Q3 2019 Earnings Call
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I would now like to introduce your host for today's call Misgive real Rabinovich head of Investor Relations. Please go ahead.
Thank you Andrew good afternoon, and thank you for joining us.
Welcome to pay Pal Holdings earnings conference call for third quarter 2019.
Joining me today in the call or Dan Schulman, our president and CEO and John Raining, Our Chief Financial Officer, and he VP global customer operation.
We're providing a slide presentation to accompany our commentary.
The conference call is also being webcast and both the presentation and call are available to the Investor Relations section of our website.
We will discuss some non-GAAP measures in talking about our company's performance.
I would find a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the presentation accompanying this call.
In addition management will make forward looking statement.
Her based on our current expectations forecasts and assumptions and involve risks and uncertainties.
These statements include our guidance for the fourth quarter and full year 2019.
Our preliminary outlook for 2020, our medium term outlook and the impact of our acquisition.
Our actual results may differ materially from these statements.
You can find more information about risks uncertainties and other factors that could affect our result in our most recent annual report on Form 10-K , and quarterly reports on Form 10-Q filed with the FCC and available on the Investor Relations section of our website.
You should not rely on any forward looking statement.
All information in this presentation is as of today's date October 23 2019.
We expressed we disclaim any obligation to update the information with that let me turn the call over to Dan.
Thank you got real and thanks, everyone for joining us on today's call.
I'm pleased to report that pay about had a very strong quarter across all of our key metrics.
Revenues grew by 19% on an FX neutral and spot basis to $4.38 billion.
Our revenue growth was driven by strong transaction and TPV volumes.
For the first time ever we processed over 1 billion transactions per month in a quarter.
25% year over year to 3.1 billion transactions.
TPV growth accelerated 80 basis points from last quarter.
It was up 27% on an FX neutral basis to $179 billion.
GPV, excluding ebay grew by 31%.
240 basis points from Q3 28 King.
E Bay TPV declined by 3%.
And now represents just 8% of our total TPV.
Our own approximately 300 basis points from Q3 last year.
As of now our best estimate you said ebay will be approximately 6% of our total TPV at the end of the operating agreement in July 2020.
Excluding unrealized losses associated discreetly with our investments in Mccarter Liebreich Andrew there.
We delivered a very strong 79 cents of non gap E. P. S.
That's compared to our guidance on a similar basis of 69 to 71 cents.
Excluding the mark to market changes in our strategic investment portfolio.
non-GAAP EPS grew 31%.
Driven by a year over year expansion of more than 200 basis points in our non-GAAP operating margin to 23.4%.
I'm very pleased with the leverage of our operating model and the continued expansion of our operating margins.
This leverage drove our largest ever quarterly E P S overperformance versus our expectations.
And provides us with increased confidence in our medium term guidance of 20% EPS growth compounded annually.
Well, so very pleased to report strong growth in both net new active engagement.
We added 9.8 million net new actives in the quarter a record number for any previous Q3.
We now have 295 million active accounts on our platform up 16% year over year.
Including over 23 million merchants.
We anticipate ending the year at approximately 304 million active accounts.
Our stated target of 300 million.
Engagement continues to consistently increase growing by 9% almost 40 transactions per active account.
Mobile is a major driver of our growth with the one touch at 172 million consumers and 13.8 million merchants.
We are quite focused on growing our value proposition beyond checkout as our consumers look for more reasons to use paper, how it's part of their everyday financial life.
I'm quite pleased by the efforts of the pay Pal team this quarter.
And I'm encouraged by the strength of our business fundamentals.
We are focused on executing against our strategic priorities, we've made significant progress in driving forward our pricing initiatives.
As well as our product integration with pay Mantas and we now anticipate lie.
Full stack integration by yearend.
Venmo continues to be an incredibly powerful platform for engaging consumers.
We processed more than 27 billion in volume for the quarter growing 64%.
Almost $300 million and payments per day, and then annual run rate that now exceeds $100 billion.
The venmo team has made tremendous strides in enhancing the use cases of venmo.
Including a recently signed deal was synchrony to provide a venmo credit card.
All of this is producing very strong monetization result.
We ended Q3 with Venmo, just shy of a 400 million dollar annual revenue run rate.
Last year, we acquired Hyperwallet.
Knowing that payouts are a powerful tool for fueling engagement as retailers and marketplaces look for new ways to interact with their customers.
One year later I'm pleased to report that our payouts capabilities are gaining strong traction among leading brands.
In the quarter travelers insurance announced customers can now receive insurance claim payments the tape out.
Pepsico launched its first ever cash back loyalty program powered by then no and tape out.
Lima, the global Scooter rental platform selected pay Pal to facilitate payouts to which network a freelancers.
An epic games is now using our capabilities for competitive fortnight players to expedite their price payout process.
This month, we added venmo as a payout option, providing merchants with another powerful way to reach than most highly engaged user base.
Credit continues to be another strong driver of engagement on our platform.
This quarter, we launched new consumer installment plans in the United States in Germany.
Which allow pay pal customers to pay for their purchases with easy to understand monthly payments.
This capability is already leading to incremental sales for our merchants.
And we signed a long term strategic partnership agreement with Citi, Australia to develop consumer credit products for pathos customers and Australia.
We continue to gain strong adoption among merchants around the world in daily spend categories.
In the quarter, we further expanded our relationship with Walmart.
Launching pay Pal checkout, that's a sole payment solution for its online grocery business in Mexico.
In Japan Paypower was one of the official partners for the Japanese governments initiative to promote cashless payments throughout the country.
We made significant strides this quarter with multiple strategic partners to create better experiences for our shared customers.
With American Express, we've launched a feature where amex card members can split a purchase in the amex SAP via pay Pal or venmo.
We now offer account linking on mobile devices with capital, one and PNC bank in the United States.
We launched instant transfer to bank accounts for venmo customers through our partnership with JP Morgan Chase.
We launched cashback programs with both chase and discover.
I'm pleased that we're beginning to see increasing traction with the results of our hey with rewards initiative.
To date 6 million consumers are unable to use eligible rewards points to pay for a purchase.
And those customers who are using the rewards currency currently do so nearly 10% of the time.
And we're seeing increased engagement and spend as a result.
In September we announced that the peoples Bank of China has approved our acquisition as a 70% equity interest in Gopac.
License provider of online payment services.
We are honored to become the first non Chinese payments company to be licensed to provide online payment services in China.
This is a very significant development for us has the potential to dramatically expand our total addressable market.
And our long term growth prospects.
The license enables us to expand upon our relationships with existing partners like China, Unionpay and how they express.
And forge new partnerships with China's financial institutions, and technology platforms, allowing us to provide a comprehensive set of differentiated payment solutions to businesses and consumers in China and globally.
Our initial focus will be on provided cross border payment solutions to China's merchants and consumers.
Linking China's commerce ecosystem.
To pay passive das two sided network.
The transaction is expected to close in the fourth quarter of 2019.
And is subject to customary closing conditions.
We will share much more about our plans early next year, but suffice it to say, we're very excited that our growth opportunities as a result of this landmark agreement.
Q3 was an important quarter for us.
And our results demonstrate the strength of our expanding two sided network.
More importantly, I'm optimistic about the opportunities in front of us.
Our ability to shape the financial services landscape.
I've been leaving the pay Pal team for the past five years and I've never seen it more United focus and excited about our future.
We think the next five years will be as defining and value, creating as the past five.
And with that let me turn the call over to John .
Thanks, Dan.
I want to start off by thanking our customers partners and global team for helping us deliver a great quarter.
The strong results were reporting today demonstrate the continued execution of our strategy to deliver long term sustainable growth.
Our volume growth accelerated to 27%.
Our revenue grew 19%.
We delivered more than 200 basis points of operating margin expansion on both the gap and a non-GAAP basis.
And we realized operating leverage across each of our non transaction related expenses.
Excluding the effect of unrealized losses from our strategic investment portfolio, which I will discuss later non-GAAP EPS grew 31%.
Our Q3 performance shows the consistent strength of our platform and the scalability of our business.
Revenue in the third quarter increased 19% on both a spot and currency neutral basis to $4.38 billion.
Hyperwallet and I settled contributed approximately 1.9 points to revenue growth.
Versus the third quarter of 2018, U.S. revenue grew 19% and international revenue grew 20% on a currency neutral basis.
On a spot basis transaction revenue grew 18% accelerating the point from last year in the second quarter. This year.
Revenue from other value added services grew 24%.
In the third quarter transaction take rate was 2.21% and total take rate was 2.4 or 5%.
Compared to Q3 2018. This was a decline of 12 basis points in 13 basis points respectively.
Continued strength in Peterffy contributed to approximately half of the decline for both transaction and total take rate.
The performance of Ebays marketplaces business and the headwinds for the stronger dollar also contributed to the reduction and take rate.
$70 million in revenue from hedge gains benefited both transaction take rate and total take rate by approximately three basis points.
Volume based expenses increased 23% in the third quarter to $2 billion.
Transaction expense was 95 basis points as a rate of TPV, improving one basis point from Q3 2018.
Transaction loss was 14 basis points as a rate of TPV.
And improvement of four basis points from Q3, 2018 and flat to last quarter.
This level of transaction loss as a rate of TPV matched the lowest we've ever achieved.
And we realize this result, while accelerating TPV growth.
This reduction in transaction loss was driven by continued improvements in our risk management capabilities.
Loan losses were five basis points as a rate of TPV, which represents an increase of two basis points from Q3 last year.
This increase was due primarily to growth in both our merchant and international consumer loan portfolios.
Transaction margin dollars grew 16% to $2.3 billion in the third quarter.
Transaction margin as a rate was 53.4% a decline of approximately 150 basis points versus Q3 18.
Non transaction related expenses grew 6% versus last year.
Normalizing for cost related to our 2018 acquisitions.
These expenses grew 1.9% or four cents for every dollar increase in revenue.
This performance highlights the scalability of our model, our operating discipline and our ability to grow at a low marginal cost.
On a non-GAAP basis operating income in the third quarter grew 30% and exceeded $1 billion for the first time.
In addition, our operating margin expanded more than 200 basis points from Q3 2018.
We delivered leverage across each of our non transaction related expenses.
Adjusting for 2018 acquisitions operating income grew 31% and our operating margin expanded 250 basis points in the quarter.
Other income in the quarter declined by $256 million relative to Q3 2018.
Primarily due to a $228 million net unrealized loss on our strategic investment portfolio.
On a per share basis. These unrealized losses negatively affected our results by approximately 15 cents after tax.
When we guided Q3 night TPS in July we included an expected benefit of three cents related to a funding round for talks.
A privately held company in which we have an equity investment.
A few weeks later this funding round closed and as expected we recognized a three cents per share benefit to GAAP and non-GAAP EPS.
In addition in the quarter.
Our strategic equity investments in Suber Mercadolibre rate resulted in an unrealized loss of approximately 18 cents per share.
Consistent with the plans we discussed in April on our first quarter earnings call. We disclosed the expected effect of these net unrealized losses for the third quarter and our 8-K released on October eight.
Since January 2018, certain equity investments are required to be revalued based on observable price movements.
This new standard had a relatively minor impact on our results in 2018.
This year, however, our strategic investments Mercado Libra and Hooper have created more earnings volatility.
Starting in 2020, we will update our non-GAAP methodology to exclude the impact of these gains and losses on our strategic investments as we believe this will provide a better understanding of our operating performance and a more meaningful comparison of our results between periods.
And the third quarter, our non-GAAP effective tax rate was 11.1% versus 16.4% last year.
Excluding the impact of unrealized losses from our strategic investment portfolio, our tax rate would have been 13.5%.
Our non-GAAP effective tax rate also benefited from a favorable geographic mix of pre tax income.
non-GAAP EPS for the third quarter grew 5% to 61 cents.
Adjusting for unrealized losses, a 15 cents this year non-GAAP EPS grew 31% in the quarter.
We ended the quarter with cash cash equivalents and investments of $13.2 billion.
In addition, we generated $923 million a free cash flow.
Approximately 21 cents of free cash flow for every dollar of revenue.
Normalizing for the proceeds we received from selling our us consumer credit receivables portfolio last year free cash flow grew 20%.
During the quarter, we returned $350 million to shareholders through share repurchases.
In addition in Q3, we also access to public debt markets for the first time raising $5 billion in gross proceeds.
The senior fixed rate notes or Tranched in 357, and 10 year terms.
The average life of this debt 6.6 years with a weighted average interest rate of 2.56%.
We used a portion of the proceeds to repay our outstanding borrowings on our 364 day credit facility.
And plan to use the remainder of the proceeds consistent with our capital allocation priorities.
I'd now like to discuss our guidance for the fourth quarter of 2019 in the full year as well as our preliminary thoughts for 2020.
For the fourth quarter, we expect revenue in the range of 4.89 billion to $4.95 billion were 17% to 18% growth on a currency neutral basis.
In the fourth quarter for the first time, we're lapping the acquisitions at both I settled and Hyperwallet.
Last year as we disclosed when we reported Q4 18 results. These acquisitions contributed approximately one and a half points of growth.
Relative to when we provided guidance in July .
You asked dollar strengthened.
We estimate this headwind to be approximately $30 million in the fourth quarter.
Both our integration with pay mantis and the pricing initiatives that we discussed last quarter are on track and we expect to be substantially complete by the early part of next year.
For Q4, we expect non-GAAP earnings per share to be in the range of 81 to 83 cents, representing 18% to 21% growth.
Our guidance includes no expectation of any gains or losses on our strategic investment portfolio.
As a result for the full year, we now expect revenue to be in the range of 17.7 billion to $17.76 billion were approximately 15% growth on a currency neutral basis.
Normalizing for the sale of the U.S. consumer credit receivables portfolio, the implied revenue growth rate would be approximately 18.5% for the full year.
We now expect our non-GAAP earnings per share to be in the range of $3.06 to $3.08, representing 26% to 27% growth.
Excluding the net unrealized gains year to date of 11 cents from our strategic investment portfolio. This guidance implies non-GAAP earnings growth of 25% to 26% for the year, which represents a raise in our EPS outlook.
In addition, given the strong free cash flow, we generated year to date, we now expect free cash flow for the full year to be approximately three and a half billion dollars.
I'd now like to provide an initial framework for how we're thinking about 2020.
As a reminder, our medium term outlook calls for 17% to 18% revenue growth on a currency neutral basis compounded annually, which includes approximately one and a half points of revenue growth each year on average from acquisitions.
We're very pleased with the strength of our business and expect our core trends to continue.
Our current expectation is that revenue will grow 17% organically on a currency neutral basis next year without the effect of any acquisitions.
2020 also has two dynamics I'd like to discuss.
First our operating agreement with ebay expires in July and we estimate that this transition will impact revenue growth by approximately one point next year.
Second we will be lapping the contributions to revenue in 2019 from our acquisitions of Hyperwallet and Ifetel.
Which we expect to be an additional point of headwind together. These factors pressure revenue growth by approximately two points in 2020.
Even with this the strength of our core business provides us with the ability to grow revenue in the range contemplated in our medium term guidance.
Our initial 2020 framework also calls for at least 50 basis points of operating margin expansion.
Next year, we're accelerating our investment in several key initiatives to drive long term growth and strengthen our platform.
At the same time, our ongoing focus on efficiency and natural leverage opportunities will allow us to sustainably deliver operating margin expansion.
We expect a portion of this operating leverage to be offset by but well below the line items, including additional interest expense on a recent debt issuance and lower interest income earned on corporate cash.
As a result, our initial outlook is for approximately 17% to 18% growth on non-GAAP EPS in 2020.
It is important to note.
We are confident that we will grow non-GAAP EPS by approximately 20% compounded annually over the medium term consistent with our previous guidance.
The strength diversification and durability of our business give us confidence in our medium term outlook.
In conclusion, our third quarter results demonstrate our ability to deliver strong revenue and earnings growth and generate significant free cash flow, while advancing our strategic priorities.
Our scale affords us continued leverage opportunities.
We are focused on creating value for our customers and shareholders and strengthening our position as the world's leading digital payments platform.
With that I'll turn it over to the operator for questions. Thank you.
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Our first question comes from the line of 10 cents Wang with Jpmorgan. Your line is now open.
Yes.
Thanks, so much nice acceleration here, especially in the us it looks like revenue up 19%. So just curious I know that you have ebay drag.
You have some pricing thats coming up here in the fourth quarter. So maybe can you help us unpack the drivers this quarter for the 19% or overall.
With the acceleration just curious how sustainable this is given some of the puts and takes that we're all expecting here. Thanks.
Maybe.
I'll start off with that and then turn it over to John .
Yeah, we're quite pleased with the revenue growth.
Had in the third quarter.
And really what we expect.
And fourth quarter and going into 2020 say there a couple of things and you're right. These are before.
Pricing initiatives really come to play as well as our full integration with pay mantis.
Our net new actives and our engagement.
Our our really beginning to kick in and start to drive incremental growth in our revenues.
We had records and net new actives for the quarter.
Almost 10 million.
You've got engagement going up again by another 9%.
To 40 times a year just those couple of things that really starting to.
To put more and more acceleration in.
And what we're beginning to see right now is that.
Sales into our back book.
And a lot of sales into the front book.
Our coming in much more strongly than we've ever had before we're just winning more business right now there's a bit of a network effect going on we have on most 300 million.
Active accounts now.
Merchants.
Understand the scale, we have they want to be a part of that.
We do.
Start to see right now the beginnings of our capabilities of selling as a platform provider and not just product so as I mentioned with payouts.
In my in my.
Earnings script.
Seeing that really start to take hold we're really starting to see a lot more full stack processing start to take hold and so having a lot more incremental product sales both in the back book.
As well as in the front book, including just basic things like presentment of the tape out button, where it's presented given the scale. We have now merchants are are putting us into more and more prime positions of presentment.
Partnerships are beginning to kick in right now we now have nine out of the top 10 us banks working with us.
The market places outside of ebay.
Yes, they have over $100 billion of TPV right now growing at 36%.
With us and.
So we're really beginning to see a bending the curve in our core.
Organic pay Pal growth and that is really encouraging.
For Us and then of course.
You have venmo.
Rapidly growing.
It's monetization efforts right now we're really pleased with that I think what were equally pleased with is we see a lot of good runway.
In front of Venmo as well.
I was just add.
As Dan suggested were seeing good trends across many aspects or a business I think it's important to remember for for the first part of this year at least the first three quarters, we've had some more difficult comps with.
Things like cross border with some currency effects and things like that and so we are.
Sort of lapping some of some of the beginning impacts of that not that.
I think the currency environment seems to be getting much improved from from where it was but with respect to.
The couple of things that you alluded to around payment to us in pricing.
We are live with both of those there is a metered ramp on each of them. So we've launched in three countries on the pricing initiative that we've referred to previously and not to to overly fixate on that because we make pricing changes all the time, but I know there were some questions about that.
Given our last call and payment US we're excited about the progress that we're making there we're ramping up in the fourth quarter and as I noted in my remarks, we we expect to be complete with each of those by the early part of next year.
Thank you and our next question comes from the line of Bryan Keane with Deutsche Bank. Your line is now open.
Hi, guys solid results here.
About the the purpose of the additional debt issuance back in September .
We see more aggressive stock buybacks or more M&A.
The goal pay acquisition and I'm also wondering if we'll see more acquisitions in Asia or elsewhere. Thanks.
Thanks, Brian good to get to speak with you.
I'd say that the debt issuance was.
Perhaps twofold, one it was opportunistic into it gives us more flexibility.
Opportunistic in the sense that it's just if it was a good time to tap into the debt markets I I talked about the various tranches of our debt and we literally secure tinder 10 year debt at less than 3% and so that's a very attractive rate for us and we've got ample opportunities to allocate that capital.
And it does give us more flexibility given our strategic initiatives, but there is not.
Don't read into that and that Theres a change in how we're thinking about capital allocation. So as a reminder, we said when we provided our medium term guidance that we expect over that timeframe of approximately five years that we would spend 40% to 45% of our free cash flow.
To buy back stock and that we would spend between one and $3 billion.
In M&A activity now that's not necessarily each year, but thats on average over that period of time. This allows us the flexibility to do that.
And importantly, as you think about the cash generating ability of our business will generate three and a half billion a free cash flow. This year, but that comes sort of ratably throughout the year going and tapping into the debt markets. At this point in time gives us the opportunity to access that cash.
On our timing versus when we're earning that cash throughout the year. So no change to our plans, we still believe that effective capital allocation supports and contributes to long term value creation and this was really just.
An opportunity to tap into the debt markets to get to a more optimal capital structure as we've suggested for some time that gives us more flexibility.
I can just quick add onto.
John's.
Great answer there.
I think on on the M&A front.
We obviously have quite a strong balance sheet right now some $13 billion of cash and as John mentioned generating about $3.5 billion of free cash flow.
This year.
We.
Have stated that we will be.
Acquisitive.
We look at some 200 300 companies every quarter.
We will.
Over overtime and on average as John mentioned spend somewhere between one and $3 billion, we anticipate.
On acquisitions last year was a light year.
But you should expect us to be acquisitive.
Those acquisitions would obviously any revenues that come from would be additive to our 2020 plans. We're at 17% organic anything we would do would be on top of that.
And we'll continue to look it.
Capabilities that would improve things like consumer engagement.
We would look at geographic expansion opportunities go pay would be a good example of that scale and scope with different partners Melia nuclear would be good examples of that and so.
No change in our capital allocation, but you should expect us to use our balance sheet.
In areas that would compliment our internal development efforts and allow us to continue to seize growth opportunities, where we see them.
Thank you.
Our next question comes from the line of Jason Kupferberg with Bank of America Merrill Lynch. Your line is now open.
Hey, good afternoon, guys. Good numbers here I just had a question on a clarification on 2020, just a question is on the ebay front. So only a 1% revenue headwind for next year certainly less than the investment community has had feared so I'm. Just wondering is this largely a timing issue in terms of how much of the ebay take rate comes to.
Down in 2020, specifically as well as the pace at which do you expect unbranded volume to roll off and then just a quick clarification is on the EPS growth for next year, the 17% to 18% is that off the new three or six to 308 number and 19 or is the base to 95 to 297.
Excluding the 11 cents of year to date mark to market gains.
Hey, Jason.
So on ebay.
There's a couple of dynamics going on there.
The.
Our expectation right now is that.
Ebay is about fully ramped to the 10% that they're allowed in each of the too.
Entities that where theyre doing manage payments, which are Germany in the us.
So going into the back half of next year, we would expect that those would ramp much more appreciably.
As they're already live in those markets Theres, a more or our expectation anyway is that there is a.
More metered ramp for when they launch in some of these.
Other geographies, which is.
Consistent with kind of what we've seen in the first two geographies, where they've Lance launched I think also related to that is our expectation about what share of checkout, we retain and based upon what we've seen in both Germany and.
You asked its consistent to what we said.
Back in January 2018 around our expectations. There. So so each of those elements influences our expectation around ebay, but obviously that's that's.
On an estimate at this point in time and that can change and we will certainly what you know if if something does agenda for you get to that.
Let me, maybe expand a little bit.
On ebay.
So Jason.
I think.
Obviously base going to be an important in strategic partner.
With us for a long time to come but it's obviously shrinking in terms of its overall volumes and its impact on our financials, it's been three quarters in a row.
They've had negative TPV growth.
Yes, they are negative 3% outside of that were growing at 31%.
Our TPV.
And we think at the end of the away, they're going to be down to about 6%.
Our overall TPV volumes and if you think about it when we initially split from me they TPV their percentage of TPV was around 20% now it's dropped down to about 8%. If you look at their revenues revenues have dropped in half as a percent.
Overall, and so I think it's really worth noting that while all of that's been happening our revenues.
Then growing on average call it 18% to 20% during that timeframe, our margins have been going up and so you know there obviously a much smaller part of pay Pal than we expected. When we were first thinking about the away and therefore the transition at the end of the L.A. is going to be much less.
The impact.
Much.
Much more manageable and we think that 1% of revenue growth impact.
It's probably a pretty reasonable expectation I'd say nothing in there into mediated payouts right now.
Give me any incremental cause for concern I mean, maybe even the opposite they need regulatory approvals and all the countries that they're going to roll out into there's going to be a long tail that that's going to be hard to get to China's obviously, you're going to be an interesting.
Discussion item on that.
Merchants are increasingly beginning to sell on multiple platforms right now and they're using Paypal, one touch activation to do that instead, they are quite tied into Paypal and we are seeing the pay pal share of checkout on intermediate payments rising significantly.
And so you put all those.
Into place along with the growth that we're seeing and other marketplaces and our ability to start to work with some marketplaces that we weren't able to work with before and we think this is going to be a.
Very manageable transition.
And we hope to be close partners with the Bay as we go through that.
Jason and to address your second question, which.
Hi.
Probably should have anticipated given the noise that we've had in some of these mark to market adjustments, but the the earnings growth that we talked about of 17% to 18% in 2020 is on a similar base in 2019, so it excludes the mark to market adjustments in 2019.
So to answer your question.
Presumed.
Our next question comes from the line of Darrin Peller with Wolfe Research. Your line is now open.
Hey, Thanks, guys.
Your margin Kimi materially above our estimate.
It looks like operating leverage on sales and marketing in DNA and I guess better losses, I know I think John you mentioned were a lot more pronounced.
What are your thoughts on what's allowing that kind of margin I think now versus before and just when considering I guess the pricing changes the partial offset of ebay mid year.
Integrations can you just touch on sustainability and maybe how the 50 Bips expected in 2020 would have looked if not for free bank.
Yes.
Sure Dan So a couple of things one as we look at the outperformance in the quarter, we provide a range of estimates around revenue and earnings and.
We came in at the higher end of that range that we expected. So the revenue outperformance is one of the bigger drivers within the quarter for for how we perform but as you noted we also performed very well on the expense side.
I'll I think its caution you about.
Assuming that that level of sales and marketing is a run rate basis. There are a number of initiatives going on there as we go to market in a different way that.
Have affected that quarter and so that's just kind of aside point, but the general point around operating margin leverage and what we can do there. This is a very sustainable initiative for us and you'll remember they're in a couple of years ago. We first started this this the work in this area. There was some question about was this a onetime cost take out.
Or was this really sustainable I.
I hope that we're beginning to allay the concerns around people about the sustainability of that this is perhaps the best performance that we've ever seen in any particular quarter growing our organic costs non transaction related costs at 1.9% and this is really just well if you remember I described at the time as we.
We're re plumbing, our business or rewiring, our business to be able to grow.
At a very low marginal costs and it's it's literally in every aspect of the business, but I'll give you. One example that maybe.
What we're really give you a flavor of how these are coming about so you know.
We obviously have significant number of calls that come in each month in our call Center 5 million on average per month.
And we aspire to be able to address each of those issues that our customers have into beyond the phone with or not have them have to wait on the phone, but we're not perfect and if you go back to last December we had 33000 calls that.
Customer had to wait over 45 minutes why looks right before I came in here today and in the month of October we have 526 calls.
It's a dramatic improvement, but what's noteworthy about that as we achieved that without adding a single human being to address that problem. Those were all issues around schedule efficiency.
Better routing when someone goes into the IDR things like that that just enables us to provide a better customer experience, but the same time lower our cost and the scheme of 5 million calls a month 33000 is maybe not a lot but each of those customers has an experience and that that it impacts whether they use us again, whether they choose.
Turned in the future and so it's things like that that.
Dr. dramatic improvements in our business both on the cost line, but also what it can do for the customer experience as well.
I had a couple of things to that.
There is I think a really important.
First of all.
Things that you don't see that are really important to us are things like what are we doing with developer tool sets our development platform.
Which makes our engineers.
So much more productive before we would have to higher.
A lot of people that that just couldn't get their code through and now we have tool sets in an environment.
That is much more efficient may be two time see efficiency that we had before.
Things like losses, as we grow bigger and our transaction volume.
Becomes larger our ability do machine learning on that combined with the.
The acquisition, we did have smitti those losses now are at a lower level that we think continues.
As well and probably may even improve as we get larger and finally I would just say venmo.
No we used to.
At more and more money that we would have to put into venmo each year as a group.
And it is now.
Instead of a drain on our margin structure help on our margin structure.
As we go forward and I would expect that too.
To continue to happen so.
All in I think we feel pretty good about the leverage of the model.
And it's why we have such strong confidence around that.
20%.
On patterning annually number.
Thank you. Our next question comes from the line of David Togut with Evercore. Your line is now open.
Thanks, So much could you give us.
Sort of a deeper dive or status update on some of the delayed new pricing initiatives and new product integrations with partners that you called out on the second quarter earnings call and to the extent any of those impacts are embedded in the 2020 guidance. So it will be helpful to have.
Thanks, so much.
Sure David This is John ill.
Address that so when we.
Announced the delay in those initiatives initially in the last call.
I think it's fair to say that we probably erred on the side of conservatism as we thought about the back half of the year and that they are both.
Specifically the payment this initiative as well as the price initiative they are both performing.
Moderately better than what we expected at that point in time in terms of.
The the pace of the integration of each of those.
And we and we do expect to have a benefit as we have a full.
Those are rolled in at the beginning of next year and we get the for the vast majority of you get the full run rate benefit of each of those with respect to pricing.
That's been rolled out in three countries in Q4, and and we will expand that further into next year and as a reminder, this is.
With respect to refund pricing and in line with industry practice, we don't charge fees to process refunds, but also in line with industry practice, we are retain the fixed and variable piece of that.
And certain merchants are excluded if you have negotiated pricing and so forth, but those those are performing as expected, but as we look at 2020.
We'll go live with additional merchants and we will have additional price changes that always looking to price to the value that we create for our customer base as we offer expanded capabilities and and experiences for them. We all want us we want to be able to price to that as well.
I just said David that.
Pricing is an ongoing process for us we had certain things baked into our plans and we were laid on those we had certain expectations on integration.
Especially in to pay Memphis, and we were laid on those.
It's one of the reasons why I'm really happy with performance of so many people on the tape out team.
They were really laser focused on getting those.
Implemented in the right way.
And these are complicated integrations and we want to make sure that were fully transparent.
The way, we roll these things out and so I'm pretty pleased with the way the team stepped up.
And addressed all of that as John mentioned I think on the pay mentors side, we'll have full stack integration lives by the ended the year.
And then we start to roll in payment to says almost 1500 pillars. We want to roll then all of those billers into a bill pay.
Apple right on the paper lap.
And and that will take into the first and second quarter before we have.
I have that completed but the full stack integration onto our Braintree platform will happen.
By the end of the year pricing just to reiterate what John said pricings and ongoing process for us we're going to have pricing initiatives. This year next year the year. After the year after that I mean, we continually assess market dynamics.
We look at the evolving practices our competitors, we take a hard look at the value. We provide and then we try to price appropriately based on all those factors and yeah, we price sometimes up sometimes we take prices down depends on product it depends on corridors it depends on regions.
In the world.
But.
But we're very considerate about it.
We do have.
Some degree of latitude in all those things and.
And right now thank John and I are both pretty pleased where we are.
Thank you and our next question comes from the line of Lisa Ellis with Moffettnathanson. Your line is now open.
Good afternoon guys.
Other value added services.
Pretty handily in the quarter on looking at it looks like loan growth was up about 65% year on year and also sequentially.
So now that we're kind of clear of the synchrony transition can you just give it can you give us an update on how you're thinking about the role of credit.
In your strategy going forward and specifically like how much of this vast growth is going on balance sheet versus off balance sheet and can have asked continued to grow like this well well above GDP and revenue growth going forward. Thank you.
Sure at least that's going to speak with you.
So yes, we think about our credit strategy, obviously, you're very familiar with what we did with.
You asked consumer loan portfolio, when we sold that $6 billion portfolio and now we have a partnership with synchrony going forward.
That's a strategy that we like because it's very much asset light.
When we look at.
The opportunities for credit in our business, both on the merchant side as well as international consumer.
They are significant growth opportunities and we think that particularly like when we look at.
The merchant lending and Thats, where our value proposition shines when we can provide working capital loans understanding the seasonality in cyclicality of of emergence business.
The way that others can't with access to some of their payment flows and so we want to continue to grow that.
But what we don't want and again, we've demonstrated this with our past experience, we don't want credit to become to capital intensive to where it takes away from other opportunities that we have and so I do think that Oh vast revenue and specifically credit revenue can continue to grow at a rate.
Higher than overall TPV for Paypal, So I think thats definitely true, but if you look at our total.
Credit receivables today, there are about $3.5 billion inclusive of both merchant and international consumer far less roughly half of what the U.S. consumer credit receivable swore for us.
When we when we sold the those and we were much smaller company, then as well and so we will get to a point seemingly given the opportunity that's in front of us on credit, where we will likely go asset light with.
Some of one or or or both of those portfolios as well I think thats further down the road, but we want to be very mindful around how we allocate and allocate capital in this business to both drive value for our shareholders, but also provide good offerings like credit for our customers.
Thank you.
Have time for one last question from the line and then do you actually two more questions I think.
Okay.
Our next question comes from the line of Heath, Terry with Goldman Sachs. Your line is now open.
Great. Thanks.
Dan I realize it hasn't closed yet, but can you give us a sense, maybe a little bit of the history of how it came about that paper was chosen to do the go pay deal I would imagine there was a lot of competition, particularly to be the first one for maybe the first of its kind.
And then the roadmap could look like for the rollout of those services and the integration.
You want to see there and then when could we see.
Material cross border offering and China, and how would that compare to what you're currently able to offer through your only pay relationship.
Yes.
Good question season, I think actually Heath, given the extent of that question will lovely and after after this so.
First of all obviously is incredibly meaningful event to be the first non Chinese companies tend to payments license.
The process domestic online payments in China.
It's a tangible example of China opening its financial market.
We have been working this diligently for years.
I'd say diligence that I mean literally almost every single day.
We've had calls and and have been working this and.
We worked quite closely.
With that BBSI with other authorities.
Inside China.
We work with the administration here.
To enable all this to happen and then I think.
What we've demonstrated across the globe and I think was appreciated.
Various entities within.
Yes.
Is our ability to work closely with regulators.
Weve invested quite heavily in compliance and risk management.
And we're a strong collaborator.
With the financial.
Ecosystem.
We're much more partners with financial ecosystem.
Then go around the financial ecosystem and be a disruptor, we're innovative but were partners.
With the existing structure.
And so I think.
All of that combined in a very good.
Working relationship and in many years of that.
Enabled to.
Yes.
This event to happen.
It's obviously.
Pretty significant for us it obviously increases our total addressable market quite substantially China.
Is the world's largest ecommerce market theres, something like 500 million online shoppers and they're going to drive something like two trillion dollars of online sales this year.
Just more than 50% of global online retail.
In China is obviously, an advanced and sophisticated digital marketplace, but we believe that we can offer a quite differentiated value proposition to both Chinese merchants and consumers by working closely with Chinese.
Financial institutions.
Various tech platforms inside of China to connect sort of their vast commerce ecosystem with sort of our vast network of consumers and merchants outside of China and so this is actually a substantial substantially.
More than what we can do right now so for instance think.
Before we could not worked with companies and allow Chinese consumers to purchase from Paypal merchants outside of China and now we can start to facilitate that working again in partnership.
With Chinese tech platforms and door Chinese financial institutions, we can take Chinese merchants, who may want maybe want to sell on other platforms and do pay outs back into China.
Cross border, we'll be able to enable that through our platform multinationals that are doing business in China can use our platform to to enable their transactions and for us too.
Process.
Those digital payments coming across that so.
A lot of people are focusing just on the domestic consumer part of China, Theres, obviously opportunities there.
Working in connection with partners inside of China, but theres, a tremendous amount that we leveraged kind of the strength.
Our network and strength of.
Yes.
Thomas ecosystem inside China, which is significantly digital.
And that we think.
Affords us some pretty significant opportunities over at least the.
Medium to long term. So we're quite excited about the opportunity, we'll give a lot more details as we go into.
The next year as the.
Transaction closes and.
And we'll make sure that we continue to update everybody on this so.
Again, he thank you for that question operator.
That will be the last question I want to thank everybody for joining us today. We appreciate your time and we look forward to speaking with all of you soon thank you.
This concludes today's question and answer session, ladies and gentlemen, thank you for participating in today's conference call. This concludes the program and you may now disconnect everyone have a great afternoon.
Okay.
No.
Yes.