question. First of all, obviously, we had good solid progress against what we said we're going to do, negative 12% in Q1. I think our OpEx for the full year could decline as much as negative 10%, which is a bit higher than we expected. And as I said in my remarks, we're just beginning on this efficiency journey. I think you're going to see our costs continue to come down year-over-year-over-year. And this is not just about efficiencies. By the way, it's not about cost reduction. It's about doing things better. There's no question that AI is going to impact almost every function inside of PayPal, whether it be our front office, back office, marketing, legal, engineering, you name it. AI will have an impact and allow us to not just lower cost, but have higher performance and do things that is not about trade-offs. It's about doing both in there. The other thing that the teams are doing and doing extremely well is they're improving processes. Right now, they're removing friction with a much simpler onboarding process, first transaction resolution. We're seeing better engagement as a result, fewer calls, as I mentioned, higher NPS. You're seeing that in our newest cohorts coming in with significantly higher TPA and ARPA. And so, I think this is going to be a cost journey that we'll be on for a long time to come. And I think at the same time, we'll just be doing things better than we've ever been doing them before as well.

Yes.

Understood. Yes.

Oh please go ahead, David.

Yes. No. Just the second piece of that as well, Dan, which is, is there an inflection point you see coming in terms of transaction margin dollar growth accelerating at some point later this year or in early 2024?

Do you want to take that?

Yes. So I really think about it as a multiyear journey that we're on to continue to transition the business and really drive more profitable volumes through the unbranded processing side, while at the same time accelerating the growth in branded. We're off to a really good start. Q1, we saw acceleration in the branded business. It was very broad-based in terms of what we were seeing. And we continue to see very strong growth on the unbranded side of the platform. Sequential acceleration on unbranded given its size and scale is very impressive. Given the beta business that we run, it will take some time to see what I would see an inflection point in the overall sort of TM dynamics. I would say Q1 did have some nuances to it, which included about 130 basis impact just from normalizing our credit provisions. So that's not specifically related to unbranded, branded mix. It really was sort of credit loss provisioning that impacted the TM rate as well. But to your point, as we move through the year, we do continue to expect to see a continuation of the TM dynamic that's put out in Q1. There are some exciting trends that we're seeing in the business, however. So I'd say what we saw in cross-border in Q1 and the growth in that business is quite encouraging. It was the strongest quarter we had for cross-border really since Q4 of 2021. That, of course, has a higher yield to it overall. So as we start to see some of those pieces of the business pick up, that will also help. And then just from a TM standpoint, we did see some pressure as well in Q1 specifically on the unbranded side for PayPal. And this is not Brain business. This is the transitioning of our unbranded processing on the PayPal side to PPCP has created some pressure in the quarter, which we don't to be sort of ongoing as we think about how we exit the year given what our expectations are for PPCP. So we're continuing to be disciplined about the growth of the business. We do expect all these strategies to start to play out and start to help turn the overall TM profile, but I would expect it's going to take a number of quarters before we see what we would call an inflexion point.

Thank you.

You bet.

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

Hi, good afternoon, Dan and Gabrielle, thanks a lot of time this afternoon. I wanted to follow-up on one of the comments or topics you've mentioned quite a bit on this call, Dan, that's around engagement. I wonder if you can give some update. You've mentioned that there's been some improvement in engagement, but I'm wondering if you can give an update on those initiatives, more specifically, how that's helping engagement and conversion, especially things like advanced checkout, et cetera? And what kind of lift you're getting from that? And maybe give a little more detail of how we should think about the tie into some of the unbranded initiatives and if we think there can be further at least improvement in those engagement levels or uptake by merchants, et cetera? Thanks.

Sure. So first of all, as I mentioned, kind of we've got these three initiatives, they all tie together, and they all lead to driving more share and volume of branded checkout. So as we do more and more on our unbranded, we put out our latest integrations into the market. And when we put out our latest integrations in the market, we take away friction, we take away latency, and we see more engagement, and a lot more checkout go through our latest integrations. But one of the initiatives that we haven't really spent time talking about point is what we're doing on our digital wallets. So those are the three, right, drive engagement and monthly active users and ARPA through our digital wallets, drive our checkout, drive our own brand, and they're all linked together and then keep a tight envelope on our cost structure. Those are the four things that we're focused on. In the wallet, we're making good solid progress, whether that be on our Venmo wallet on the PayPal side of it. Look, the PayPal app is already one of the largest commerce and payments apps in the world. It's used by about 55% of our base right now. That's up about 600 basis points year-over-year. And our app users are predominantly our monthly active users and our power users. They've got 35% more ARPU. They've got 58% greater transactions for active on it. And their churn is at least 25% less than the rest of the base. And the thing that I'm really pleased to see what John Kim and his team are doing is that the velocity of experimentation in our wallets now is like nothing that we've seen in quite some time. We have constant champion challenger, hypotheses going out, replacing challengers…

That's all I have. Thanks for that Dan.

Yes, you bet. My pleasure.

We have time for one last question from the line of Bryan Keane of Deutsche Bank. Please go ahead.

Hi, thanks for taking the question. I wanted to ask about credit. Are you managing to book any different on credit given the macro and exposure to BNPL and merchants and just thinking about maybe the impact of provisions for credit losses for the rest of fiscal year '23 maybe as a result of managing the book any different. Thanks.

Yes, you bet. Thanks, Bryan. So you'll see in the Q, which will be filed tomorrow, we did increase the provisions on the PBPL portfolio, which is the PayPal business loans portfolio. Overall, that portfolio is about 17% of our overall receivables, so sort of a sliver of our overall book. We did widen our credit box in the middle of last year. We have seen some performance that was less strong than we would have liked that is working its way through our system. And so we increased the provisions. We've already started to see an improvement overall in a box. I mean that's something that we'll just work its way through our systems. We expect delinquencies to worsen through Q2 peak in this quarter and improve throughout the remainder of the year based upon the origination strategy. But really, that piece of the book is a very small component of the overall portfolio. And I'd say more importantly, the area that we're really growing where we're really growing where the originations are quite strong continues to be the Buy Now, Pay Later portfolio. And there, we've seen very broad-based strength. And so that's a really important part of our strategy. It supports the improved checkout performance in our business on the branded side, and we're excited about the continued growth of that business overall. We did mention in the prepared remarks that our expectation is to externalize part of that portfolio during this year and work with a partner to really provide sort of longer-term sustained support for growth in that portfolio. As I say, overall, we continue to be very pleased with our credit portfolio. We've seen very good performance in -- across the book. We are seeing some normalization, which we expected to see as it relates to just sort of kind of normalization post COVID and really getting back to what we historically seen in terms of performance. But in terms of reserve coverage, when we take a look at reserve coverage today versus when CECL started, which was the first quarter of 2020, we're actually a few hundred points -- a few hundred basis points better overall. And so the book itself continues to be quite healthy.

Got it. Thanks so much.

You bet.

All right. Well, I think we're at the top of the hour. So I just want to thank everybody for your great questions. Thank you for your time, and we look forward to speaking with all of you again soon. So thanks, everybody. Take care. Bye-bye.

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