PayPal Holdings, Inc. (NASDAQ:PYPL) 51st Annual JP Morgan Global Technology, Media and Communications Conference Transcript May 22, 2023 10:40 AM ET
Executives
Dan Schulman – Chief Executive Officer
Analysts
Tien-Tsin Huang – JP Morgan
Tien-Tsin Huang
All right. Thanks everyone for joining. My name is Tien-Tsin Huang. I follow the payments and IT services sector. And I was just telling Dan Schulman, of course, CEO from PayPal, how grateful I am to have him. I know he’s super busy traveling the world.
And I will say it upfront, like I have seen Dan present in a lot of different settings. I always enjoyed hearing him talk whether it was from American Express. We have had you at this different events, which again, I am always grateful to have a conversation with you.
But the thing I always liked about you the most, Dan, was hearing you speak at the NYU and I am not an NYU guy, but not smart enough. But I always thought you had such a great connection with your professors and the students and I know we always get caught up in the numbers and branded, unbranded payments. But I just want to say that upfront, Dan, I always appreciate sort of the way you connect with people and the stuff that matters. So thanks again for being here.
Dan Schulman
Thanks.
Question-and-Answer Session
Q – Tien-Tsin Huang
So let’s get right into it. I guess, if you don’t mind, Dan, fireside chat. I have taken a lot of questions from the audience and we will take questions from the portal as well. But if you don’t mind, let’s start off with sort of your views on e-comm and the health of the consumer. I know we want to benchmark PayPal growth, whether it’s branded or unbranded against e-comm. How do you see e-comm trending today, year-to-date, as well as going forward?
Dan Schulman
Yeah. First of all, thanks for those kind words, Tien-Tsin, I appreciate it. So the year is off to a better start than we originally anticipated. We saw our TPV accelerate by about 300 basis points from Q4, 200 basis point acceleration in branded checkout and 100 basis point acceleration in unbranded from Q4, both above our expectations.
Look, I think that, e-commerce is probably off to a bit of a stronger start than most of us expected. We had pretty muted expectations coming into the year. I thought it would be anywhere from negative 2% to positive 2% globally. I now think that’s more likely to be in low-to-mid single digits growth as I look forward.
But I think we have got to remember that a lot of e-commerce revolves around discretionary spend and there’s definitely been a move post-pandemic into more kind of services, entertainment, travel away from goods, that will normalize back.
But you have also had pressure on discretionary because of inflation. Inflation is moderating a little bit here in the U.S., and we are probably seeing a bit of a return to more discretionary spend, but across the world, it’s still stubbornly high.
When I look at comps for us and I look at other discretionary retailers like Target, their e-commerce was negative 3%, Home Depot was negative 3%, Best Buy was negative 13% on their e-commerce. So I feel pretty good about our 6.5%. I think, in general, probably held a couple of markets we grew on the branded side and we clearly took share on the unbranded side.
Tien-Tsin Huang
Good. And I know you have less exposure some travel in some of these areas. So it’s really hard to index and I think it’s somewhat underappreciated. The benchmarking exercise, which I know isn’t easy, so thanks for going through that. So, yeah, let’s go into the numbers. So you did outperform on revenue and EPS. I know the sticking point for the quarter was around margins. What surprised on the margin outlook in your mind, do you mind running through that again for us?
Dan Schulman
No. I mean we did have a good Q1. We would be pretty handily on the revenue side by about 150 basis points of growth, 10.4%. I think really, importantly, I think, most people came into the year thinking we were going to grow mid-single digits on revenue. We kind of came out of the first quarter saying it’s going to be high-single digits. We also exceeded on EPS pretty handily and took our EPS growth up from 18% to 20% EPS for the year.
And we also put out PPCP, we took down our non-transactional OpEx by 12%. Our monthly active users, which are 20 times to 30 times more valuable than just an active user also grew the quarter our new cohorts are performing extremely well. So we had a good Q1.
The one place that people pressed on was our transaction margins. They grew by about 1% in the quarter. Look, over a five-year period from 2017 through 2022, we have grown our transaction margin dollars by an average of about 13%. We are kind of in a place right now where there are a couple of things that are putting pressure on that.
One is e-commerce is slower growth than it’s typically been. I truly believe that will begin to normalize. I think you are not going to have e-commerce growth in the low-to-mid single digits. It will be to the mid-to-high single digits over time and we are extremely well positioned when that rebound happens.
Also cross-border, which is a very high margin piece of our business is under pressure as well, but we are beginning to see that normalize. I mean China, China was negative 30% growth over the last couple of years. That’s beginning to move in a really positive direction as our other markets even the U.K. is beginning to rebound.
And obviously, the big thing that happened is that our unbranded really as being a lot more successful in the market than we anticipated. We have put a lot of resource and effort in fixing our unbranded platforms in launching things like PPCP.
We grew something like 40% year-over-year last year. We expected that to come down and we are seeing a really strong pipeline. We are seeing existing customers give us more volume and so the reason we took down our transaction margin expansion from 125 basis points to 100 basis points, it’s just because we are seeing more growth in a part of our business that’s lower margin.
But we have got clearly well thought through plans in place to increase the margin structure of the unbranded business. I am sure we will talk about that, as well as continue to grow our branded checkout, which is not just the bread and butter of PayPal, but our highest margin opportunities as well.
Tien-Tsin Huang
Yeah. And I know you should have to apologize for growing very fast even if it’s a lower margin piece of the business. But before we get into the details, I get this question a lot, Dan, when might that mix shift turn and turn in your favor? Are we far away from that or is it somewhat imminent?
Dan Schulman
I don’t even know what that question really means when you say turn in our favor.
Tien-Tsin Huang
Yeah.
Dan Schulman
Because I am not going to tell our sales force to slow down on winning…
Tien-Tsin Huang
Right.
Dan Schulman
… unbranded, because unbranded is massively strategic to us. First of all, unbranded carries with it our latest checkout integrations and when we have our latest checkout integration, we either hold or grow share against anybody.
Our part of the blessing incurs of PayPal is we have massive scale, 35 million active merchants who use us, but we have 20 years of legacy out there as well. And so upgrading that to our latest checkout integrations, which are best in class is incredibly important and any time we upgrade somebody on to our unbranded with that comes our latest checkout integrations, both across PayPal, Venmo and Buy Now, Pay Later and so I want to grow that unbranded as fast as we can.
I also want to grow the profitability of it as well and so we know exactly what we need to do there as well. We need to expand internationally because there are better margins. We are predominantly on Braintree domestic right now. We are going to move down market with PayPal Complete Payments, PPCP, which has higher margin structures, and we are adding value-added services on top of that, that have higher margins.
Those will take some time to play through our margin structure, but they absolutely will as the year progresses and as we go into 2024. We are executing really well right now. When we say we are going to do something, we typically do it, we typically do it on time. I am talking about our product road maps right now and they are making a difference in the market.
So we have a real good game plan around driving margin structure around unbranded, and I hope it continues to take share going forward because over the long run that would be a real positive for us.
Tien-Tsin Huang
Yeah. I think the improvements to check out. I mean that’s big. I know we have been talking about it for years. There’s still a lot of white space with guest checkout being such a big part of the market, but can you dig in a little bit more for the audience. What is this advanced checkout going to look like, will it put PayPal in more of a level playing field experience wise as with Apple Pay for example? Just give us a little bit more feel for what that means?
Dan Schulman
Yeah. Well, there’s so much to it. So, first of all, our goal is to be best-in-class and not to be on par with anybody to be best-in-class. We have a lot of assets to leverage on that for merchants. Merchants want checkout providers that are cross channel.
In other words, not just mobile, they want mobile, desktop, laptop, whatever it may be. They want cross operating systems, because 75% of the world is still Android and iOS is obviously an incredibly important part of that ecosystem, but it’s a part of it.
We have more checkout choices than anybody else. Our wallet is more robust than anybody. Our scale is larger than anybody. And as I mentioned, it’s really our legacy that we need to upgrade. We are taking this step by step. We are reducing latency. We have reduced latency by 40% over the last two years. We are going to reduce another 10% this year.
Every second that we improved from latency, it generates a large amount of revenue for us, because it’s conversion checkout, passwordless is going up another 10% this year alone. We have increased that quite dramatically so that people don’t need to put in their password, they can do kind of a one click checkout. Over a third of our top 100 merchants are on our latest integrations will be about 50% by year end on that.
And as we roll out PPCP, our PayPal Complete Payments platform into our channel partners, they bring with them a lot of the long tail of our merchants as well. So once they upgrade to PPCP, if they are a hosted channel provider, then all of that merchant base, which is really the higher end of the small business and the lower end of the midsize business automatically upgrade to our latest checkout.
And when somebody is on our latest checkout conversion rates go up, anywhere from 3% to 10%, which is a massive improvement. And again, as I mentioned, when you are on our latest checkout, we either hold or grow share against anybody on that. So we have a number of, what I would call, basic hygiene initiatives underway. We have made a huge amount of progress on that.
But we also are thinking about what is the next-generation of checkout, how do we win not just against other wallet players, but how do we take guest check out, how do we use our unique data sets? We — last quarter we did almost 6 billion transactions through the platform last quarter alone. That is a huge — and by the way, that doesn’t include a lot of the PSP traffic that we put through as well.
So we have a unique and extraordinary large data set and when you think about how we can combine that with various forms of machine learning, neural networks, advanced forms of together with our data set.
We think we can kind of redefine the full checkout experience for merchants, not just improve the PayPal part of it, but look at the entire checkout and how do we create that to become a one click process for our merchants. And we are starting to roll that out to merchants. We just did that at our sales conference huge excitement around like how game changing that could be.
So we are thinking about all the things on the here and now and there are a lot of basic blocking and tackling that needs to get done, a lot of friction that needs to be taken out of the process, a lot of in-app, native transaction that has to occur. But we are executing against that and we are really now thinking about what’s that next-generation of checkout look like and how can that be fully differentiated from any player out there?
Tien-Tsin Huang
Yeah. I know you have mentioned legacy a couple of times, Dan. When we do our surveys and I know others do it as well, even with sort of a big legacy user base, the share is still very dominant, whether it’s across iOS, especially within Android. I mean it’s 5x more popular from our work relative to Google Pay. So my question is this, with guest checkout or a big opportunity, you still have a sub-segment of the market that’s doing card on file. Is there a lot of competition for branded checkout in your mind in terms of direct wallet competitors, I know we get a lot of questions around this, but how do you see the competitive landscape? Are we looking in the wrong places, is it more card on file, guest checkout, that’s the competition? What’s your view?
Dan Schulman
Yeah. Well, all digital wallets probably 35% of online checkout right now. So there is a lot of white space for digital wallets to take share from card on file, vaulting, guest checkout, manual entry of cards and so we are focused on all parts of that.
But I do think we want to be best-in-class of digital wallets, because I think if it’s — if you are best-in-class in digital wallet, you won’t naturally take share from that other white space of the online market space. I looked at your survey very carefully and I think it’s really actually quite interesting in your survey.
If you look at from 2021 to 2022, not 2022 to 2023, because that’s only about a quarter that you can look at, but look at half 2021 to 2022. PayPal grew — I am going to show you this and remind you, PayPal grew in its preference and its share of checkout substantially. Well, Apple Pay actually came down in that and that’s sort of like not a thing that most people would have expected.
From 2022 to 2023, Apple Pay has grown and we have come down a little bit. But if you look at 2021 to 2023, just that, that we are up in share, we are up in preference and so I think a lot of the things we are doing are making a real difference. That’s really important as well. And my expectation, my full expectation is that as the year continues on that our growth in our branded checkout will accelerate.
And so that’s something I mean for everyone to take a look at, because obviously, if our branded checkout growth accelerates, that will help on the transaction margin dollar side of it, as we start to put value-added services on unbranded, which our customers are demanding as we roll out PPCP and go down market with higher margins, as we roll out more and more internationally that have higher margins, that will also play in transaction margin dollar growth. And I think the one really important thing about saying that now we are looking at high-single digits in revenue for the year is the jump off as we go into 2024…
Tien-Tsin Huang
Yeah.
Dan Schulman
… is massively different than what people were expecting before. And so if we can grow core branded start to put in more value-added services and higher margin stuff into our branded and into see more engagement around our monthly active users because of what we are doing in the digital wallet, that bodes pretty well as we look out towards the end of the year and into 2024.
Tien-Tsin Huang
Yeah. No. I think, I am glad to hear you say that as we think about exit rates with respect to branded. I know there’s a lot going on there, but you have mentioned PPCP, PayPal Complete Payments, it’s easier for me to say than the acronym. I feel like moving down market with this PPCP, I mean, that’s a big deal considering who sits there, but there’s still a lot of opportunity to go after that SMB space. You have owned that from a branded standpoint. So how — what can we learn from the branded experience to win within unbranded and I heard you letting it clear that it’s going to bring with it a lot of flywheel and opportunities to get to advanced checkout, sure. But the opportunity to seize it, though, Dan. How real is that, it sounds like the partner plan will be important, pricing will be important, but how do you see that maturing as you go after this, because it is new?
Dan Schulman
Yeah. There is massive pent-up demand for our unbranded offer through both our channel partners and through small and midsized businesses. It’s a huge market. Where we have something like 35 million active accounts, most of those are small and midsized businesses, it is our bread and butter. We have inside sales force and a sales force that approaches both channel partners and the upper end of small business, the lower end of midsize.
We have had a legacy product there. None of you are recognized, it’s called PayPal Pro that is like a 10-year-old product completely insufficient to addressing that market really all the architecture that we are deprecating right now, which is always painful when you deprecate something, but…
Tien-Tsin Huang
Yeah.
Dan Schulman
… those customers are not well served on that architecture and need to move to PPCP. PPCP is state-of-the-art, unbranded platform comes with all of our latest checkout integrations on top of it, value-added services orchestration plays the same thing that we have done upmarket, but much more kind of platform-oriented market is more customized with Braintree.
We have got a lot of channel partners and large channel partners quite interested in it. We will announce more of those as the year goes on. But I expect PPCP to be one of our most successful product launches that we had.
We had a great product launch with Buy Now, Pay Later. I think we are one of the top two or three players in the world on that right now. But I think PPCP will be just as impactful as we go into the lower end of the marketplace.
We have never really had a product to compete there, we now have a very competitive product to do that and we have a lot of relationships to build on and a lot of demand to take advantage of. So we have very high hopes and we have a very robust funnel of opportunity, and that will start to come through as the year goes on.
Tien-Tsin Huang
Okay. Good. No. Look, there’s a lot of lot of irons in the fire, as I say, going on and PPCP is definitely one that we are interested in tracking.
Dan Schulman
That’s true.
Tien-Tsin Huang
So you are balancing a lot of this with a narrower focus and we have seen non-transaction expense come down quite a bit. I think you are now expecting that to be 10% down, if I remember correctly, Dan?
Dan Schulman
Yeah.
Tien-Tsin Huang
It sounds like you expect non-transaction expense to continue to decline thereafter. So is the obligatory question, right, how much more room to cut before you cut muscle?
Dan Schulman
Yeah. Well, I’d say, just the first thing is we are not going to cut muscle. I mean cutting muscle is always being an athlete and a martial artist, but an older one. Like cutting in a muscle is never helpful, but being in good shape is always helpful. And we were negative 12% OpEx. I think people were wondering whether we would get our cost structure back in line…
Tien-Tsin Huang
Right.
Dan Schulman
There’s no question about it. And I think being negative 10% this year, honestly, is just the beginning of what we need to do. We like many other companies added a lot of expense during the pandemic to keep up with demand.
At the end of this year, if you look at just our classic run rate, we will be back on track with our classic OpEx run rate over like a five-year CAGR period, but not better than that, not better than that.
And with all of the productivity, all the benefits that we get from platform consolidation that we are doing modernizing our platform, our products are getting better, we are having less calls coming into customer care. We have a lot of productivity work that we can yet do and you are clearly going to see that come into next year as well.
But I also think that AI is going to redefine the workplace for not just PayPal but for all companies, like, I think, if you think about technology trends, you think about the cost of compute, the cost of transport, the cost of service, those have all come down massively with technological advantage.
One thing that has not come down is the cost of software. But I think we are like in a Guddenburg [ph] moment right now with software, where you are going to be able to use forms of AI to do all of your quality control through that, which is a massive cost element for it. New software is going to be done in an automated fashion.
And then you look at front office, back office, legal marketing. This is not about cutting in a muscle. This is about doing things more efficiently, better at much lower cost and that is going to continue for quite some time.
This isn’t like, I know I have heard, well, Dan, you are going to be around for X amount more time, what do you think the next CEO will do? I think being efficient, looking at forms of productivity, using AI to go and be more and more efficient and better, like, that, like, any CEO you bring in will be looking at all those things. It just makes sense to go and do that because it’s not just a cost exercise. It’s getting better at the basic things that you are doing.
And then you use obviously, AI to differentiate yourself on your value proposition as well as we were talking about. So AI to me is both a productivity play, not so much cost but just getting better at the things you are doing, but it will obviously drive cost improvements, but really a value proposition play.
And so I think when you think about our cost structure, clearly, the things we are doing continue on into next year and I think continue on for many years to come. And then you drive branded share of checkout, which increases your margin structure, increase your unbranded, you keep winning out in the market there, because it drives our checkout, you put on more profit streams that opens up actually new transaction streams for you.
And then you drive your digital wallet to make sure that you drive engagement with your consumers and have a place where merchants and consumers can interact more frequently. I think that plan is a plan we have been on for the last like year and a half and at least from my perspective, when I look out over the next year or so, I can’t imagine that we will be on a plan that will be much different than that.
Tien-Tsin Huang
Okay. So sticking with that and I do want to talk about the CEO transition here. But with generative AI, I know at the icons, people are going to get sick of me asking people about it, but I will ask it anyway. Dating back to whether it was Virgin or American Express or now PayPal. When you think about these tech waves with generative AI, it feels like I don’t want to say incumbent companies, but the larger companies with a lot of data, a lot of history, a lot of users, et cetera, stand at most to benefit, as well as be hurt by generative AI. So I am curious where does this rank for you in terms of opportunities to amplify what you just said in terms of productivity, software development, you name it?
Dan Schulman
I don’t think you can underestimate it. I do think you are right. I think larger companies or companies have unique sets of data that have a lot of experience as we do in machine learning and neural networking in forms of AI we will have some advantage, although there’s a lot of open source that’s going to go out there.
Meta, I think, did something very different than a lot of the other players are. So you are going to have a lot of open source and open source is always quite powerful in there. But I don’t think any of us should underestimate the power of what AI will open up. It will open up new value propositions for sure and it will redefine the structure of work. That doesn’t mean that new jobs won’t grow in importance.
But if I look at things like the legal profession, there’s no way you can keep the hourly model, right? There’s no way that whole business model doesn’t radically change. I mean, at least 40% of what’s done today on that on research and everything can be done almost instantaneously.
And so I think every part of the organization and we have got a full effort right now looking at every part of the organization. How is it redefined? How does it get better? What does it do to our cost structure? What does it do to our hiring going forward and what does it do to our value proposition? How do we leverage what is very unique to PayPal?
Everybody always wants to know like what do people want to buy, what are they and we know not just what people’s intentions are, but exactly do they buy or not, what do they look at, we have very unique sets of data that can be massively helpful to retailers and to consumers and the whole shopping journey.
Tien-Tsin Huang
Okay. Good. No. Thanks for going through that. Time flies, we have 4 minutes left. So I have to ask you, I guess, on the CEO search, thinking about what you just said and all the foundations of PayPal that you are — you did a good job of going through, is the bias for you and the Board to search for someone that has more of a technology sort of product orientation or is it more important to have domain expertise around banking and fintech or is there another factor that you think is important. I am just curious what’s top of mind?
Dan Schulman
Yeah. First off, it’s really it’s a very bitter sweet to leave PayPal of the company. I think it’s got so much potential in front of it. I have been there for nine years, I am 65, will be almost 66 when I retire and its time for somebody new to take this to the next chapter and its next potential.
The Board is moving as rapidly and possibly can to identify the next CEO. We are looking at all those criteria, obviously, we want to find somebody who’s got tech experience, heavy product, understands a regulated industry as well, because that’s extraordinarily important part of what we part of our special sauce is, we are world-class at compliance and risk management. We have great relationships with the regulators and government officials around the world and it enables us to do things that others might not be able to go and do.
So they are moving as quickly as they can. They understand how important that decision is. They want to be deliberative about it. But move as expeditiously as possible and that’s what’s happening inside our Board room right now. So I am excited about the list of potential candidates that we have and let’s see where all of that comes out.
Tien-Tsin Huang
And I assume Gab has done a great job as acting CFO. Is that a sequential decision with the CEO first and then the CFO decision thereafter?
Dan Schulman
Well, you are right, Gab has done a great job and we have worked very closely together…
Tien-Tsin Huang
Okay.
Dan Schulman
… over the last year and a half and I have had nothing but massive respect for her. But the Board is really focused on the CEO search right now and getting to a decision as rapidly as they can.
Tien-Tsin Huang
Okay. Good. Look, I mean, like I said, Dan, like I said in the very beginning, like from and I worked on the original IPO of PayPal and the eBay transaction?
Dan Schulman
Yeah.
Tien-Tsin Huang
And then you coming through and the tough changes that you made with consumer choice, right? And moving away from the eBay run model and moving more open things like that. I mean, those were tough changes to make to get you guys to the point here to still be talking about it. I think back then people thought PayPal was a Dinosaur.
Dan Schulman
Yeah.
Tien-Tsin Huang
And there was worry about competition and everything else and here we are still talking about sort of the next step from shares. So I will leave you with this question then, given that and PayPal survived a lot of different themes, sort of what do you think is sort of the next battle or hurdles that PayPal really needs to overcome, forget about the short-term macro and what we have talked about before, but the bigger picture, what’s sort of the bigger challenges you think that the next CEO is going to have to take here?
Dan Schulman
Well, there’s always going to be competition. I mean, it’s an incredible marketplace. If we didn’t have any competition, probably, wouldn’t be as great market. But history has been littered with people that have come after PayPal. I mean, when I first came on, you had all the wireless carriers coming after payments…
Tien-Tsin Huang
Yeah.
Dan Schulman
All the merchants that were going to come after with MCX coming after, the networks coming after it, you have then the single integrated button by those coming after it. PayPal has quadrupled its volumes in the last nine years, tripled its revenues, tripled its profitability during all of that timeframe. There will always be competitors will always need to adapt and move and not stand still on that, but we have and we are going to continue to go and do that.
I think people probably underappreciate the amount of assets that we have and the amount of customer goodwill and brand strength that we have. And we are now executing extraordinarily well, it’s taken a little while to get our legacy platforms in a place where we can iterate and experiment at a quite a rapid pace. But we do 50,000 software releases a year now. We were doing a couple of hundred when I first came in.
I think there’s massive opportunity still. The financial system is redefining itself. I think we are going to look at different types of rails that will be faster and less expensive. I think we are well positioned to play in that marketplace and so I think, you are going to see a lot more people coming into the system and I think the system is going to be way more efficient than it’s ever been before.
And so I am as excited today as I was when I joined PayPal, there are probably as much doubts today as when I joined the lot of doubts. But we just keep iterating, we keep executing and that’s what we are focused on, and if we do that, I think, we will have a great future ahead of us, too.
Tien-Tsin Huang
Yeah. No. PayPal has been a survivor. It’s been a fighter like you. You have been a fighter. So, again, grateful for all the time that we spent together, Dan, debating the business and hopefully get the chat in different settings like this.
Dan Schulman
Yeah. Thanks, everybody.
Tien-Tsin Huang
Thank you, Dan. Appreciate it.
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