Q4 2019 Earnings Call

Gentlemen, and welcome to pay Pals fourth quarter and full year 2019 earnings conference call.

This time all participants are in listen only mode. After the presentation, there will be a question and answer session.

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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 the fourth quarter and full year 2019.

Joining me today on the call or Dan Schulman, our president and CEO and John rainy, our Chief Financial Officer, and E. B P global customer operations.

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 a 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 it's her 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 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 results and 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. It 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 get real and thanks, everyone for taking the time to join us on today's call.

I'm pleased to report that people had a strong quarter ending 2019 with record results across key customer and financial metrics.

Over the past year, we meaningfully improve and expanded the pay Pal platform.

We strengthened our value proposition for consumers and merchants.

Spend in our international scope and scale.

And announced transformative strategic acquisitions investments and commercial agreements.

For the year, we delivered $17.8 billion in revenue.

That's 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.

$3.10.

Excluding net unrealized gains on our strategic investments, we delivered $2.96 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 E Bay.

She BV 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.

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 funny.

I'm pleased to report that engagement continues to consistently increase.

For the first time this year and great engagement grew by double digit.

Increasing by 10% to 40.6 transactions per active account.

Mobile transactions are a major driver of our growth representing 44% of TPV.

<unk>.

We ended the year was then most customer base exceeding 52 million active accounts.

Driving it's current revenue run rate of more than $450 million.

Last quarter, we announced that Venmo signed a deal with synchrony to provide a venmo credit card.

I'm pleased to announce that visa will be our exclusive network partner for this new product.

We also recently announced our first ever Venmo rewards program with select merchants for Venmo debit card holders.

Merchant funded rewards are deposited directly into a customer's account.

So that they can be used INAP.

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 <unk> use venmo pay outs to reward their customers and pay them via them, though.

We're excited to introduce new Monetizeable value added services store venmo platform over the course of 2020.

We continue to see strong demand for our pay outs capabilities enabled by our Hyperwallet acquisition.

Digital payouts or attractive to multiple industries, including the insurance 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 Walmart is using our capabilities to pay merchants on its marketplace.

Expect to see continued growth in our pay outs products.

Earlier this month.

Close the acquisition of hunting.

The addition of honey and it's complimentary capabilities to the pay Pal network will significantly transform our relevance and drive engagement with our consumers and merchants at the earliest stages of their commerce journey.

Are integration activities are off to a strong start.

Or early joint marketing activities I've already produced nearly 100000 downloads of the honey browser extension.

And on day, one our customers could use their pay Pal credentials the log into honey.

I continue to be impressed by the caliber of the honey team I couldn't be happier to welcome them to pay Pal.

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 pay Pal wallets.

In December we finalize the deal with F.I.S.

Which will enable us to scale are paid with rewards capabilities across thousands of financial institutions in the United States.

And U.S. 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 we'll be processing their payments in Europe , Brazil.

India and across the Middle East.

In December we also signed a commercial agreement with Mcartor Liebreich.

That has the potential to drive a meaningful increase in our international scope and scale.

It's part of the agreement pay Pal will be made available as a payment option.

<unk> online check out for people in Brazil, and Mexico, which opens the door for pay Pal consumers to shop, and hundreds of thousands of new merchants.

Tape out will also be accepted in the Mercardolibre marketplace for cross border purchases.

In return, we will off offer Mcartor Pago I think payment method I pay Pal merchants around the world.

Approximately 50 million Mercadopago 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 the Mercadopago wallet.

I'm pleased with our growing partnership and look forward to continued collaboration with Marcus and the medic team.

In addition to the continued international expansion of zoom in Q4 we launch the ability for zoom customers to send money to recipients in the U.S.

Dziedzic alliances with Walmart and Euro neck.

Customers in the U.S. can now you soon too quickly send money for cash pick up typically within minutes 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 close or acquisition of Gopac, becoming the first foreign payment platform to be licensed to provide online payment services in China.

This transaction as 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 Union pay international.

Unionpay International is 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 or mutual customers will be able to add union pay cards to their pay Pal wallet in more than 30 countries.

Allowing union pay customers to seamlessly shop at pay past 24 million merchants globally.

In addition, China Union pay.

Enable Chinese merchants to accept pay Pal in person, where C.U.P. cars are accepted.

Or two companies will collaborate to accelerate both online and offline acceptance of pay Pal 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.

Or 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 pay Pal community for charity.

For the full year of 2019 pay Pal community donated more than $10 billion to charity, including over $1 billion in the month of December .

And giving Tuesday, we raise a record $106 million.

The world's secular trend towards digital payments and commerce continues to rapidly grow.

Or total adjustable market significantly expanded with the acquisitions of Honey and go pay and our commercial partnership with Mcartor Lee break.

In 2020, our growth investments are focused on a recent acquisitions.

Growing our infrastructure in China, and other international markets.

Venmo modernization.

In our in store point of sale initiative.

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 or capabilities in geographic footprint.

And I'm confident that our efforts will drive our market leadership and growth over the foreseeable future.

And with that altering the call over to John .

Thanks, Dan.

I want to start off by thinking our customers partners and employees for helping us deliver an outstanding here.

2019 was another great year for pay Pal and I'm pleased with our teams accomplishments.

Results were reporting today demonstrate the consistent execution of our strategy to realize long-term sustainable value creation.

We're entering in 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 effect from the stronger dollar negatively impacted revenue by $35 million.

This impact was more than offset by $58 million and hedge games.

Relative to the fourth quarter of 2018.

U.S. revenue grew 19% and international revenue grew 17% on a currency neutral basis.

Transaction revenue growth, 18% and revenue from other value added services group, 14%.

Strength across core pay Pal Braintree in Venmo, all contributed to transaction revenue growth.

[noise] other value added services revenue growth reflected solid performance of our credit business offset by the lapping of interim servicing revenue from Saint gritty as a reminder, this headwind will continue through the second quarter of this year.

In the fourth quarter transaction take raid was 2.27% and total take rate was 2.49%.

Compared to queue for 2018.

Was a decline of eight basis points and nine basis points respectively.

Which is the lowest level decline we've reported.

Strong p. two p. 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 wreck take rate improved.

The diversification of our business and our pricing initiatives allowed us to deliver these results.

Volume based expenses increased 20% and 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 TPV, an 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 TBV, an increase of one basis point from Q4 last year.

This increase primarily resulted from growth in both are merchant in international consumer long portfolios.

Transaction margin dollars grew 16% to $2.7 billion in the fourth quarter.

Transaction margin as a raid was 53.8%.

Klein of approximately 90 basis points versus queue for 18.

Nontransaction related expenses grew 7% versus last year and increased only 13 cents for every incremental dollar of revenue.

On a non gap basis operating income and the fourth quarter grew 28% to $1.2 billion.

Are operating margin was 23.6% expanding 204 basis points from last year as we delivered leverage across all of our nontransaction related expenses.

Represents our strongest performance ever demonstrating our sustainability to scale at a low incremental cost.

[noise] other income in the fourth quarter declined by $33 million relative to last year.

No 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 disclose in our eight K. issued on January knife.

In the fourth quarter on a per share basis net unreal ice gains contributed to suggest E.P.S. versus four since last year.

Starting in 2020.

We're updating our non gap methodology to exclude the impact of gains and losses and our strategic investments.

We believe this presentation will provide a better understanding of her operating performance and a more meaningful comparison of our results between periods.

With this change we no longer will issue at eight K. following quarter end disclosing the effect of <unk> unrealized gains and losses on our results.

[noise] in the fourth quarter are non gap effective tax rate was 17.2% versus 17.7% last year.

Non gap B.B.S. for the fourth quarter grew 24% to 86 cents.

Adjusting for net unrealized gains non gap D.P.S. grew 28%.

We ended the quarter with cash cash equivalent some investments of $13.6 billion.

In addition, we generated more than $1 billion, a free cash flow or approximately 22 cents a free cash flow for every dollar of revenue.

During the quarter, we returned $305 million and capital to shareholders through sheer repurchases.

[noise] I'd now like to discuss or 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're also raising our earnings outlook, excluding the dilutive effect of acquisitions announced in 2019.

The Guy this we're providing that's been updated to reflect the impact from a recent acquisitions of honey and go pay.

The adoption of Cecil the new accounting standard for recognizing credit losses, and our expectations for currency movements [noise].

For the four year, we expect TPV to grow in the mid twenties percentage range.

We expect to generate revenue between 20.8 billion and $21 billion.

This range represents currency neutral growth of 18% to 19% increase from our initial outlook of 17%.

Our guidance includes about one and a half 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 I settle in Hyperwallet.

As well as an approximate one point headwind from Ebays manage payments transition.

In 2019 revenue from E. Bayes marketplaces business declined 4% and represented 14% of our revenue.

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 ebays growth rate.

As a result, we remain competent in our ability to successfully navigate ebays continue transition to its managed payments program.

I'd now like to turn to R.H.P.S. guidance.

On our third quarter call, we indicated that our preliminary outlook for H.P.S. 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 R.A.P.S. to grow between 18 and 20%.

This growth rate of 18% to 20% incorporates a one point headwind too earnings growth from Cecil, while reflecting or underlined business strict.

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 pay.

As a result, we now expect non gap earnings per share to grow 15% to 17% and being the range of $3.39 to $3 46 sets.

While we expect the acquisition of hunting it to be dilute of this year. We expect this transaction to be a creative to earnings that 2021.

He is an exciting in addition to our platform and this year, we will be accelerating investments are developing truly integrated and differentiated wall 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 Union pay to strengthen the foundation of our cross border platform for small and medium size Chinese businesses and develop a cross border.

Shopping experience for Chinese consumers.

We will also be investing to enable in store shopping experiences for nine Chinese consumers visiting China.

I'd also like to provide some context for our expectations related to her operating margin performance.

In 2019, we expanded are operating margin by approximately 160 basis points.

Nearly three times the average annual rate of expansion contemplated by our medium term gadgets.

In 2020, we expect our operating margin to remain essentially flat as a result of absorbing acquisition related deletion, while continuing to invest in our other key strategic initiatives.

This year is Dan just discussed in addition to prioritizing spending on a 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 or non gap effect of 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 a 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 balance return of capital with growth investments, while maintaining an efficient capital structure.

Or 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 gap earnings per share to be in the range of 76 cents to 78 cents represent in growth of 15% to 18%.

Excluding the impact of acquisitions or earnings guidance represents 19% to 22% growth.

We expect or acquisitions announced in 2019.

To have a more dilute of 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 gap 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 or 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 are committed to our medium term financial targets in are confident that the strength of our diversified platform flexibility of our balance sheet and <unk> execution capabilities will allow us to continue delivery value to our stakeholders.

With that I'll hand, it back over to the operator for questions like.

Thank you.

As a reminder to ask a question you will need support star one on your telephone.

To 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 Wayne with J.P. Morgan.

Thanks, Good afternoon, unless it a lot of good information here. So I'll ask on the outlook of you know mine just your guidance this year versus last year aside from hunting how would you how would you characterize overall visibility this year versus this time of year ago. It seems like you have more on your control but.

Lots of moving pieces, so lovely thoughts on disability.

Yeah.

Thanks, and it's Dan I'll start on that and then maybe John all selling on it.

<unk>, we had a strong queue for and actually a even stronger back half of Q4 a holiday season was strong for us.

<unk> was strong and frankly, we're seeing a strong January as well.

And that comes from a couple of things that we actually really didn't have the year before for so I think we're executing.

A lot better then we have for quite some time.

A second and really important because we have the visibility in this you know 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 role that out into but that's going exactly according to.

Plan, you signed a number of very large deals at the end of the year, we implemented many of those in December .

And we are seeing that that as growth rates.

Begin to kick and those are deals like they meant is that we've talked about but other very large multibillion dollar deals as well and so.

We answering this year.

Really a fundamentally different place then we.

We entered the a year before a lot of momentum.

For instance, we feel very comfortable with <unk> are.

Forecasts around G.P.Z., we're talking about TPV being in the mid twenties, you know that was 22% and he for but of that.

22% to actually.

200 basis points, I guess was because of the laughing advise that'll. So you normalize for that you're at 24 little weaknesses in E. Bay and then we've got these big deals that are already implemented accelerating others like <unk> to calm and we.

Feel very comfortable with our T.V. celebrating into the mid twenties. 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 a ton of initiatives that were a excited about as well so oh, John would yet yeah, I I'd, maybe underscore a couple of points to Dan mentioned I think what's notable to engine.

About this year versus last year is in particular, how we're starting off the year you know.

There's always a certain amount trepidation that exist about the macro economy, but you know I think the macro economy was maybe a little wobbly or last year and and 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 start.

And off on on the right start, but but also I'd underscore the point he mentioned around execution. You know, we we recognize that we have a pretty precious opportunity here at pay Pal when you combine the secular tell ones of our business with the the incredible assets that we have when you look at our portfolio of products.

And it's it's incumbent upon us to execute and I think the team is executing as well now as they ever have so <unk> I think that gives us more confidence than a on a relative basis versus last year.

Thank you.

Next question comes from the line of James saw set with Morgan Stanley .

Great. Thank you very much I wanted to touch on you touch on a lot of different incremental market opportunities, but I will not touch on <unk> and the efforts to continue to develop that as a as a separate brand you talk a little bit about kind of what the objectives are for growing demonetization during 2020.

And and be on and how he should be measuring those and I guess kind of dovetailed with that now that visa owns plod. It it seems like.

Just want to how that may impact the ability to grow Ben Oh, and and some of these other and slurry services, whether it be internationally et cetera.

<unk>.

Yeah.

James.

For the question.

We were.

Continue.

He plays every quarter with the performance of a them.

Even as it's gotten larger we've seen strong net New Act is you know that 52 million now at year end.

Oh, we said we saw them over to wind up was over 100 billion of T.V. and it wound up at 102 billion.

About 60% for the year, Yeah exit it I think in about a 56%.

Growth rate yeah. Its revenue run rate right now is over $450 million.

Dollars and.

Ads were getting that scale on the revenue side, yeah, we're beginning to see losses reduce as well each year. So we got to have a line of sight.

When break even as and when it starts to actually turn profitable as well, we don't want to slow down its growth at all we want to keep enabling them how to grow as rapidly as possible.

But we're really pleased with its trajectory and I expect to see good revenue growth continued a strong strong revenue growth on them aside.

Adding new capabilities all the time, Devon is continuing to expand we're going to put a big emphasis on pay with them, though there's a lot of.

Of work going on around that right now because we think that's a very big opportunity that he did not take as much advantage of last year as we probably could if.

As I mentioned.

We are going to be developing credit card that was a very competitive process with a number of issue lawyers are looking to work with us on that very competitive on the networks I too. So we're really pleased with the economics around that the C.S. had things like just like.

Goods and services.

Services as one of the biggest moneymakers on the pay Pal P. two p. side, we're going to add that into the them aside and they're a number of other monetizeable services that you'll see come out that will reveal.

In a in good time as as they are introduced.

In terms of Plaid you know we've worked out quite closely with flat in terms of using plan to integrate into a bank accounts of different banks, we are working sometimes with some of the larger banks to.

Integrate directly and and with Plaid really for quite a number of the banks and a and really for that long tail.

We were really happy.

With the acquisition Plaid by visa.

We've work, obviously very very closely with these and Mastercard and the other networks, but very closely with these we're an investor or or an investor in Plaid. 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 are more comfortable in utilizing plaid visa, obviously has a tremendous global scale and as you saw in the plot announcement from these I was one of the folks quoted on that.

As we really look forward to working with visa to see how we can take advantage of this a joint platform now that they own applied in there could be a lot of a different opportunities as a result of that.

That that's a good anything else <unk> nope.

I sort of <unk>.

Thank you.

Question comes from the line of Brian .

The what your bank.

Hi, guys get afternoon.

I was just hoping to get clarification on the T.P.V.C.F.X. neutral.

From 27 per cent three cute at 22%.

So just one understand that delta but.

Importantly.

<unk>.

To the man 20 per cent going into.

So I know I'm not sure how much honey is a factor there.

Maybe you could give us a walk on how to get back to that mid twenties TBB. Thanks.

<unk>, it's going to speak with you. So if you look at our T.P. The 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 two eyes that'll, but looking at T.P.D. in total there. Some other factors, but you know one is obviously ebay we saw about point decline.

Related to eat Bay, and if you sort of decomposed that a little bit even look at our transactions and you look at the various parts of our business.

Transactions to related E. Bay declines, 6% for us in the quarter.

And so this has been you know something that we've talked about the the next year will begin that period, where where where we will transition away from that but we're still seeing the rest of our business grow quite well.

We look into 2020, there are a number of things that will bridge that back to the mid twenties part of it is just exhilaration were seen in the business right. Now is Dan alluded to in the December January time frame, but we've got international expansion going on next year, we've got some work being done with large merchants.

Oh that were.

Ramping up with payment us and then other other parts of our business that we're emphasizing more like recurring payments subscriptions they'll pay that give us confidence that we'll be able to achieve that that mid twenties T.P.V. number even in a period, where we are trying.

Position away from ebay and I think it's worth mentioning in doing it while expanding operating margins in 2019, and and and given us the latitude to make the investments that we need in 2020 to continue this trend of mid twenties TPV growth into the future.

Yeah.

Just add a a little bit onto what John said.

<unk>, probably please me the most about.

You for is to see coming out of it the re acceleration of a lot of our court trends are core business started to accelerate rain tree, even though it's gotten larger and larger.

I'll bet, it's growth rate will be a larger than it was a this year going forward. We know what deals we have in place and we know we've got.

I would say quite good visibility.

Into.

What our T.P.Z. looks like so we're very comfortable with that projection on that and we're seeing it in our trend lines.

Thank you.

And our next question comes from the line of Lisa Atlas with Moffettnathanson.

Oh Good afternoon, guys question on China, now that you've successfully acquired majority's take up go pay and then sign.

Send expanded agreement with Cup.

Do you just.

Provide a bit of color on your overall market entry strategy to the domestic market. Their meeting are you more focused on say belting out the presence of the pay Pal wallet as a competitor to some of the local digital wallets. All you more focused on brain trained belting out broader payment processing could you give us a little bit of color that thank you.

Yeah sure I'll take that and then John can do that.

I said, Lisa the first idea that we had working with the P.B.S.C. is.

People now need you have a legal basis.

To have a payments license inside John provide both cross border and domestic payments capability. We worked over last several years closely with the P.B.S.C. and we invested.

A lot of dollars and resources into our compliance and risk management efforts.

The business so.

Only do they have a close relationship with the P.B.S.C., but now with regulators around the world.

That legal basis allows us to look at cross border and worked very closely with multi national.

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 were inside of China with either folks like C.P. other tech platforms.

Financial institutions inside China.

It's a link.

Ah their cards into our wallets of Chinese consumers can you use our platform to do purchases at our 24 million versions outside of China.

One of the most exciting things that we have though going on because you know as.

Agreement that we have with.

Unionpay International and China Union pay is really.

Landmark arrangement I mean inside China, China Union pay is the network. It's the equivalent of deals that we might have struck with visa Mastercard discover and and that's all in one.

It's that significant in terms of a player obviously have very close relationships with the banks.

And we believe that we can start linking.

Yeah payment instruments into our wallet in China Union pay end to pay Pal.

Looking to expand acceptance.

Of the pay Pal wallet with Chinese merchants and that will enable also travelers coming into China to be able to use pay pal wallet to purchase and as you know Lisa better than anybody on this call you know if you go.

Going to be buying things inside China. It is with your mobile phone. It is with you are codes and if you're a visitor coming in difficult to start to do those purchases and you will now be able to use your pay Pal account to go and do that again, just will take some time too.

Develop and and implemented.

But that is our vision and I would also say in our conversations with some of the key players <unk>.

Inside of China other capabilities on our platform like full set 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 you know because obviously the strong positions that alley, and we each I'd have a inside.

The company wondering how much opportunity. This is an explosive market, we are going to be working hand in hand.

He Chinese players inside the market is strength in cross border and we think the combination of that.

Offers a significant opportunity for US again this will play out over time, but I have to say, we're pretty excited and.

And investing a against this opportunity.

We sat at AD that I think a couple points.

It is a significant investment that you know we are managing in 2020 and it will carry into 2021.

But it's also a significant opportunity just you know the estimates that I see is by next year, China will be 40% of worldwide Cross border T.V.

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 were 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'd want to emphasize around this investment.

<unk>.

The things that we're doing in China, and the way that we're investing there.

<unk> solution for other markets. So we're approaching as 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.

<unk> investing appropriately given the significance of the opportunity.

Thank you.

Next question comes from the line of <unk>.

Search.

Hey, Thanks, guys look it's good to see your confidence in P.P.D. growth being mid twenties again for the year I assume a part of that as engagement.

Engagement, obviously did well this quarter was up temper centered accelerated it just I'd love to hear more about the drivers of that you know how sustainable that is do you expect that 10 per cent growth rate to either stay the same or get better and then when we think about honey a a big part of our thesis on how to use that the fly will affect could help that even more can you just touch on the operating.

Already there as well thanks.

Yeah.

And it's Dan thinks that question I.

I think you no from talking to us that.

Engagement is one of the most important drivers for us and we are very focused on it.

When I started.

Some.

Almost six years ago now you know we were at 17 times a year you know what 41 right now, but that's our.

Our goal.

And we realize that this is aspiration all you know as for somebody to use tape out or then though.

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.

<unk>.

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 start with some sort of trigger based event.

Was it that'd be a promotion or some kind of deal and honey.

Enables.

To take.

Full advantage of those trigger based type of capabilities and.

Honeys not just you know coupons, it's far from into some mobile shopping assistance and offers platform. It 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 it already saved last.

Alone, it's customers a billion dollars of opportunity I'm products and services and so we think there's a lot of opportunity for engagement and scaling of that honey half as we integrate it into the pay Pal and a and Mel apps, but that's only one part of what we're thinking.

About in terms of engagement, we talked about pay meant as a lot of what we people think about payment is is you know the full stack integration that we're doing with them and but we're also going to be implementing they'll pay capabilities into our consumer apps they'll pay is obviously.

Another form of engagement John mention recurring payments, whether it be a your spot if I, who Disney any of a number of.

Payments streams, where we can make it simple and easy for you to pay that if your credit card expires will automatically update it you know and have to keep find that out and so we're going to do it on around that and one of the big areas of opportunity for us is starting to move into the off line space.

10%, 12% of Commerce as done online mobile that's obviously growing rapidly, but you know you you look at the tremendous opportunity around the world and even here in the United States beginning to move into.

Off line through things like whether it be zettle capabilities on the merchant side, whether it be through all the cards and we're a major issuer of cards right now tied into your pay Pal account or through Q.R. codes, which we are already experimenting with and if you.

Look inside your paper lap, where you're venmo at you'll see prominently.

Ah displayed a a scan capability or the ability to show.

Q, our code to be scanned by a merchant and we have the wherewithal and all Android phones, but not apple phones, yet to be able to use the N.S. eat ship to be able to do tapped to be tap to pay capabilities and so that will be another big thing that will be investing in this year.

You're all around driving.

Engagement and the Big thing about engagement. If you think about net new activities. You know when you get to be the scale that we are now with 305 million people in our platform.

Every time, you start to improve that engagement shurn comes down as well and lifetime values starts to go up and so this can be a real fly will 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.

We have time for one last question from David Togut with ever core.

Thank you good afternoon bridging to 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 a capital allocation priorities between <unk>.

And further acquisitions.

David All all start with the last part of your question, what Dan talk a little bit about some of the integration plans.

What were we don't it we don't anticipate changing our capital allocation priorities are going forward.

A reminder, that spending about 40 to 50 per cent of our free cash flow towards returning a bind back stock or turn cash to shareholders and then a $1 billion to $3 billion per year in acquisitions again, I'd I'd 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 Ah that Ah we compete with because you know we have the opportunity to go out and acquire companies and acquire capabilities as well as invest internally as well as return cast shareholders.

And it 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 will continue to be acquisitive will continue to return cashed shareholders will continue to invest in ourselves.

And David Let me go and but before I answer that opera I think we have time for one more question. After this so maybe we'll just keep the line of and 401 more additional question. So 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 honey team is.

Extraordinary.

They are great product and engineers are they react extraordinarily quickly you know when we acquired zoom admittedly that was a number of years ago and our tech stack did not have a hall of the service oriented architecture that we have today.

But we were able with zoom it took us something like six to nine months to integrate log gain with tape out onto the zoom Ah at with Honey day number one.

They thought customers could log in with their credentials right onto the honey at day number one we were doing cross marketing together, we have a full plant over the course of the year by quarter on exactly functionality that we are integrating together the big.

Thing for us to integrate honey into our mobile apps, we have significant scale on those mobile apps.

And as a relatively heavy engineering left.

But we are looking at that in the back half of this year, but there are a host hayman capabilities that we will integrate into the honey at going forward that our our payment capabilities credit type of capabilities and so we've got a full integration plan.

In place I'm pretty please.

With the execution against that as John mention Alright execution capabilities are are humming, along pretty well right now and I do think that combination.

Of a honey and pay Pal 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 it basically increase their sales in a world. The digital commerce and Honey is a big tool set for that and we are you know 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 personalize timely relevant offers for can for consumers and become a highly.

You added partner to to our mershon. So we're quite excited about it pleased with the integration so far a lot to do but we're very focused on it.

One motivation operator.

Thank you and our last question comes from line up.

<unk> with Goldman Sachs.

Great. Thank you I I know you've talked a lot about China and some of the other bigger initiatives in 2020 already but <unk> step back and and just talk about it and maybe even prioritized sort of where the investment priorities in 2020 fall and the.

Incremental costs that you see associated with them, where where those fall in the the the guide and and then if we look out over time sort of the ability <unk> you see because.

<unk> operating margin expansion over time, if you take on.

Incremental costs.

Sure. He if this is John Oh, all tackle that.

Thanks, you know well, it's not a comprehensive list I would say a couple of things to 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 off line point of sale offerings.

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 of those things are <unk> are significant costa and really.

Or have a significant magnitude that absinthe 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 operating margin so the the incremental growth and operating income divided by the incremental revenue was roughly 35%.

And and I think that's that's a fantastic number and one that's that is really been pretty consistent throughout the year, but at a much higher level than 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 the type of revenue growth that we have and do it at a low marginal costs that results in you know incremental operating margins North of 30% then I I'm confident we're going to create a lot of shareholder value here and I think that's a good way to think about our business long term.

Yeah.

Just that to that I mean, I think about you know our guidance 420 20. This is you know the beginning of the E. Bay transition.

During the year closing in on $18 billion, and we are talking about effects neutral revenue growth of.

18 to 19 per cent. We're looking at you know looting you know acquisitions, something like 19% to 21%.

E.P.S. growth, especially absorbing the Cecil impact on that if you look over the last three years R.E.P.S. Cagar is grown at 27% and so we have really strong conviction in our ability to x.

<unk> against our medium term guidance I think Johns right, we want to invest we want to seize 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.

I think we're we're feeling like we're entering into 2020 and a strong position and it gives us more confidence than we had when we entered into into last year.

And a lot of conviction around or medium term guidance.

So thanks, John <unk>, Yeah, you that so I want to.

Thank you heat for that that question and thank all do you for joining US today, we really appreciate your time and was so we're just speaking with all these thanks a lot.

This conclusive days Q. and a 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.