PayPal Holdings, Inc. (NASDAQ:PYPL) Morgan Stanley Know-how, Media and Telecom Convention March 8, 2023 5:40 PM ET
Firm Members
Dan Schulman – President and CEO
Convention Name Members
James Faucette – Morgan Stanley
James Faucette
All proper. We’ll go forward and get began right here with PayPal this afternoon. Thanks very a lot to all people for becoming a member of us this yr’s TMT convention. Earlier than I get began with Dan Schulman, President and CEO of PayPal, I do have some vital disclosures to learn.
Please see the Morgan Stanley analysis disclosure web site at morganstanley.com/researchdisclosures. In case you have any questions, please attain out to your Morgan Stanley gross sales consultant.
Query-and-Reply Session
Q – James Faucette
So Dan, how have you ever been? You’ve your boots on. I’ve my boots on. That is the beginning of the final rodeo tour. It is that the deal precisely, no less than so far as investor conferences go. So all proper. So look, I’ve obtained my questions right here, however perhaps we’ll begin at a excessive degree. Over the previous yr, you and the remainder of the group at PayPal have taken plenty of steps to regulate to each a softer e-commerce surroundings in addition to basic macro surroundings. So how do you are feeling about your positioning in the present day? And what’s going to you be most targeted on within the coming yr? Like what does the to-do-list appear to be?
Dan Schulman
Effectively, to start with, thanks for having me, James, and thanks for sporting your cowboy boots in empathy. So look, it has been an attention-grabbing final a number of years for all of us, and particularly in the event you had been within the e-com sector, we went into the pandemic, all the pieces doubled. Our volumes doubled. We placed on over 100 million new actives. And then you definately come out of the pandemic and you must regulate to a brand new actuality, as on-line to in-store regulate. And persons are making an attempt to determine what does that appear to be.
After which on the similar time that is taking place, you will have the conflict breaking out in Europe, ravaging the European financial system. You’ve COVID shutdowns in China, actually limiting exports out of China. You have inflation internationally, which is affecting discretionary spend, all of that impacting type of the e-commerce market. And on prime of that, for us, we additionally needed to soak up $1.9 billion of income popping out of our income streams as eBay moved to their managed funds. All of that occurred within the final three years.
In order I take into consideration type of the place are we proper now, eBay is finished. We have lapped that. It was 40% of our income once we spun out of eBay. It is Lower than 2% of our income now, lower than 2% of our revenues. So we have lapped that, and we’re type of transferring ahead on that. When it comes to type of the financial system and e-commerce, I mentioned a month in the past once we reported This autumn, that the quarter was off to a robust begin.
And right here we’re a couple of month later, and I’d reiterate that once more. I feel throughout our enterprise, we’re seeing power that is past what we anticipated. Each branded checkout is accelerating. Unbranded, it is doing fairly properly. So we’re both starting to see the start of a flip of e-commerce. The inflation cooling barely, perhaps discretionary spend coming again, perhaps our merchandise actually taking an impression out there.
The third factor, clearly, is our value construction now’s precisely the place we would like it to be. We spend a variety of time on that. I am certain we’ll discuss value construction going ahead. However we really feel extremely assured in our potential to satisfy or exceed that 18% EPS goal that we put out to develop our working leverage no less than 125 foundation factors.
After which clearly, our merchandise are starting to make a mark from now with our retailers, particularly. We’re seeing a variety of uptick in share sorts of issues, the place we now have our newest integrations. And plenty of of our opponents are literally weaker proper now. Folks discuss concerning the aggressive surroundings.
However in the event you have a look at the Purchase Now Pay Later gamers, they’re having a really robust time. They’re pulling again. They’re desperately making an attempt to determine how one can become profitable whereas we proceed to realize share off of that. So I feel we — it has been — that is been an actual targeted couple of years for us. We have needed to do fairly plenty of issues. However I feel we’re going into ’23 with the potential for it to be, I feel, a really robust yr and to come back out of it with a variety of momentum.
James Faucette
So, let’s discuss among the underlying assumptions there and as you have a look at ’23. Importantly, once we return to a month or so in the past whenever you reported earnings, you didn’t present a prime line outlook for 2023. However can we discuss the way you’re enthusiastic about e-commerce by way of February and what that portends for the remainder of the yr? It is clearly a tough query. However what’s your view proper now of the world from the e-commerce perspective?
Dan Schulman
Sure. Effectively, it is nonetheless clearly intensely advanced set of issues that you must assume by way of. You do have inflation coming down barely, however it’s nonetheless stubbornly excessive. Fed and different central banks will certainly must proceed to take up rates of interest. That is for certain. By the way in which, larger rates of interest truly assist our enterprise mannequin, given the quantity of stability we now have on our stability sheet in contrast to a variety of our opponents.
However we’re nonetheless seeing the power that we noticed popping out, and so I really feel like considered one of two issues are taking place. I feel from our perspective, we thought that e-commerce was going to be flat, perhaps up low single digits. I feel it’ll be larger than that, and I feel it’ll be larger than what we anticipated within the quick time period and what we anticipated for a full yr.
And once more, we’re seeing that throughout the enterprise. Like branded checkout is accelerating from fourth quarter. Unbranded continues to go from power to power. We’re beginning to launch new merchandise into the market like our PayPal full funds down marketplace for unbranded and placing all of our greatest integrations of branded checkout into that.
So, we have a look at this fairly rigorously. Clearly, it is our complete enterprise, and we now have fairly a little bit of the share of the web market comes by way of our platform. However as we glance nation by nation, it is completely different, however China, clearly opening up, seeing exports beginning to come out of that. European financial system, a lot better than a variety of us feared it will be.
And the U.S., if we do go in a recession, I feel it will likely be shallow, shallower than we anticipated. And we’re starting to see individuals spending extra on discretionary gadgets, no less than by way of our platform. So, let’s wait till the quarter ends till we see what occurs, however I feel our view is that e-commerce development will probably be stronger than no less than we anticipated going into the yr.
James Faucette
So there’s that, and the macro surroundings sounds good. And admittedly, we heard one thing related from Visa, and so they talked about their card not current volumes in a press launch late final week. In order that appears comparatively constant. However what concerning the branded checkout, you mentioned that, that appeared to be monitoring just a little bit higher than perhaps it was within the fourth quarter. How do you anticipate that branded checkout to develop relative to type of the underlying volumes of the shops the place PayPal is accepted this yr? I imply can it proceed to take share on-line, do you assume?
Dan Schulman
Effectively, I feel that is going to be a debate that can go on till there’s an correct single metric and measures that — look, we are attempting to work with a few the large measurement companies on the market, whether or not or not it’s Euromonitor or Salesforce or others, to try to get a constant view of market share. Look, we have tried to be fairly clear about it. We expect there are specific markets the place we’re gaining fairly a little bit of share. There are markets the place we’re dropping share, and there are markets the place we expect we’re mainly holding share.
A technique or one other and that debate will go on, and we’ll attempt to show our speculation that I feel, total, we’re holding or gaining share. However a technique or one other, acceleration of branded checkout from This autumn into Q1 is an effective factor. It would not matter the place you’re on that debate. As you see branded checkout speed up, that may be a constructive factor for us.
I feel we have a look at type of what the dynamics are out there. We’re wherever between three and 5 the market share of checkout of our nearest competitor. So after all, whenever you’re the most important, development charges could be completely different. We additionally — this is not a zero-sum sport between digital wallets. We’re all feeding off of individuals manually getting into their card. That is nonetheless 25% to 30% of the market. We’re taking a variety of share from that as our different digital wallets.
However the different factor is we’re now starting to take share and fairly meaningfully so from different Purchase Now Pay Later gamers. And the place we now have our greatest integrations in place, it would not matter who we’re competing in opposition to we maintain or develop share. They clearly have dimension benefits when it comes to our scale, 80% plus prime 1,500 retailers within the U.S. and Europe, 35 million lively service provider accounts all through the world. Client choice clearly skews in direction of PayPal when doing a web based checkout.
So, there are a variety of issues which can be benefits for PayPal. That mentioned, there are additionally locations the place we have to get higher, and we’re fairly upfront about that as properly. I feel relating to cell checkout, the place individuals aren’t on our greatest integrations. They don’t seem to be on our Braintree integration. They don’t seem to be on our cell SDK. The place you are not native within the cell app, the place it’s a must to go into the app after which bounce out to the PayPal servers to finish your PayPal transaction after which return into the service provider that provides latency. It provides clicks into it. We all know that conversion goes up nearly 10%. Now we have our newest native integrations into that.
And so — however that is the place we’re placing all of our efforts when it comes to checkout and our digital wallets and our unbranded efforts to hold our greatest integration. So, we all know the place we have to focus, the place we do have these integrations going into place. We see them doing precisely what we anticipated, and now it is only a matter of time for us to roll that out to our base. However we have quarter-by-quarter aims. We have made good progress. We’ll proceed to make good progress, and we have a variety of belongings to construct off of.
James Faucette
So I wish to ask a few follow-up questions to a couple of your factors there. First, again on branded checkout, our personal proprietary analysis exhibits that, and I am certain you recognize this higher even than we do, is that brand-wise, Venmo skews to a youthful demographic that’s actually type of getting into the workforce in power now and with power. And we have had Pay with Venmo rollout at Amazon. However — and we’re additionally seeing Venmo — Pay with Venmo increase to different retailers as properly so you can begin to monetize that. However how ought to we take into consideration the trail ahead for Venmo? And what does that appear to be? And are we at a degree but that that is contributing this enchancment in branded checkout that we’re seeing?
Dan Schulman
There are locations in our enterprise the place I give us an A for execution. I feel our unbranded proper now, a few of our checkout expertise, a few of our SDKs and APIs have gone from actually zero to being best-in-class during the last yr.
On Venmo, it will be tougher or better on that. Look, Venmo is a beloved model. You bought some 90 million lively accounts simply right here within the U.S. It is nearly 1/3 of the U.S., 60 million or so month-to-month lively accounts on Venmo. It is beloved. It is a verb. Folks use it.
After I go to school campuses, I all the time ask this query, like what number of of you used Venmo? It is 100%. It isn’t like 85%, it is 100%. So it is precisely that demographic that you simply’re speaking about. And so it is obtained big potential when it comes to its monetization capabilities, however the actuality of that versus the potential shouldn’t be what I’d anticipate at the moment.
By the way in which, that is to not say that it isn’t rising nice. It is doing over $100 million of income each single month, rising at double digits. It is clearly a significant half and a rising a part of PayPal. However I feel there’s a lot extra that we will do with the franchise.
Pay with Venmo is slowly, however absolutely coming alongside. While you went into Amazon, it is mainly getting 1/3 of the market or extra of acceptance. We simply had been accepted at Starbucks. We’re in all of the main cell apps proper now, and also you’re starting to see that take maintain, however that can take a while.
I feel that Faucet to Pay, our partnership with Apple transferring into the Venmo enterprise accounts, could possibly be a significant mover of that. And we have to and will do a a lot better job on linking credit score and debit into the app. As a result of the place we now have individuals have finished that. You see CLV is 5x of a Venmo buyer. So I’m — there’s so much to love about it, however we have to do much more to essentially take full benefit of its potential.
James Faucette
Obtained it. Obtained it. After which again on functionality and product functionality on branded, let’s discuss concerning the — you talked about the competitors just a little bit in passing, however the one which we hear about so much is Apple Pay. And I feel that is in all probability a key supply of concern even with significantly Apple Pay’s development on-line. What benefits do you see? Or do you assume PayPal has relative to Apple Pay? And the place does PayPal nonetheless must do work to be comparable when it comes to tech, consumer expertise, adoption, et cetera? Like what’s — like the place have you ever executed properly on the to-do-list? And what’s nonetheless on the to-do checklist?
Dan Schulman
Sure. Effectively, clearly, we now have a variety of benefits typically, not simply versus Apple Pay, however others. Our acceptance at retailers is magnitudes better than every other pockets. Client choice is no less than 2x to 3x. Some research have proven 8x for utilizing PayPal at checkout. Now we have type of the best conversion charges out there, the bottom loss charges out there for our service provider companions.
We additionally settle for a variety of cost, monetary devices. You may pay with rewards factors. You may pay along with your stability. You may pay now or you’ll be able to pay later; or Purchase Now Pay Later, which has now accepted over 300,000 retailers upstream on product pages. Over 2 million retailers have had a Purchase Now Pay Later expertise with PayPal. Over 30 million shoppers have utilized by an replace later at retailers 200 million instances. It is an incredible franchise that grew at 160% final yr that’s differentiated than in Apple Pay or others.
And our app has extra companies in it. You may go to it beforehand. You may search for coupons, promotions, reductions. We’re placing so as monitoring buy as properly. So we now have a variety of issues that an Apple Pay or others that do not have. And the place we now have some gaps versus Apple Pay, that are in issues like authentication, we’re closing that hole fairly a bit. Our passwordless login now’s as much as about 60% within the U.S. We’re implementing cross keys that allows us to maneuver proper into biometrics throughout each Android and Apple. So we’re closing these type of gaps.
The place Apple nonetheless has a bonus, and it is one the place I feel it is an unfair taking part in subject, is we do not have entry to the NFC chip. So in retailer, they’ve full entry to that, and that can inevitably be a regulatory subject in some unspecified time in the future in time. So I feel we’re closing the gaps the place we expect we now have gaps, and we’re doing that fairly aggressively and fairly shortly. And we even have a number of benefits that others proper now simply haven’t got.
James Faucette
Proper, proper. No, that is sensible. So let’s discuss profitability, margins, et cetera. You talked about that’s the — that you simply assume that you may develop EPS this yr, no less than 18% on the again of no less than 120 foundation factors or just a little little bit of margin growth. Clearly, for buyers, and it is sensible value of capital goes up, rates of interest go up, near-term profitability turns into extra vital for buyers. And you’ve got a large-scale value financial savings plan on the market. However can you are taking us by way of a few of these value financial savings, the place they’re coming from, how they’re progressing? And if we had been to see a greater prime line yr than you’d anticipate, how do you combine the flow-through versus returning some incremental funding, et cetera?
Dan Schulman
Sure. Effectively, we’re type of forward of the targets that we talked about. Final yr, we laid out that we felt we would do $1.3 billion of financial savings this yr. We added one other $600 million on prime of that. And I feel we’re originally of that value journey. We simply had an extended multi-day workers assembly, type of the impression of our machine studying and our AI capabilities contained in the Firm. And actually, each a part of the Firm goes to be impacted by that. Our again workplace, our entrance workplace, our coding, our authorized groups, our advertising, all of that, we’re going to have the ability to do at a lot decrease value buildings than we now have and a lot better than we do in the present day.
I feel this concept of us having working margin leverage as we increase our revenues going ahead is one thing that we see for a number of years forward. This isn’t a 2023 and also you’re the place you must be. That is ’23, ’24, ’25. There may be a lot that we’re going to have the ability to do to cut back prices, however not simply cut back prices as a result of that is by no means your manner in direction of greatness. It is vital to be as environment friendly as you could be. However I feel cut back our value and grow to be simply a lot better than what we’re doing.
I am already seeing that in our product supply when it comes to our potential to say we will do one thing after which go do it after which for it to do what we thought it was going to do. However I feel as we develop our revenues, and I be ok with our momentum on that entrance, you will note a variety of that drop all the way down to the underside line. And that is why we’re extremely assured of our 18% EPS development, however extremely assured of working margin leverage within the years forward.
James Faucette
Proper. Effectively, that is good to listen to. Let’s discuss administration. Yesterday, it was introduced that Blake is stepping down as CFO on that information. Definitely, my very own coronary heart goes out to him and his household for all one of the best for him. However — in order that’s a seat to fill, clearly, your personal seat to fill. Are you able to simply discuss how we must always anticipate that to progress? And perhaps as you are speaking concerning the development, perhaps extra importantly, as we had been type of chatting beforehand, what do you see as the most important challenges for the following CEO of PayPal? It is a multifaceted enterprise that is obtained a variety of complexity that I am undecided all people all the time appreciates.
Dan Schulman
Sure. Effectively, to start with, on Blake, clearly, it did not work out as any of us hoped. He got here into PayPal. He is right here for about three weeks or so earlier than he had a medical situation that he needed to handle. We have been ready to see how that goes and the way he feels. And these jobs, as all of you recognize, they’re 24/7. They’re extremely, bodily and emotionally demanding jobs, and you have to be 100%.
And Blake and I spoke, we had been talking on a regular basis, and we each agreed that it’ll be very troublesome for that to occur. And Gabrielle has finished such an exquisite job for nearly a yr plus now, and we’re very shut companions. She is perhaps the one particular person within the Firm who I do know for certain works tougher than I do and is aware of the enterprise in and out. And we now have not missed a beat since John left for Walmart. Gabs got here in, and it is simply been tremendous.
So, we’ll proceed on with that. And as you had been saying, I additionally want the easiest for Blake. He will probably be a senior adviser for us. He’ll assist Gabs over the course of the following couple of months and hopefully assist me as properly. However this was the appropriate factor for each PayPal and for Blake. When it comes to the following CEO of PayPal, look, it is a very advanced world firm that is obtained huge scale on the patron aspect.
Now we have like 400 million lively accounts internationally, 35 million enterprise counts. It is a massive B2B firm. It is a massive B2C firm. It is a massive community firm. It’s — operates in an extremely fast-moving ecosystem. I might say are we in monetary companies? Are we in expertise? Are we in different elements of the chain, actually type of the underlying platform piece of it? Sure, we’re in all of that. We’re companions to the most important monetary establishments on this planet, all the networks.
We serve small companies to the most important enterprises and most refined enterprises on this planet. And we’re massively regulated. We’re 67 regulatory entities all through the world. We work with finance ministers and authorities officers on all the pieces that we take into consideration as a result of we’re at the vanguard of a variety of the place the monetary system is transferring in direction of.
And we now have huge scale. We do 6 billion-plus transactions 1 / 4. We do — what did we do final yr $1.3 billion, $1.4 trillion by way of our platform. And so, we should be fairly considerate and fairly deliberate as we take into consideration the following CEO. They should proceed to guarantee that we proceed on with the initiatives that we now have in place. They’ve the identical self-discipline round productiveness and price construction, however that they proceed to evolve our worth proposition going ahead.
And we have to by no means stand nonetheless round that. That anticipating what clients want, assuring that we will ship in opposition to that, which we’re getting higher and higher at, is extremely vital. I do assume that the following CEO as a result of I do assume we are going to exit this yr with quantity of momentum. I feel a variety of issues will probably be in place.
And actually the following factor to essentially take into consideration is what does the ecosystem appear to be going ahead. Clearly, you are seeing a variety of retrenchment within the ecosystem. Look, PayPal is a massively robust firm, generate properly in extra of $5 billion of free money stream each single yr, extremely robust stability sheet. We’re gaining a variety of momentum.
Now we have a variety of partnerships, however type of enthusiastic about the place the ecosystem goes and what’s our half in that will probably be, I feel, a giant a part of what the following CEO seems like, together with assuring that we now have a worth proposition that no one can replicate. Now we have belongings and data and information and AI and machine studying instruments that no one else has proper now. Now we have the most important vault monetary devices on this planet by far and away.
Now we have the most important dataset. We should always be capable to and we’re starting to work on type of what does that subsequent era of checkout appear to be and the way is it that we will construct one thing that truly no one else will be capable to replicate or be very troublesome for them to duplicate. And so there’s so much for the following chief for PayPal to concentrate on, to be enthusiastic about. And I could not be extra enthusiastic about persevering with on the Board and serving to them in that subsequent chapter.
James Faucette
Sure. No, for certain. It is like — it is a very distinctive place and problem as a result of PayPal has super strengths. However on the similar time, even when simply due to value of capital, et cetera, the world is altering. And so like the way in which that it’s a must to put collectively and handle these partnerships, et cetera, are altering as properly.
Dan Schulman
Completely, sure.
James Faucette
So a giant job to do. Effectively, Dan, thanks very a lot for becoming a member of us. That is on a regular basis we now have. Thanks to all people for listening in.
Dan Schulman
Thanks everybody.
James Faucette
Thanks.
