Good afternoon. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to PayPal Holdings' Earnings Conference Call for the Second Quarter 2023. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] 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 second 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 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, without limitation, our guidance for the third quarter and full year 2023 are planning assumptions for 2023. Our comments related to anticipated foreign exchange rates, operating margin impact from our sale of loans to KKR 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, August 2, 2023. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

Thanks, Gabe, and thanks, everyone, for joining us on today's call. I'm proud of the PayPal team as we delivered another solid quarter. Revenues came in above the top end of our guidance, and non-GAAP EPS grew 24% to $1.16 in line with the midpoint of our guide. And we are reiterating our guidance for non-GAAP EPS and operating margin expansion for the full year. Encouragingly, e-commerce growth appears to have stabilized in the mid-single digits, substantially above our estimates when we entered 2023. Our branded checkout volumes grew roughly in line with the industry in Q2 and accelerated to nearly 6.5% growth in the month of June, and in July, our branded checkout volume growth accelerated again to over 8%, our highest monthly growth rate since the end of the pandemic. We expect branded checkout volumes will strengthen throughout the back half of the year, supported by traction from our key strategic initiatives. Of course, we still face a fluid global macroeconomic environment. However, it is quite encouraging to see core inflation rates continue to come down. As inflation cools, we would expect to see discretionary spending rise, which we believe will support and possibly accelerate the overall growth of e-commerce spending. And as the market leader in digital payments, any uptick in e-commerce will accelerate our growth. Revenues in Q2 grew by 8% on a currency-neutral basis to approximately $7.3 billion. It's instructive to note that we are lapping certain items that provided an outsized benefit to us in Q2 and Q3 last year. Consequently, those items pressure our revenue growth rate by approximately 1.25% in each of those quarters this year. Excluding these items, our growth in Q2 would have been between 9% and 10%. As we mentioned last quarter, we expect our revenue growth in the…

Thanks, Dan. I'd like to start by thanking the entire PayPal team for their continued commitment to serving our customers and executing our priorities. PayPal delivered another solid quarter in a dynamic environment. We're reporting revenue at the high end of our guidance range and earnings per share consistent with our expectations. Our results are tracking with the guidance we gave for the full year and reflect steady progress against our long-term growth aspirations. We continue to invest in our key initiatives, while demonstrating discipline in delivering on our operating expense commitments. In June, we were delighted to share more about our long-term strategic plan and product road maps at our investment community meeting. Importantly, the product launches we discussed are on track, and we continue to gain conviction in our ability to accelerate our branded checkout volumes and drive greater profitability across our PSP services. During the quarter, we were pleased to announce a multiyear agreement to sell both our existing European Buy now Pay Later receivables as well as future originations to KKR. During my remarks, I will discuss the impact of this externalization on our financial results. We have also included additional details in our investor update presentation. Before discussing our outlook for the remainder of the year, I'd like to highlight our second quarter performance. As Dan mentioned, revenue increased 8% on a currency-neutral basis and 7% at spot to $7.3 billion. Transaction revenue grew 5% to $6.6 billion, driven primarily by Braintree and PayPal branded checkout. Headwinds to growth in the quarter included the lapping of $75 million in contractual compensation from merchants last year, which was de minimis this year, $72 million less in hedge gains relative to Q2 last year and the impact from migrating and consolidating legacy PayPal payment services. Other value-added…

Thank you. [Operator Instructions] Your first question comes from the line of . Your line is open.

Hey, thanks a lot. I want to ask a question on e-commerce Health. And Dan, I know you talked about it upfront. We're just getting a lot of questions on the e-commerce industry in general. So you mentioned inflation easing should help. I'm curious about other trends like shift from services to goods like our economists are talking about, which I think would also be a tailwind for you versus an previously. Is this something you're seeing? Or maybe is that changing how you're thinking about the second half versus a quarter ago? It seems like there's some room for upsetting your outlook here given the exit growth rate and what you talked about for July? Thanks.

E-commerce is definitely one of those. We see e-commerce growth accelerating. We think it is at least in the mid-single digits right now. That's substantially above what we thought when we entered the year where we thought it might be flat year-over-year. And I would say I've got a slight bias that, that will continue to accelerate. You've got a range out there from low of zero to high 10%. We think it's probably right in the middle of that, and we think it is being driven by a shift from travel and services into goods and to fashion, where coming into retail pieces of that. And clearly, as inflation cools, we would expect to see more discretionary spend rebound, and that will help drive e-commerce. So one of the headwinds we faced was e-commerce growth slowing. Now it's accelerating again, and that clearly will be meaningful for us. We're also seeing improvements, as Gabi mentioned, in cross-border. That's beginning to accelerate again. That's obviously a very meaningful thing for us because, one, our value proposition is perfect for cross-border. It's consumers buying from merchants that they don't really know, but they trust PayPal and make sure that, that payment will be protected for them. It's obviously extremely high-margin business for us, and that seems to be accelerating nicely right now. PPCP, which was a really important introduction for us for numerous reasons, could not have a better reception in the market. We've got tremendous momentum there. Braintree continues to go from strength to strength, and we're seeing a lot of our value-added services now start to take hold. I can talk about some of that later in the call. Somebody wants to ask about that. And obviously, branded checkout is accelerating. That 8% is the highest we've seen since the end of the pandemic. And -- we continue to expect to see that strengthen as we go through the year as many of our initiatives are really taking hold in the last quarter. We've got another 200-plus experiments that are going to happen in Q3. And so that's all adding to momentum. And I guess at the end of the day, what that's adding up to when we look at our Net Promoter Score, we're now at a 7-year high in that. And so there's clearly a lot of momentum in the business right now, and we just want to double down on that. So we do obviously feel a lot better today than we did 90 days ago. But I think that's just going to continue when you ask that same question a quarter from now.

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

Hey, Thanks, guys. Revenue growth was obviously sound, but we still saw transaction profit dollars a little less pronounced versus revenue. I think it actually may have decreased a bit year-over-year. And so Gabriel, I know you talked about some one-time grow-overs and hedging differences. And I'm sure the mix between branded and branded continues to have an impact given the growth of Greentree. But if you could just help us understand the moving parts in the quarter and the trends in the second half as far as gross profit or transaction profit growth goes, that would be great.

You bet. You bet, For the quarter, transaction margin dollars grew 1%, which is essentially in line with Q1. That said, when we look at the underlying performance of our business, we're very encouraged by the stronger results we're seeing. In my prepared remarks, I called out several items that created headwinds to growth in the quarter due to lapping. In addition, we actually had some benefits that we saw in the quarter as well from the release of reserves from held for sale reclassification as well as from lapping that large merchant exposure last year. And so when we adjust for all these items, both the benefits and the drag on a more normalized basis, we actually see transaction margin dollars in the quarter growing several points faster than the reported 1%. And what we're really encouraged by is the strengthening profile of the business. We're actually starting to see the benefits of our initiatives as we get through some of the noise from lapping, we do expect to see improving transaction profit growth. When we think about the back half in Q3, we'll still see some pressure on transaction margin performance. In Q4, we expect to see an improvement. And then over the longer term, our TM profile in the future will certainly be benefited by the acceleration in branded checkout by e-commerce acceleration by the improved cross-border trends that Dan referred to as well as from the value-added services that we're adding on the PSP side.

That's really helpful. So it sounds like some of these initiatives are third, fourth quarter events, but they could move needle starting them.

We expect to exit the year in a much stronger position from a TM trajectory than where we are right now.

Okay. Very good. Thanks. Guys.

Your next question comes from the line of James Faucette with Morgan Stanley. Your line is open.

I wanted to follow up on Darrin's question. I know that unbranded seems to be a drag or dilutive to margins right now overall, which is a little bit surprising given just kind of how margin structure tends to be throughout the industry. I know you've talked a little bit in the past about adding incremental services to unbranded that could improve that structural margin component in on branded. Can you talk a little bit about what that may look like, timing and if any of those initiatives are will play a role in improving the transaction margin that you're looking at for the latter part of this year? Thanks.

Yes. I'll take a crack at that, James. Thanks for the question. Our PSP business does continue to go from strength to strength. -- as we talked about our overall TPV was nearly 30% in the quarter. And that's despite, as Gabriel mentioned, deprecating some of our older PSP flows, things coming off of our PayPal Pro. We actually migrated about $5 billion of TPV from our legacy stacks onto PPCP in this past quarter. And so it's a bit of a drag in the quarter, but we're going to be done with that by the end of the year. And we continue to win marquee accounts in the business, whether that be booking.com, meta, Allstate insurance, these are big accounts that we are winning because winning PSP is a strategic imperative for us. It allows us to have our latest checkout experiences with the largest, most important merchants in the world across PayPal, Venmo and by now pay later. We captured 100% of the data flows, which really is feeding our AI engines. It's fueling what will be our next-generation checkout. And most importantly, it's fueling kind of our ability to have best-in-class authorities in the industry and the lowest loss rates in the industry. In terms of the higher-margin services that we're going to be putting out there, -- we are seeing a lot of traction on that right now. For instance, we are moving into in-store. That's always been an area of opportunity for us. We are now fully implemented with 20 marquee merchants in over 1,000 in-store locations, over 2,500 POS systems will continue to do quite well there and push significantly in that. We're making good progress in selling things like payouts, risk-as-a-service, disputes, automation. We're seeing our largest customers begin to adopt that right…

Thanks.

Your next question comes from the line of Ramsey El Assal with Barclays. Your line is open.

In terms of operating margin performance, were there any factors besides credit that had a bigger impact than you expected in Q2? And then separately, can you just talk about the overall health of the credit business? Give us more color on the steps you're taking to maybe manage it a little bit differently. It sounded like that was the plan.

Absolutely. So for the quarter, we expanded our operating margin by about 228 basis points to 21.4%. This was a slight miss to our guidance of approximately 22%, and it was predominantly driven by increased pressure from PayPal business loans. There's no other items that really contributed to that miss. Overall, PayPal business loans was about a 90 basis point drag to transaction margin and to operating margin, and this is approximately 2x what we expected at the beginning of the quarter. So it really was a real impact -- as it relates to our broader credit business, we're in a really good position. Like the rest of the industry, we're seeing some reversion back to pre-covid levels of performance. But across our diversified portfolio of consumer and merchant credit, we're seeing relatively stable delinquency and charge-off trends The largest growth area for us continues to be our Buy-Now-Pay-Later solutions, where our performance continues to be very strong. Of course, going forward, given our partnership with KKR, the majority of the originations are going to be funded off-balance sheet for us, and we'll be able to support the sustained growth of that business. On the PayPal business loan side, this is really the part of our portfolio where we have seen deterioration. This portfolio represents less than 15% of our overall net receivables. We've historically seen consistently strong performance in this book. And last year, we widened the credit box and the performance has not been within our expected risk appetite. We've taken steps to improve performance. We significantly tightened originations. Today, the book is down about 30% in total receivables, and we expect this pressure to continue through the back half of the year, but then really to abate as we move into next year. That said, the overall strength of our business and the momentum we're seeing is allowing us to maintain our operating margin and EPS guidance for the year while we're absorbing this credit pressure.

Thanks so much, VERY helpful. Appreciate it.

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

I wanted to come back to branded TPV growth. So you had 6.5% in the month of June. You were over 8% in July, you're expecting further acceleration during the balance of the year. So can you just talk more specifically about the drivers of and the visibility on that ongoing improvement? Like how much of it is better macro? How much is traction with PayPal's own branded checkout initiatives and which among those branded checkout initiatives is moving the needle most materially here in 2023?

I'll take a crack at that, Jason. Thanks for the question. It's an important one we are really pleased, obviously, to see branded checkout accelerate like it is. And we have good confidence that the initiatives that we're putting into place are going to continue to drive that growth. As I think about what is driving that growth. It's hard to delineate exactly what is happening because of macro, in terms of e-commerce, improving in general, as I mentioned, to Tianjin's first question around e-commerce and what is due to our initiatives, but we are clearly putting a lot of time, effort and resource into improving the checkout experience. And my adds off to that entire checkout team for all that they've done here. And I say, look, first of all, as e-commerce is growing, we're going to grow with it because we are clearly one of the market leaders, if not the market leader in digital payments around that. We do have a scale advantage over anybody in terms of 30 million-plus merchants that we have out there, 80% of the top 1,500 Internet retailers. We have a performance advantage in checkout up to 600 basis points better in auto rates than the industry average. And we have a trust advantage. When small businesses put PayPal on their site, they see their online sales go up by almost 44%. So those are things that we are building upon. But as we mentioned in our Investor Day on June 8, we've -- the amount of acceleration in the amount of innovation we're putting into the market has improved dramatically. -- we did 100 A/B tests in the first quarter. We did 200 A/B tests and incremental 200 in the second quarter. We're going to do another $200 million coming here…

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

Could you provide an update on your cost takeout plan for 2023, the progress you've made? And do you have any preliminary thoughts quantifying how OpEx reductions will carry into 2024? A – Daniel Schulman: Yes. Thanks, David. I'll start and then probably Jens will jump in on this. Look, we're going to continue to do surgical discipline in our cost structure. -- down 11% and in Q2 for the full year. We still expect that to decline consistent with what we talked about by 10%. And therefore, when we think about our operating margin expansion coming up by at least 100 basis points and some of that incremental pressure that we're absorbing on the credit side that as Gabi mentioned, we'll kind of move through our numbers by the end of the year. You're obviously seeing growing margin expansion driven by some of the top line enhancements we're doing not just the cost discipline that we've demonstrated. I would just say that this is not just about efficiencies, but this is about doing things faster and accelerating the velocity of our innovation. -- it's not about trade-offs. It's about lower cost, but higher performance. And you're seeing that because I look at our MBS being at 7-year highs. Look at the amount of innovation that we're now pumping through the system right now. We're getting more done more efficiently. There's no question that AI is going to impact every single company and every function just as it will inside of PayPal. And we've been experimenting with a couple of hundred of our developers using tools from both Google, Microsoft as well as Amazon. And we are seeing 20% to 40% increases in engineering productivity. Just imagine that in terms of how much more product we can get into the market and how efficiently we can do that. And I think we've always known and anticipated that AI will drive productivity improvements really for foreseeable future. But I think the exciting more unexpected result is that we think it's going to transform our value proposition as well. things like enabling us to look into all of our transactions, look at early fraud metrics to be able to feed that back to customers with early fraud alerts that assured them that we are protecting them, enabling them to add more and more financial instruments to us as well that we can protect this PayPal assistant that's going to -- that's really an AI chatbot. We've been using it internally inside our consumer app. It's pretty amazing what it can do. Obviously, our advanced checkout, things like customized rewards. So AI is going to be a thing that not only drives productivity improvements for us, but really importantly, value proposition improvements for us. And so we're surgical on our cost thing. We've been very disciplined in it. We're quite pleased with it, and I think we'll see productivity improvements over the years to come.

Yes. As Dan said, we're on track for a 10% decline in our other OpEx for the year. The first half is down kind of low double digits, call it, 11.5%, 12%. In the back half of the year, of course, we begin to lap some of the cost savings that we began to take out last year. And so the decline in other OpEx declines a bit, and so we'll be in sort of the high single digits then, building on what Dan said, just around delivering better experiences to our customers and the productivity gains, it's also coming from the platform migration and consolidation work that we're doing. And that too allows us to scale more efficiently over time. And so you should expect to see us continue to look for ways to deliver better experiences to our customers and scale them efficiently on our platform.

Your next question comes from the line. Sorry, we have time for one last question, and it comes from the line of Bryan Keane with Deutsche Bank.

Question here. I wanted to ask about the consumer value prop and a big piece of that is going to be the wallet and the enhancements of the wallet, including offers. Can you just talk about some of the initiatives you're doing there that's going to improve the digital wallet going forward?

Yes, sure. Thanks for the question. I mean, obviously, increasing the number of consumers who use our digital wallet. It's one of our most important initiatives because we feel it's going to drive both engagement ARPA, monthly active users -- the app user today, the typical app user has a 35% greater ARPU, 60% greater TPV and 25% less churn. And so the more we can put on that, the better and about 55% of our base today uses the app, just to give you an idea of that. And the app to your point, is designed to -- it's designed to enable the full shopping experience from discovery, which is like the deals and offers that you just mentioned to flexible payments, the widest array of funding choices, things like biop later, split tender that enables you to utilize 2 different funding sources to buy your purchase to post purchase, which includes package tracking and returns management, refunds directly into your PayPal wallet. I won't go in again to all the experimentation we're doing, but you can see kind of the tremendous amount of velocity there. The new features that are coming into the wallet include this early fraud alert. We've scaled that now to 10% and that's really designed to protect our customers. We can see fraudulent signals well before others. We can let a consumer know that their card has been compromised. We can simultaneously let the FI know so that card can be reissued instantaneously. And so we're seeing early but really positive response to consumers from this, and it causes them to defend these alerts that come that causes them to open the app, the more they open the app, the more they do with us. I think I mentioned on the rewards cashback that…

This concludes today's conference call. Thank you for joining. You may now disconnect your lines. +