Q4 2019 Earnings Call - Buy Side
Earnings Conference call.
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I would now like to introduce your host for todays call Miss Gabrielle Rabinovitch head of Investor Relations. Please go ahead.
Thank you Andrew good afternoon, and thank you for joining a.
Welcome to pay Pal Holdings earnings conference call for the fourth quarter and full year 2019.
Joining me to end the call our Ghansham in our president and CEO and John Rainy, our Chief Financial Officer, and SVP Global customer operations, we're providing a slide presentation to accompany our commentary. This conference call is also being webcast and both the presentation and call are available to the Investor Relations section of our website.
We will discuss some non-GAAP measures and talking about our company's performance.
You can find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the presentation accompanying this conference call.
In addition management will make forward looking statements that are based on our current expectations forecasts and assumptions and is there and involve risks and uncertainties.
These statements include our guidance for the first quarter and full year 2020, our medium term guidance and the impact of our acquisitions. Our actual results may differ materially from these statements.
You can find more information about risks uncertainties and other factors that could affect our results and our most recent annual report on Form 10-K , and quarterly reports on Form 10-Q filed with the SEC and available on the Investor Relations section of our website.
You should not rely on any forward looking statements all information in this presentation is as of today's date January 29, 2020 , we expressly disclaim any obligation to update the information with that let me turn the call over to Dan.
Thank you again, breo and thanks, everyone for taking the time to join us on todays call.
I'm pleased to report that paper had a strong quarter ending 2019 with record results across key customer and financial metrics.
Over the past year, we meaningfully improved and expanded the paper platform.
We strengthened our value proposition for consumers and merchants.
Spending our international scope and scale.
And announced transformative strategic acquisitions investments in commercial agreements.
For the year, we delivered $17.8 billion in revenue.
Thats up 19% on an FX neutral basis adjusted for our receivable sale to synchrony.
In the fourth quarter, we generated $4.96 billion of revenue growing 18% on an FX neutral basis.
Our strong revenue growth combined with disciplined expense management enabled a 28% year over year increase in our non-GAAP earnings per share to $3.10.
Excluding net unrealized gains on our strategic investments, we delivered $2.96 of non-GAAP EPS up 25% on a year over year basis.
On that same basis in Q4, we delivered 84 cents of non-GAAP EPS growing 28%.
For 2019, our overall payment volume grew 25% on an FX neutral basis to $712 billion.
Excluding ebay GDV grew 29% on an FX neutral basis to $649 billion.
As we continue to grow market share.
In Q4 alone we process, just shy of $200 billion of TPV, a new record for us.
We processed more than 12 billion transactions in the year, including nearly 3.5 billion transactions in Q4 loan.
Ebays TPV continues to decline shrinking by 4% on an FX neutral basis.
Consequently, we anticipate that ebay will be approximately 6% of our total CPV by mid year.
We added 9.3 million net new actors in the quarter ending the year with 305 million active accounts on our platform.
Up 14% year over year, including 24 million merchants.
In 2020, we expect to add approximately 35 million net new active accounts inclusive of our acquisitions and this does not include any onetime impact on an ace associated with the acquisition of running.
I'm pleased to report that engagement continues to consistently increase.
For the first time this year in great engagement grew by double digits, increasing by 10% to 40.6 transactions per active account.
Mobile transactions are a major driver of our growth representing 44% of TPV.
One touch adoption is now at 199 million consumers in 14 million merchants.
Venmo processed $29 billion in volume for the quarter growing 56%.
And for the year volume increased to $102 billion.
We ended the year with Ven, most customer base exceeding 52 million active accounts.
Driving its current revenue run rate of more than $450 million.
Last quarter, we announced that venmo assigned to deal with synchrony to provide a venmo credit card.
Pleased to announce that visa will be our exclusive network partner for this new product.
We also recently announce our first ever Venmo rewards program with select merchants for Venmo debit card holders.
These merchant funded rewards.
Our deposited directly into a customers account.
So they can be used in app with merchants are transferred to a bank account or debit card, providing consumers with these and choice.
Last year, we saw brands like Netflix Pepsi and tripled today use venmo payouts to reward their customers and pay them via venmo.
We're excited to introduce new Monetizable value added services to our venmo platform over the course of 2020.
We continue to see strong demand for our payouts capabilities enabled by our Hyperwallet acquisition.
Digital payouts are attractive to multiple industries, including reinsurance industry, where consumers are demanding faster payments.
In the quarter, we began delivering claims payments on behalf of insurance providers like Chubb insurance Assureon and combined insurance.
In addition, United Airlines is now leveraging our platform to pay passengers all over the world for baggage claims and Wal Mart is using our capabilities to pay merchants on its marketplace.
I expect to see continued growth in our payouts products.
Earlier this month, we closed the acquisition of hunting.
The addition of honey and it's complementary capabilities to the Paypal network will significantly transform our relevance and drive engagement with our consumers and merchants at the earliest stages of their commerce journey.
Our integration activities are off to a strong start.
Our early joint marketing activities have already produced nearly 100000 downloads of the honey browser extension and on day, one our customers could use their paper credentials to log into honey.
I continue to be impressed by the caliber of 100 team and I couldn't be happier to welcome them to Paypal.
We are deepening our relationships with financial institution partners around the world.
We recently announced the ability for Citibank institutional clients to make payments directly into their customers Paypal wallet.
In December we finalized the deal with F.I.S., which will enable us to scale, our pay with rewards capabilities across thousands of financial institutions in the United States.
And US Bank is currently integrated functionality to support both account linking and pay with rewards capabilities.
We continue to expand our platform capabilities around the world.
We recently expanded our relationship with Uber and will be processing their payments in Europe , Brazil, India and across the Middle East.
In December we also signed a commercial agreement with Mccarter Libra site that has the potential to drive a meaningful increase in our international scope and scale.
As part of the agreement Paypal will be made available as a payment option and then Ricardo Pago online checkout for people in Brazil, and Mexico, which opens the door for Paypal consumers to shop at hundreds of thousands of new merchants.
Paypal will also be accepted in the Ricardo Liebig marketplace for cross border purchases.
In return, we will offer offer Ricardo Pago as a payment method at Paypal merchants around the world.
Allowing approximately 50 million Ricardo Pago users in Brazil, and Mexico to pay with their preferred digital wallet.
And we will expand zooms presence by allowing mercadopago users to receive remittances directly into their mercadopago wallet.
I'm pleased with our growing partnership and look forward to continued collaboration with Marcos and the Melich team.
In addition to the continued international expansion of Zoom in Q4, we launched the ability presume customers to send money to recipients in the us through strategic alliances with Walmart and euro neck.
Customers in the US can now use zoom too quickly send money for cash pickup.
Typically within minutes at nearly 5000 locations across the country.
This is a positive step in our mission to make the movement and management of money quick easy and affordable for everyone.
In December we closed our acquisition of Gopac, becoming the first foreign payment platform to be license to provide online payment services in China.
This transaction has the potential to dramatically increase our total addressable market opportunity.
Digital payments in China are expected to grow from 1.5 trillion dollars to three trillion dollars over the next four years and the number of users is set to grow to well over 1 billion.
Last week, we announced a wide reaching partnership with Unionpay International.
Unionpay International as issued over 130 million cards outside of mainland China.
And as part of the China, Unionpay group, which has over 7.5 billion cards on their network.
As part of the agreement our mutual customers will be able to add unionpay cards to their paypal wallet in more than 30 countries.
Allowing unionpay customers to seamlessly shop, and paper cost 24 million merchants globally.
In addition, China Unionpay will enable Chinese merchants to accept Paypal in person were CDP cards are accepted.
Our two companies will collaborate to accelerate both online and offline acceptance of Paypal for Chinese merchants.
This is a landmark agreement and we'll have global impact for our joint customers.
Look forward to partnering with other Chinese financial institutions, and technology platforms to expand both cross border and in country digital payments.
Our efforts to drive social impact and create value for all of our stakeholders continues to evolve and expand.
This past year saw a record volume of funds raised by the Paypal community for charity.
For the full year of 2019, the paper community donated more than $10 billion to charity, including over $1 billion in the month of December .
Giving Tuesday, we raised a record $106 million.
The worlds secular trend towards digital payments in commerce continues to rapidly grow.
Our total addressable market significantly expanded with the acquisitions of Honey and go pay and our commercial partnership with Mccarter Libra.
In 2020, our growth investments are focused on our recent acquisitions.
Growing our infrastructure in China, and other international markets.
Venmo monetization and our in store point of sale initiatives.
Our ability to drive and benefit from these trends and initiatives is reflected in our strong results and our expectations for 2020.
We are very excited about the year in front of us our brand reputation and trust are stronger than ever.
We obviously need to execute stay vigilant and remain steadfast customer champions, but we have our sights set high and we aim to aggressively expand our capabilities and geographic footprint.
Im confident that our efforts will drive our market leadership and growth over the foreseeable future.
And with that I'll turn the call over to John .
Thanks, Dan.
I want to start off by thanking our customers partners and employees for helping us deliver an outstanding year.
2019 was another great year for Paypal and I'm pleased with our teams accomplishments.
The results were reporting today demonstrate the consistent execution of our strategy to realize long term sustainable value creation.
We're entering 2020 ready to build on our momentum focused on our key initiatives and excited about the year ahead.
Now to our fourth quarter results.
Revenue in the fourth quarter increased 17% on a spot basis and 18% on a currency neutral basis to $4.96 billion. The translation effects from the stronger dollar negatively impacted revenue by $35 million.
This impact was more than offset by $58 million in hedge gains.
Relative to the fourth quarter of 2018.
US revenue grew 19% and international revenue grew 17% on a currency neutral basis.
Transaction revenue grew 18% and revenue from other value added services grew 14%.
Strength across core pay Pal Braintree, and Venmo, all contributed to transaction revenue growth.
Other value added services revenue growth reflected solid performance of our credit business offset by the lapping of interim servicing revenue from synchrony. As a reminder, this headwind will continue through the second quarter of this year.
In the fourth quarter transaction take rate was 2.27% and total take rate was 2.49%.
Compared to Q4 2018, this was a decline of eight basis points and nine basis points respectively.
Which is the lowest level decline we've reported.
Strong PDP growth continues to be the largest driver of the year over year decline for both transaction and total take rate.
In addition on a sequential basis, both transaction and total Rick take rate improved.
The diversification of our business and our pricing initiatives allowed us to deliver these results.
Volume based expenses increased 20% in the fourth quarter to $2.3 billion.
Transaction expense was 96 basis points as a rate of TPV consistent with the fourth quarter of 2018.
Transaction loss was 15 basis points as a rate of PPV and improvement of three basis points from Q4 2018.
Continued improvements in our risk management capabilities contributed to the strong performance in our loss rate.
Loan losses were four basis points as a rate of TPV, an increase of one basis point from Q4 last year.
This increase primarily resulted from growth in both our merchant and international consumer loan portfolios.
Transaction margin dollars grew 16% to $2.7 billion in the fourth quarter.
Transaction margin as a rate was 53.8% a decline of approximately 90 basis points versus Q4 18.
Non transaction related expenses grew 7% versus last year and increased only 13 cents for every incremental dollar of revenue.
On a non-GAAP basis operating income in the fourth quarter grew 28% to $1.2 billion.
Our operating margin was 23.6% expanding 204 basis points from last year as we delivered leverage across all of our non transaction related expenses.
This represents our strongest performance ever demonstrating our sustainability to scale at a low incremental cost.
Other income in the fourth quarter declined by $33 million relative to last year.
Net interest expense, resulting from our debt issuance in September as well as lower net unrealized gains from our strategic investments contributed to this result.
As we disclosed in our 8-K issued on January knife.
In the fourth quarter on a per share basis net unrealized gains contributed two cents to EPS versus four cents last year.
Starting in 2020.
We're updating our non-GAAP methodology to exclude the impact of gains and losses on our strategic investments.
We believe this presentation will provide a better understanding of our operating performance and a more meaningful comparison of our results between periods.
With this change we no longer will issue an 8-K following quarter end disclosing the effective net unrealized gains and losses on our results.
In the fourth quarter, our non-GAAP effective tax rate was 17.2% versus 17.7% last year.
non-GAAP EPS for the fourth quarter grew 24% to 86 cents.
Adjusting for net unrealized gains non-GAAP EPS grew 28%.
We ended the quarter with cash cash equivalents in investments of $13.6 billion.
In addition, we generated more than $1 billion of free cash flow or approximately 22 cents of free cash flow for every dollar of revenue.
During the quarter, we returned $305 million in capital to shareholders through share repurchases.
I'd now like to discuss our guidance for the full year and the first quarter.
Relative to the preliminary outlook for 2020 that we provided in October we are raising our revenue expectations.
We are also raising our earnings outlook, excluding the dilutive effect of acquisitions announced in 2019.
The guidance, we're providing has been updated to reflect the impact from our recent acquisitions of honey and go pay the adoption of cease all the new accounting standard for recognizing credit losses, and our expectations for currency movements.
For the full year, we expect TPV to grow in the mid Twentys percentage range.
We expect to generate revenue between 20.8 billion and $21 billion.
This range represents currency neutral growth of 18% to 19% and increase from our initial outlook of 17%.
Our guidance includes about 1.5 points of growth from the acquisition of honey at the midpoint of the range.
Consistent with our preliminary outlook. This revenue guidance includes an approximate one point headwind to growth from the lapping of our acquisitions of Ifetel and Hyperwallet.
As well as an approximate one point headwind from Ebays manage payments transition.
In 2019 revenue from Ebays marketplaces business declined 4% and represented 14% of our revenue and approximate 300 basis point decline from 2018.
Since the end of 2015.
Ebays annual contribution to our revenue has consistently declined from 26% of our total to 14% today and has grown at a compound annual rate of 2%.
Over the same period the rate of growth for the rest of our business has been 22% or 10 times EBITDA growth rate.
As a result, we remain confident in our ability to successfully navigate ebays continued transition to its manage payments program.
I'd now like to turn to our EPS guidance.
On our third quarter call, we indicated that our preliminary outlook for EPS growth in 2020 was 17% to 18%.
Since then our expectations for core earnings growth have improved.
Before incorporating the impact of the two acquisitions. We recently closed we now expect our EPS to grow between 18 and 20%.
This growth rate of 18% to 20% incorporates a one point headwind to earnings growth from Cecil, while reflecting our underlying business strength.
In addition, we expect eight to 10 cents in dilution or about a three point headwind to earnings growth from our acquisitions of honey and go pick.
As a result, we now expect non-GAAP earnings per share to grow 15% to 17% and be in the range of $3.39 to $3.46.
While we expect the acquisition of hunting to be dilutive. This year, we expect this transaction to be accretive to earnings of 2021.
Honey is an exciting addition to our platform and this year, we will be accelerating investments to develop a truly integrated and differentiated wallet experience for our customers.
We're also realizing dilution in 2020 from funding this acquisition with cash.
In addition in 2020 following our acquisition of go pay we're investing in our local Chinese infrastructure and capabilities and building upon our new partnership with China Unionpay to strengthen the foundation of our cross border platform for small and medium sized Chinese businesses and develop a cross border.
Shopping experience for Chinese consumers.
We will also be investing to enable in store shopping experiences for non Chinese consumers visiting China.
I'd also like to provide some context for our expectations related to our operating margin performance in 2019, we expanded our operating margin by approximately 160 basis points or nearly three times. The average annual rate of expansion contemplated by our medium term guidance.
In 2020, we expect our operating margin to remain essentially flat as a result of absorbing acquisition related dilution, while continuing to invest in our other key strategic initiatives.
This year as Dan just discussed in addition to prioritizing spending on our recent acquisitions. We're also investing in venmo, our new partnerships international expansion in our in store point of sale strategies.
We expect to deliver operating margin performance consistent with the highest in our history, while investing in these significant growth opportunities.
We anticipate our non-GAAP effective tax rate will be between 16 and 18%.
For 2020, we expect free cash flow to exceed $4 billion as we continue to generate approximately 20 cents of free cash flow for every dollar of revenue.
In 2019, we returned more than $1.4 billion in cash to shareholders through stock repurchases and announced approximately $4.1 billion of acquisitions.
In 2020, we will continue to balanced return of capital with growth investments, while maintaining an efficient capital structure.
Our acquisition pipeline is healthy and our balance sheet gives us the flexibility to be opportunistic at the same time, we plan to continue to return cash to shareholders consistent with our stated commitment for long term capital return.
For the first quarter, we expect revenue in the range of $4.78 billion to $4.84 billion or 17% to 18% growth on a currency neutral basis.
We expect non-GAAP earnings per share to be in the range of 76 cents to 78 cents representing growth of 15% to 18%.
Excluding the impact of acquisitions, our earnings guidance represents 19% to 22% growth.
We expect our acquisitions announced in 2019.
To have a more dilutive impact on earnings in the first half of 2020 than in the back half of the year.
As a result, the eight to 10 cents per share of expected non-GAAP earnings dilution is more heavily weighted to the first and second quarters of 2020.
In summary, we're pleased with our performance in 2019.
We delivered strong revenue growth, our highest operating margin and record operating margin expansion and free cash flow generation.
At the same time, we advanced our strategic priorities in our core in developing markets strengthened our consumer and merchant value propositions and launch new partnerships that are expanding our total addressable market.
We're committed to our medium term financial targets and are confident that the strength of our diversified platform flexibility of our balance sheet and execution execution capabilities will allow us to continue delivering value to our stakeholders.
With that I'll hand, it back over to the operator for questions. Thank you.
Thank you.
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So withdraw your question press the pound key.
We ask that you please limit yourself to one question and return to the queue for any follow ups.
Our first question comes from the line of syncing Wang with JP Morgan.
Thanks.
Good afternoon, and logic lot of good information here. So I'll ask on the outlook. If you don't mind just your guidance this year versus last year aside from Jaime how would you how would you characterize overall visibility this year versus this time of year ago seems like you have more on your control, but still lots of moving pieces. So love your thoughts on.
Disability.
Yes.
Thanks Hanson and.
Thanks, Dan I'll start on that and then maybe John I'll upsell and on it.
First of all we as strong Q4.
And actually a even stronger back half of Q4 holiday seasonal is strong for US December was strong and frankly, we're seeing a strong January as well.
And that comes from a couple of things that we actually really didnt have the year before for saw I think we're executing a lot better.
And we have for quite some time.
Second and really important.
Because we have the visibility in this.
We've seen the pricing that we talked about start to get implemented it's implemented in.
A number of countries, we still have more countries to even roll that out into.
But thats going exactly according to plan.
Sign a number of very large deals.
At the end.
The year, we implemented many of those in December .
And we are seeing that those growth rates.
Begin to kick in those are.
Deals like pay mantis that we've talked about but other very large multi billion dollar deals as well and so.
We are entering this year and really a fundamentally different place than we.
And we entered the year before a lot of momentum.
For instance, we feel very comfortable with our.
Forecasts around TPV, we're talking about TBV being in the mid Twentys.
That was 22% in Q4, but of that.
22% to actually.
200 basis points, I guess was because of the lapping of Ifetel. So.
Normalized for that you were at 24.
Little weakness in E Bay, and then we've got these big.
Deals that are already implemented accelerating others like guber to calm and we feel very comfortable.
With our TPV accelerating into the.
Mid twentys so.
I'd say overall, we're pretty excited about where we're starting off the year things that we already have in place and we have a ton of initiatives that we're excited about as well so.
On John Jed, Yes, maybe underscore a couple points that Dan mentioned I think what's notable to engine.
About this year versus last years in particular, how we're starting off the year.
[music].
Theres always a certain amount trepidation that exist about the macro economy, but.
I think the macro economy was maybe a little wobbly or last year and and as we certainly enjoyed I think a better holiday season. This period as we looked at the month of December even going into January and so we're we're starting off on the right start but.
But also I'd underscore the point he mentioned around execution, we we recognize that we have a pretty precious opportunity here at Paypal when you combine the secular tailwinds of our business with the the incredible assets that we have when you look at our portfolio of products.
And it's incumbent upon us to execute and I think the team is executing as well now as they ever have so.
Yes, I think that gives us.
More confidence than.
On a relative basis versus last year.
Thank you.
And our next question comes from the line of James saw set with Morgan Stanley .
Great. Thank you very much I wanted to touch on you touched on a lot of different incremental market opportunities, but I wanted to touch on venmo and the efforts to continue to develop that as of the Supper brand can you talk a little bit about kind of what the objectives are for growing done no monetization during 2000.
Tony.
And beyond and how we should be measuring those and I guess kind of dovetailed with that now that visa owns plod.
It seems like.
Just wonder how that may impact the ability to grow Ben Nolan and some of these other ancillary services, whether it be internationally et cetera. Thanks a lot.
Yes.
James.
Thanks for the question.
And we were.
Into new.
To be pleased every quarter.
With the performance of Venmo.
Even as it has gotten larger we've seen strong net new actives, we've got 52 million.
Now at year end.
We said, we thought venmo would wind up with over 100 billion of TPV and it wound up at 102 billion several about 60% for the year exit in I think at about a 56%.
Growth rate.
Revenue run rate right now is over 450 million.
Dollars.
And as we're getting that scale on the revenue side, we're beginning to see losses reduce.
As well each year. So we got to add a line of sight to when breakeven as and when this starts to actually turn profitable.
As well, we don't want to slow down its growth at all we want to keep.
Enabling venmo to grow as rapidly as possible, but we're really pleased with its trajectory and I.
Expect to see good revenue growth continued strong strong revenue growth on the them aside.
Adding new capabilities.
All the time debit is continuing to expand.
We're going to put a big emphasis on pay with venmo Theres a lot of.
Of work going on around that right now because we think thats, a very big opportunity that we did not take as much advantage of last years, we probably could live.
As I mentioned.
We are going to be developing a credit card that was a very competitive process with a number of issuers.
Looking to work with us on that is very competitive on the network side too.
So we're really pleased with the economics around that.
See us add things I'd, just like goods and services goods and services as one of the biggest moneymakers on the pay Pal PDP side, we're going to add that into.
The venmo side and there are a number of other.
Monetizable services that you'll see come out that.
We will reveal.
In in good time as as they are introduced.
In terms of flat, we've worked quite closely with flat.
In terms of using flat to integrate.
Into.
Bank accounts of different banks, we are working a sometimes with some of the larger banks to.
Integrate directly and.
With Plaid really for quite a number of the banks and and really for that long tail.
We were really happy with.
With the acquisition of Plaid by visa.
Weve.
Work, obviously very very closely with visa.
And Mastercard and the other networks that very closely with visa.
We're in investor or an investor in plan, So we know them quite well and I think the security enhancements.
That visa will do on top of applied network will have the banks more comfortable in utilizing.
Plaid visa, obviously has a tremendous global scale.
And as you saw in the plot announcement from visa I was one of the folks quoted on that because we really look forward to working with visa to see how we can take advantage of this.
Joint platform now that they own applied and there could be a lot of a different opportunities as a result of that I.
I hope that answers and anything else John .
Yes.
Thanks for the pension Jane.
Thank you.
Our next question comes from the line of Bryan Keane with Deutsche Bank.
Hi, guys good afternoon.
John I was just hoping to get clarification on the TPV. The FX neutral growth dropped from 27% Threeq you did 22% for Q.
So just want or stand that delta, but probably even more importantly, the walk or re acceleration to the mid 20% going into.
This year, so I know I'm not sure how much honey is a factor there are the Hoover Union pay Meli deals, maybe you could give us a walk on how to get back to that.
20 CPB. Thanks.
Sure Brian is could speak with you. So if you look at our TPV.
Whether you look at overall or international the biggest single driver of the decline is related to the lapping of the eyes that'll acquisition. In fact, if you just look the international TPV. The entirety of that four point decline is attributable to ifetel, but looking at.
In total there some other factors, but one is obviously ebay.
We saw about a point decline.
Related to ebay and if you sort of decompose that a little bit even look at our transactions and you look at the various parts of our business.
The transactions to related to ebay declined 6% for us in the quarter.
And so this has been something that we've talked about the next year will begin that.
Period, where we where we will transition away from that.
But we're still seeing the rest of our business grow quite well. So as we look into 2020, there are a number of things that will.
Bridge that back to the mid Twentys part of it is just the acceleration we're seeing in the business right now as Dan alluded to in the December January timeframe, but we've got international expansion going on next year. We've got some work being done with large merchants you know that were.
Ramping up with payment to us and then other other parts of our business that.
We're emphasizing more like.
Recurring payments subscriptions bill pay that give us confidence that we'll be able to achieve that that mid twentys TPV number even in a period, where we are transition away from ebay and I think it's worth mentioning and doing it while expanding operating margins in 2019 and and.
Given us the latitude to make the investments that we need in 2020 to continue this trend of mid Twentys TPV growth into the future.
I, just add a little bit onto what John said.
What probably leaves me the most about.
Q4 is to see.
Coming out of it.
Re acceleration of rollout of our core trends, our core business started to accelerate braintree, even those gotten larger and larger.
Of that its growth rate will be larger than it was this year going forward, we know what deals we have in place.
We know we've got.
I would say quite good visibility.
Into.
What are TPV looks like so we're very comfortable with that.
Projection on that and we're seeing it in our trend lines.
Thank you.
Our next question comes from the line of Lisa Ellis with Moffettnathanson.
Good afternoon guys.
Question on China, now that you've successfully acquired the majority stake of go pay and then sign the more recent expanded agreement with cop.
Can you just.
Provide a bit of color on your overall market entry strategy to the domestic market. There, meaning are you more focused on say building out the presence of the Paypal wallet as a competitor to some at the local digital wallets are you more focused on Braintree and building out broader payment processing.
Could you give us a little bit of color there. Thank you.
Sure I'll take that and then.
John can do that.
As it Lisa the.
First idea.
We had working with the PSC is.
People now need to have a legal basis.
To have a payments license inside China to provide both cross border.
Domestic payments capability.
We worked over the last several years.
Closely with the BBSI and we invested.
A lot of dollars and resources into our compliance and risk management efforts across the business. So not only do we have a close relationship with BBSI, but now with the regulators around the world.
That.
Legal basis.
Allows us to look at cross border and worked very closely with multinational that have established shop in China. One of the few now platforms, where that international payments traffic can go over it also now have the ability work.
Inside of China.
With either.
Folks like CP other tech platforms.
Financial institutions inside China to link.
They are cards into our wallets of Chinese consumers.
Can you use our platform to do purchases at our 24 million merchants outside of China.
One of the most exciting things that we have though going on because.
Agreement that we have with.
Unionpay International and China Unionpay is really.
Landmark arrangement I mean inside China, China Unionpay is the networking equivalent of deals that we might have struck with visa Mastercard discover and amex all in one.
That's significant in terms of player obviously have very close relationships.
With the banks.
And we believe that we can start linking.
They are payment instruments into our wallet in China Unionpay.
And to pay Pal, we looking to expand acceptance of the.
Paypal wallet with Chinese merchants and.
That will enable also travelers coming into China.
We have the U.S Paypal wallet to purchase and as you know Lisa probably better than anybody on this call.
No.
If you're going to be buying things inside China is with your mobile phone. It is with QR codes and if you're a visitor coming in it's difficult to start to do those purchases and you will now be able to use your Paypal account.
You go and do that again this will take some time.
To develop.
And and implement.
But that is our vision.
And.
I'd also say in our conversations.
With some of the key players.
Inside of China.
Other capabilities on our platform like full stack processing.
They're interested in utilizing those capabilities and working with merchants as well so.
It's a relatively comprehensive set of opportunities we have.
I know some folks leave because obviously the strong positions and alley, and we chat have inside.
The company wondering how much opportunity. This is an explosive market, we're going to be working hand in hand.
With key Chinese players inside the market is strength in cross border, we think the combination of that.
Offers a significant opportunity for US again, this will play out over time.
Ive to say, we're pretty excited and.
And investing against this opportunity.
With that I'd add that I think a couple points.
It is a significant investment.
That.
We are managing in 2020, and it will carry into 2021.
But it's also a significant opportunity.
Yes.
The estimates that I see is by next year, China will be 40%.
Worldwide Cross border TPV and this is a market, where we have roughly 1% penetration into their half a billion digital users.
And you compare that to our core markets where were significantly penetrated.
If we can turn that 1% into 234, 5%, that's a big opportunity for us.
But I think one thing I want to emphasize around this investment.
Is.
The things that we're doing in China, and the way that we're investing there. It's a scalable solution for other markets. So we're approaching us as if there will be other opportunities, where we can have a much more prominent presence in those markets versus kind of dabbling in some of these markets like we do today without our full.
Product and so we're taking a very long term perspective, and divesting investing appropriately given the significance of the opportunity.
Thank you.
Our next question comes from the line of Darrin Peller with Wolfe Research.
Hey, Thanks, guys look it's good to see your confidence in TPV growth being mid Twentys again for the year I assume a part of that engagement.
Engagement, obviously did well this quarter was up 10% an accelerated it just I'd love to hear more about the drivers of that.
And then when we think about how many a big part of our thesis on how to use that the flywheel effect could help that even more.
Can you just touched on the opportunity there as well thanks guys.
Yep.
Darren it's Dan Thanks for that question.
Thank you know from our talking to us that.
When I started.
Some.
Almost six years ago now we're at 17 times a year.
41, right now but.
Our our goal.
And we realize that this is.
Aspirational is for somebody to use pay Pal.
Or venmo.
Every single day that is our goal is to have daily engagement with that we have a long ways to go before we get there.
Honey, we think significantly.
Increases our engagement.
With consumers.
Im sorry.
Allows us to be more towards the beginning.
Of the shopping journey more towards the intent piece of this.
Great thing is that one third of all commerce transaction star with some sort of trigger based event.
Whether that be promotion or some kind of deal in honey.
Enables.
Us to take.
A full advantage of this trigger based type of capabilities and.
Honey is not just in though coupons, it's far from and it's a mobile shopping assistance and offers platform provides rewards at this price tracking tools and alerts their dropless. Some wish list that kind of thing and so we think and by the way honey team and already saved last.
Year alone its customers.
Billion dollars of opportunity on products and services and so we think theres a lot of opportunity for engagement and scaling of that honey app as we integrate it into the pay Pal and and venmo apps, but that's only one part of what we're thinking about in terms of engagement, we talked about pay mentesana.
A lot of what we people think about payment. This is the full stack integration that we're doing with Amgen.
But we're also going to be implementing bill pay capabilities into our consumer apps Bill pays obviously another form of engagement John mentioned recurring payments.
Whether it be.
Your spot of Fi, who Disney any of a number of.
Recurring payments streams, where we can make it simple and easy for you to pay that if your credit card expires will automatically updated and I don't have to keep rolling that out and so we're going to do a ton around that and one of the big areas of opportunity for us is starting to move into the offline space.
Yes.
10%, 12% of Commerce is done online mobile thats, obviously growing rapidly but.
You look at the tremendous opportunity around the world and even here in the United States beginning to move into.
Offline through things like whether it be zettel capabilities on the merchant side, whether it be through all the cards and we're a major issuer of cards right now tied into.
Paypal account or through QR codes, which we are already experimenting with and if you look inside your pay Pal app for your Venmo App, you'll see prominently.
Displayed a scan capability or the ability to show your own QR code to be scanned.
By a merchant and we have the wherewithal and all Android phones, but not apple phones, yet the USI NFC shipped to the other do tap debate tap to pay capabilities and so that will be another big thing that we'll be investing in this year all around driving.
Engagement and the Big thing about engagement, if you think about net new actives.
When you get to be the scale that we are now with 305 million people on our platform. Every time you start to improve that engagement churn comes down as well and lifetime value starts to go up and so this can be a real flywheel for us and we are.
Investing.
Heavily in.
In our engagement activities.
And you know I would expect to see good engagement growth.
Thank you.
And we have time for one last question from David Togut with Evercore.
Thank you good afternoon bridging Darrens question.
If you could perhaps expand upon integration plans and priorities for Honey Science and then just as a quick follow up now that you own honey for a few weeks any updated thoughts on capital allocation priorities between share repurchase and further acquisitions.
David I'll start with the last part of your question, let Dan talk little bit about some of the integration plans.
What were we own it we don't.
Anticipate changing our capital allocation priorities.
Going forward.
As a reminder, that spending about 40% to 50% of our free cash flow.
Towards returning buying back stock returning cash to shareholders, and then $1 billion to $3 billion per year in acquisitions.
Again, I would point to the the cash generation of our business and I think that gives us.
In some ways a competitive advantage versus the other players in the landscape that we compete with because.
We have the opportunity to go out and acquire companies acquired capabilities as well as invest internally as well as return cash to shareholders and in many times things that we want to go after inorganically.
Allow us to be faster to market or to provide capabilities that we maybe think are better than others and so we'll continue to be acquisitive.
We will continue to return cash to shareholders and we'll continue to invest in ourselves.
And David Let me go and but before I answer that operate I think we have time for one more question.
After this so maybe we'll just keep the line has been for one more additional question.
So a quick update on on Honey first of all I said this in a in my opening remarks.
I want to emphasize it the caliber of that hunting team is.
Extraordinary.
They are great product and engineers.
React extraordinarily quickly when we acquired zoom admittedly that was a number of years ago and our tech stack.
Did not have a hall of service oriented architecture that we have today, but we were able with zoom. It took us something like six to nine months to integrate logging with tape out onto the zoom.
App with Honey day number one.
Paypal customers could lock in with their credentials right onto the Honey App day number one we were doing cross marketing together, we have a full plan over the course of the year by quarter on exactly functionality.
That we.
Our integrating together the big thing for us is to integrate honey into our mobile apps, we have significant scale on those mobile apps as additive.
Relatively heavy engineering lift.
But we're looking at that in the back half of this year, but there are a host of payment capabilities.
That we will integrate into the honey app going forward that our payment capabilities credit type of capabilities and so we've got a full integration plan in place I'm pretty pleased.
[music].
With.
Execution against that as John mentioned, our execution capabilities are our humming along pretty.
Pretty well right now.
And I.
I do think that combination.
Honey and Paypal is a very very strong one I think we can enhance the ways, we serve both consumers and merchants.
Merchants, who are looking to us for full solutions right now are looking to our products to basically increase their sales in a world is digital commerce in honey is a big tool set for that and we are excited about working with not just 30000 merchants they have today, but.
Pretty dramatically celebrating that and obviously it drives engagement and savings for consumers. It enables us to move beyond checkout.
We can enable personalized tying relevant offers for can for consumers and become a highly value added partner.
To to our merchant so we're quite excited about at least with the integration so far a lot to do but we're very focused on it.
One more question operator.
Thank you and or last question comes on line of Heath, Terry with Goldman Sachs.
Great. Thank you.
Hi, I know you've talked a lot about China and some of the other bigger initiatives in 2020 already but.
Can we stepped back and just and just talk about and maybe even prioritize sort of where those investment priorities in 2020 Hall and the incremental costs that you see associated with them, where where those fall in the but the guidance and then as we look out over time sort of the.
Ability that you see.
Staying operating margin expansion over time as you take on.
Those those incremental costs.
Sure Heath this is John I'll tackle that.
Thanks, Scott and while it's not a comprehensive list I would say a couple of things stand out in terms of our investment priorities for 2021 would be the consumer value proposition and a sub bullet or sub bullets underneath that are honey as well as what we're doing with expanding our offline point of sale off.
Brings so that's a big investment priority.
Also venmo is a big investment priority and I'd also in their international expansion all of those and international expansion includes China. So all those things are significant cost and really.
Are of a significant magnitude that absent that we'd be expanding operating margins again next year, but I'll point you to a number that I think maybe can help direct you to how to think about our long term capability to expand operating margin. So in the quarter. If you looked at our incremental operate.
The margin so the incremental growth in operating income divided by the incremental revenue was roughly 35%.
And and I think that's a fantastic number and one that that is really been pretty consistent throughout the year, but at a much higher level. The what it's been in previous years and this is the point that I continue to go back to about our ability to grow our platform at a low incremental cost and if we can continue to generate that.
Hi of revenue growth that we have and do it at a low marginal costs that results in incremental operating margins north of 30% than I am confident we're going to create a lot of shareholder value here and I think thats a good way to think about our business long term.
I just add to that I mean that I think about our guidance for 2020. This is the beginning of the ebay transition we're ending the year closing in on $18 billion.
And we are talking about.
FX neutral revenue growth of.
18% to 19%.
We're looking at you know excluding.
Acquisitions, unless something like 19% to 21%.
EPS growth, especially absorbing the seasonal impact.
On that if you look out over the last three years, our EPS Cagar has grown at 27% and so we have really strong conviction.
In our ability to execute.
Against our medium term guidance.
I think John is right, we want to invest we want to see growth opportunities that are ahead of us.
And do that in a way that's consistent.
With the medium term guidance that we put out as well as.
Execute a year over year so.
I think we're feeling like we're entering into 2020 in a strong position I.
It gives us more confidence.
Than we had when we entered into a into last year and a lot of conviction around our medium term guidance.
Single band. Thanks, John really appreciate you that so I want to.
Thank you need for that that question and thank all of you for joining US today, we really appreciate your time and we look forward to speaking with all these soon thanks a lot.
This concludes todays QNX 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 up no.