Q1 2020 Earnings Call
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Ladies and gentlemen, thank you for standing Bonnie and welcome to pay Pals first quarter 2020 earnings conference call. At this time all participants are in listen only mode. After the speaker presentation. There won't be a question and answer session to ask a question. During this session you want me to press Star.
One on your telephone please be advised of today's conference is being recorded if we require any further assistance. Please press star zero I wouldn't know only to hand, the conference over to your Speaker Ms. Gabrielle Rabinovitch head of Investor Relations. Please go ahead.
Thank you Shirley good afternoon, and thank you for joining us.
Welcome to pay Pal Holdings earnings conference call for the first quarter of 2020.
Joining me on the call or Dan Schulman, our president and CEO and John Rainy, our Chief Financial Officer and E V. P global customer operations due to the length of our prepared comments today, we plan to allow for additional time for questions. We're providing a slide presentation to accompany our commentary. This conference call is also being webcast.
And booked the presentation and call are available on 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. We will also discuss April 2020 results, which are preliminary in nature subject to change I may not be representative of second quarter two.
2020 result.
In addition management will make forward looking statements that are based on our current expectations forecasts and assumptions and involve risks and uncertainties. These statements include our guidance for the second quarter 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 in our most recent annual report on form 10-K, and quarterly reports on form 10-Q filed with the FTC and available on the Investor Relations section of our website.
You should not rely on any forward looking statements.
Information in this presentation. It doesn't today's date May 620, 20, we expressly disclaim any obligation to update the information with that let me turn the call over to Dan.
Thanks, Kevin Thanks, everyone for joining the call.
Let me start off by expressing my hope that all of you and your loved ones are safe and healthy in these unprecedented times.
I think we all would agree that covert 19 has fundamentally changed the way we think about the future.
One profound change will be a dramatic acceleration from physical digital.
It's clear that digital payments have evolved from a nice to have capability to any central service.
There's always been a distinct secular trend towards digital payments, but the current environment has rapidly accelerated that movement.
Our products and services have never been more needed.
And more relevant.
We've worked hard in recent years to establish tape outs one of the world's most trusted digital payments brands with substantial reach and scale for both consumers and merchants.
And those efforts are clearly paying off.
In the past month, there's been an unprecedented demand for products and services.
Our transactions are up 20% year over year.
With the branded transactions.
Over 43% more than doubled pre cobot levels in January and February.
On me first we had our largest single day of transactions in our history.
Larger than last year's transactions on Black Friday or cyber Monday.
Our net new active hit record highs in April surging over 140% from January and February levels.
Averaging approximately 250000 net new active accounts per day.
For the month of the April we added an all time record of 7.4 million net new customers.
I don't want to lose sight of the fact that we also had a record Q1, adding 10 million net new accounts.
But that will pale in comparison to the 15 to 20 million net new active accounts, we anticipate adding in Q2.
And last but certainly not least in April our revenues grew by 20% on an FX neutral basis.
Including record revenue growth of 35% in or pay Pal.
Checkout experiences.
Oh expand on these trends in a moment say clearly highlight the strength of our customer value proposition.
Like many other companies our first quarter was a study in contrast, we had a very strong January and February with FX neutral revenues growing by an average of 18% and TPV growing at 26%.
We began to see some covert 19 impacts in late February but the strength of our overall business outweighed cross border weakness coming out of China.
However, all that changed as we exited the first week of March.
Shelter in place and social distancing became the norm across the globe and as one economy. After another effectively shut down we saw a substantial revenue decline predominantly in our travel and ticketing verticals.
Some of our important customers, including mover Arab Dnbi and live nation saw a rapid decreases and transaction volumes.
That said the diversity of our business by merchant size and geography meaningfully offset margin pressures.
In fact, excluding increased credit reserves driven by the macroeconomic environment.
Our Q1, non-GAAP EPS would have been 83 cents growing by 26% in well exceeding our prior guidance of 76 to 78 cents.
In addition, excluding those incremental reserves are operating margin would've been 24.7% more than 200 basis points better than Q1 last year.
Finally, our free cash flow in the quarter was $1.3 billion.
Revenues in Q1 were up 13.5% on an FX neutral basis to $4.618 billion.
Well, we provided guidance in January we had expected revenue growth to be between 17% to 18%.
This gap in our growth relative to our previous expectations was predominantly due to the decreased revenues from our travel ticketing verticals.
As well as from lower revenue related to our credit business.
As I mentioned earlier, we began to see a very noticeable shift in our results towards the end of March and throughout April.
We saw a dramatic increases in our daily net new actives and overall engagement levels.
Our daily number of transactions accelerated throughout the month growing from the beginning of April in two months and by 25%.
With 7.4 million net new actives record engagement and transaction volumes and 20% revenue growth.
I would characterize April is perhaps our strongest month since our IPO.
This rapid growth across our metrics is led by distinct preferences in consumer behavior.
Our market research indicates an approximate 50% lift in consumer willingness to buy when paperless present at checkout.
On average merchants are except Paypower experience, a 60% increase in purchase conversion.
This is driving very strong revenue growth across almost all regions of the globe.
Notably it is our branded experiences that are gaining the most traction.
As a result, we expect our Q2.
Oh on margin to increase year over year.
Excluding the need for any potential additional macroeconomic related reserves.
Consequently, we would expect strong EPS and free cash flow growth in Q2.
And John will cover our guidance in his remarks.
I'm extraordinarily proud of the entire pickup team for delivering these strong results.
In the midst of considerable upheaval.
Have reacted to the crisis with unprecedented speed focus and passion.
For instance, as soon as the impacts from the virus began to be sell our team began discussions with government officials across the world to offer our support.
Our global scale platform capabilities and brand reputation are all attractive assets for governments to quickly and efficiently distribute payments.
In the U.S., we work closely with Treasury, yes be a congressional leaders in multiple other agencies on many aspects of the cares act, including distributing loans to small businesses and stimulus checks to consumers.
It was an important and proud moment when we became one of the very first non bank lenders approved to distribute the paycheck protection program funds to the small businesses we serve.
We have already funded tens of thousands of loans distributed well over a billion dollars with an average loan size 35000.
And pay Pal and venmo customers in the U.S. are eligible to receive their economic stimulus payment directly into their digital wallet.
Digital payments, whether online or in store will become an integral part of our daily lives, even when shelter in place restrictions lift.
Governments regulators and merchants of all sizes are now appealing to us to expand pay Pal and venmo into in store checkout flows in order to help enable a safe checkout experience.
Consequently, we intend to accelerate our rollout of our in store digital payments in all markets support our PDP payments.
The need for contactless payments is more important than ever before as consumers and merchants move away from handling cash we're touching keypads and it's here to strict social distancing requirements.
The steps we've taken over the last several years have positioned us to extend our market leadership in the digital payments industry with services that are arguably more important than ever before.
Our acquisitions of zoom I settle Hyperwallet go pay and honey have positioned us to lead in the era of digital commerce and payments.
Each of our acquired capabilities take on heightened importance in a time, where online and offline of blurred almost overnight for merchants of all sizes, and where consumers have embraced ecommerce and digital forms of payment as a way of life.
The opportunities for honey and paid out to help consumers find the items they need at prices. They can afford has never been more important for both merchants and consumers.
To put that in perspective in April Honeys, net new actives grew nearly 180% from pre covance levels.
And for the month of April revenues for Honey were up over 40% from January and February.
Covert 19 as presented all of us with a unique set of challenges.
That will very likely change our lives post pandemic.
But in many ways, it's only reinforce the way, we think about our business and our stakeholders.
I've always felt that putting our employees first is the best way to build a great brand and an enduring financially strong company.
We took significant steps to assure our employees financial health well before this crisis.
Our North Star is always to do the right thing for our employees, ensuring their safety security and financial health.
We made a commitment that no employee would be laid off as a direct result of covert 19.
We also focused our attention on our customers, who need our products and services more than ever as well as our empathy and support.
We took a series of important actions to help our merchants and consumers.
Everything from allowing small business customers to defer payments on their business loans, increasing protections with regards to refunds and Chargebacks waiving instant fund transfer fees and doubling cashback rewards for the paper business debit card.
These initiatives will impact our revenues and operating income in Q2.
And that impacts is contemplated in our Q2 guidance.
These actions are consistent with our company's values and I'm, absolutely convinced that the costs associated with supporting our employees and customers.
We will be vastly exceeded by the benefits generated from these actions.
This is a time when a financially strong company like Paypal needs to demonstrate that our purpose mission and values guide our actions.
We're also supporting our consumers around the globe buy directly funding and Geos and charities, who are supporting those impacted by the pandemic.
Our pay Pal and venmo platforms have exploded with friends family and countless celebrities helping each other through this time.
Venmo and pay Pal users are leveraging our platform to virtually tip service providers bartenders musicians artists and small businesses as well as descend contributions to schools places of worship and hospitals.
And we are helping Facebook.
Horizon, Google Air being be Luber live nation, Spotify and many other partners to raise money for those in need by enabling them to use our many platform capabilities.
This is an unprecedented time in our history.
The co bit 19 pandemic is impacted almost everyone around the globe.
It's demonstrated have connected our world is and it will change the way we love our daily lives.
Digital platforms combined with real World solutions have enabled us to navigate many of the unique challenges of the pandemic.
And I believe we will look back at this time as a tipping point.
Where digital payments, both offline and online we came in the central element of our lives.
Hastening the demise of cash enforcing a reimagination of commerce retailing and the payment system.
And we intend to be a driving force as those trends unfold.
We've always committed to being a model corporate citizen.
Inspired everyday by our employees and what they're doing to help our customers.
Many are working seven days a week in late into the night, because they know that Paypal has become a critical lifeline in the everyday lives of our customers.
We will come out of this crisis, much stronger and significantly more relevant than ever before.
This is our time to make a difference and we're determined to seize it do our part and make a lasting and positive impact and with that I'll hand, it over to John.
Thanks, Dan.
I want to start by thanking the entire Paypal team for how they have responded to these unprecedented events.
Their tireless efforts to go above and beyond in order to help our customers and help each other has been amazing.
Cobot 19 has certainly taken a path that has left a tremendous amount of personal and economic destruction and its wake.
It's moved from something that we hear about on nightly news to something that is that is more personal having a tangible effect on our lives.
Our thoughts are with those of you have who have been most impacted.
For all of the very real concern on a personal level as well as the economic damage from appropriate measures to combat the virus, our business is strong resilient and performing very well.
We have a very strong balance sheet durable streams of earnings and cash flow and were lever to parts of the economy that are benefiting from social distancing and shelter in place, namely ecommerce.
We entered this environment from a position of strength coming off very strong results in 2019.
We are successfully navigating this crisis and have confidence that we will emerge from this period, even more strongly positioned.
Dan spent time discussing our volume trends and earnings results in the quarter I.
I would like to provide additional details on our revenue and expense performance.
As well as how our results compare to our expectations going into the first quarter.
Our Q1 revenue guidance provided in January called for 17% to 18% growth on a currency neutral basis, and our Q1 non-GAAP earnings guidance was for 76 to 78 cents per share.
As Dan noted the first quarter was a study in contrast between March and the first two months of the quarter.
Consistent with our expectations, we saw very strong volume trends in both January and February with volumes growing 26% on a combined basis.
In March we faced headwinds as the environment rapidly shifted and volumes grew 7%, which resulted in 19% TPV growth overall for the quarter.
In Q1 on a foreign currency neutral basis total revenue grew 13.5%.
Transaction revenue grew 15% and other value added services revenue grew 2%.
Transaction revenue growth was primarily affected by weakness in the travel in events vertical and slower Asian cross border ecommerce growth.
Growth in other value added services revenue was much lower relative to our mid teens growth expectations. We earned less credit income as a result of the proactive measures we took to help our customers including relief from interest in late fee payments.
To a lesser extent. This revenue was also affected by lower interest rates on customer balances.
On a combined basis. These cobot related impacts resulted in approximately five points of pressure to revenue growth in the quarter.
On the expense side, we had another quarter of strong transaction expense and transaction loss performance.
Transaction expense was 91 basis points as a rate of TPV, a decline of five basis points, both sequentially and year over year in large part due to a shift in our volume mix related to covert.
Transaction loss was 13 basis points and improvement of five basis points year over year, and the fourth consecutive quarter in which we performed in this range.
On an absolute basis transaction loss dollars declined 14%.
This is some of the best performance, we've seen in our history for both of these expense line items and together they provided nearly 150 basis points of leverage.
At the same time, given the unprecedented pace and scale of the decline in the broader economy and the macro related adjustments that the new Cecil accounting standard mandates, we increased our reserves for expected credit losses.
This flows directly to credit loss expense and resulted in a $227 million macro related charge in the quarter, which after taxes equates to a 17 cents per share impact to earnings.
At the beginning of the quarter, our reserve coverage covered a 11% of our outstanding loan and interest receivables balance.
In response to change macro economic forecast, our reserve coverage increased 54% and now covers 17% of our portfolio.
Non volume related expenses increased by 6% entirely related to our recent acquisitions as compared to a year ago.
On an organic basis these expenses were flat.
As we demonstrated consistently for several years now we remain disciplined in our expense management.
Much of our expense base is volume related and serves as a natural hedge as volumes come down.
Further we have many levers on the non non volume expenses to sustain our track record of strong earnings growth.
Want to emphasize however that we are focused on building a great company for the long term and we'll continue to aggressively pursue growth opportunities, while acting prudently from an extent expense standpoint.
We will remain agile and responsive to how the economic environment is playing out and we'll continue to appropriately invest in our business in a manner that we believe maximizes shareholder value.
Operating margin for the quarter was 19.7% adjusting for increased macro related reserves, our operating margin would've been 24.7% improving more than 200 basis points year over year and more than 100 basis points sequentially.
Overall, we're pleased with the durability of our earnings stream and believe we are well positioned to continue delivering strong results even in the face of this exone is shock. We grew revenue 13 in half percent on volume growth of 19%, while generating a 20% operating margin in the quarter and.
$1.3 billion of free cash flow.
In addition, excluding the 17 cents earnings impact from the macro related charge to our credit business. We would have outperformed our expectations and delivered 83 cents EPS for Q1, which demonstrates the underlying strength of our business.
The strength allows us to take actions that will have a short term financial impact, but are absolutely. The right thing for our customers, where our long term competitive positioning and for the economy overall and in fact, we believe these actions will make us even stronger going forward.
We're in a very strong position from a balance sheet and liquidity perspective.
We ended the quarter with more than $10 billion of cash cash equivalents and short term investments.
In March we elected to draw down $3 billion on our credit facility or 50% of our available capacity to maximize our flexibility.
In addition in the first quarter, our free cash flow grew 60% year over year and for the full year. We continue to expect to generate approximately 20 cents of free cash flow for every dollar of revenue.
Our financial position will allow us to be opportunistic and successfully navigate this period as we assess ways that we might be able to capitalize on current market conditions.
During the quarter, we also repurchased $800 million of stock through a previously implemented Tenbfive one program.
Overall from a capital allocation standpoint, there is no change to our previously discussed strategy will continue to prioritize organic investing to achieve our growth objectives and have rapidly shifted some of our efforts in response to this new operating environment and the increased demand for our products and service.
Yes, after investing organically, we will balance share buyback with acquisitions and investments.
I now want to shift to how we're thinking about things going forward.
There are obviously many variables that are outside of our control that will impact our results for the rest of the year, most notably the path of the virus the duration of the measures put in place to combat it and the health of the global economy.
Our business is strong and we expect to continue to show, earning strength and durability.
At the same time, given the lack of visibility into the near term economic effects of Cobot night team and the wider range of potential outcomes. We believe it is prudent to pool, our previous guidance for the full year.
To be very clear, there's a difference between our ability to accurately predict the impact of Copel 19 on our business in the back half of the year and our overall confidence in our business. We will continue to update you on our business trends as we move through the through the remainder of the year.
For the second quarter, we're guiding revenue growth of approximately 15% on a currency neutral basis, and non-GAAP EPS growth of 15% to 20% I want to provide some context for this guidance.
Our revenue and earnings guidance for Q2 is our best estimate at this time and incorporates our June our April results.
And the potentially wider range of outcomes that we may experience in May and June.
Perhaps the biggest factor impacting our revenue performance for the second quarter.
As the extent to which behavioral changes associated associated with social distancing measures continue at the same pace.
Our branded payment experiences are clearly benefiting from the increase in E Commerce spend as a result of these measures.
We are assuming that these measures are slowly were relaxed over the next two months, but expect that we will exit the quarter at a more elevated level of E commerce spend than what we were experiencing going into the crisis.
We don't know the extent to which people will fully revert previous behaviors.
But we believe that this is not just about government mandates, it's about public health and taking reason reasonable precautions and adopting habits that reduce risk that on a relative basis involve minimal sacrifices.
In addition, we expect that there will be a slower recovery in verticals with longer lead time purchases like travel and events and don't expect any material improvement in the second quarter from the depressed levels that we're seeing now.
We will continue to electively help our customers by waving certain fees extending credit and offering additional forms of relief.
These actions will have an impact on our earnings in the second quarter and are contemplated in the guidance we are providing.
Our guidance also assumes no incremental macro adjustment to our reserves for credit losses beyond the increase in Q1.
This is dependent upon several macroeconomic factors, which will continue to monitor and we'll just have to see how this plays out in the quarter.
Given the impact to many businesses in the dramatic surgeon unemployment, we do not expect that there will be a returned to pre crisis levels of economic growth anytime soon.
Overall, we expect underline non-GAAP earnings growth to be a few points higher than revenue growth given the dynamics that were seen in our business the flow through on our current mix of volume and the trends in our non transaction related expenses.
At the same time, we're focused on investing in products and services to capitalize on the behavioral shifts we're seeing towards higher ecommerce penetration the avoidance of cash and a greater desire for contact list payment experiences.
The level and expect to which we accelerate investment in these areas will also impact earnings in the quarter.
I want to emphasize that trying to forecast at this time when information and trends are changing rapidly is exceedingly difficult and we're attempting to balance transparency with reliability.
We have a very strong and durable business model, one that stands to benefit from some of the secular trends that may emerge from this crisis.
I also want to acknowledge however that people are not going to live like this indefinitely people don't want to live like this and definitely shared experiences are critical to a healthy functioning society and people want to have dinner with friends travel with family and a 10 concerts in sporting events and events.
Our April trends demonstrate how we're benefiting from an acceleration in E. Commerce that has been brought on by much of the world being subject to shelter in place.
As the world begins to normalize the behavioral changes that we're seeing may also received a bit which was slower growth in some areas at the same time other areas of our business would strengthen as we benefit from having a diversified portfolio of products and services.
To be very clear, though we all look forward to movie beyond this moment in taking everything that we have learned to better serve our customers.
In closing in the face of one of the most significant financial shocks that we've seen in our lifetime, our business is more relevant than ever before.
At this situation continues for some time than we're positioned very well.
If however, we can return to normalcy, albeit with some notable changes in consumer behavior. Then we're also positioned very well.
We will continue to take a long term view in managing our business and we will take actions that we believe will further increase shareholder value and allow us to emerge from this as an even better company with better growth opportunities and more durable earnings.
I'll now turn it over to the operator for questions. Thank you.
Thank you as a reminder to ask a question you want me to press Star one on your telephone we ask that you. Please limit yourself to one question. You May then returned to the Q to withdraw your question press the pound.
Please standby, while we compile the Q and a roster.
Our first question will come from Heath Terry from Goldman Sachs. Please go ahead.
Great. Thank you Dan John appreciate all the all the additional disclosure.
When you look at the profile of the new users that you've seen added to the platform and April what kind of commonalities do you see why weren't these people have already pay Pal users, how do you see them engaging with the platform compared to your existing customers.
Are they more peer to peer or for E commerce more frequent and I realize this isn't a fair question, but how do you see them staying engaged on the platform beyond the current crisis.
Yeah, Hey, Keith it's Dan I'll take a stab at that and.
John May have some color commentary afterwards.
It's a great question.
We obviously.
We're seeing a surge.
In net new actives.
And.
You know that continues on just as an example yesterday, we put on 295000 net new assets.
And so this is continuing.
Two.
To be.
Quite sustainable over the past six weeks or so and we're really seeing the majority of these net new actives come out of what we will call our core markets, it's really western Europe.
The us.
Australia, obviously all areas of the world are growing but those are the ones that are growing the fastest where we have.
Strong brand attributes Theres a real flight.
To quality to trusted brands right now and we're seeing this not just on PDP, but across really checkout.
Services.
Really it's pretty broad based we're also seeing new segments of customers coming in we're seeing like older cohorts come in.
Calling it silver tech.
Since day, you know those are older haven't used Paypal before and now.
Our using it as there.
Kids and family members are arm explained to them how to use the service.
When we look at engagement and this is a really important question you asked about cohorts.
In here.
What we really look at and our best.
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Indicator of lifetime value.
As well as propensity to stay with us and not to churn is what we call. Our 10 day adoption rate and that is within the first 10 days of somebody signing on that they do three or more transactions with Paypal three or more.
And so when we find when they do that they're just a lifelong paypal customer and we've seen with these new cohorts and these new cohorts are pretty huge right now it could be by the end of the quarter like 6% of our total base for instance, just in the quarter.
And so these new cohorts are experiencing 830% lift in.
In adoption three uses.
Or more in the first.
10 days and so.
We feel really good about the cohorts that are coming on but very importantly.
I think I mentioned this in my script across our entire base right. Now we are seeing our daily active users daily grow by 20% and so this is leading to this explosion and transaction volume that I talked about where you're seeing transactions.
Not just that these all time levels right now, but if you look at the shape of that through the month of April from the beginning of April to the end of April our number of daily transactions on a seven day moving average has grown by 25%.
And so you really get a sense of the momentum.
Thats building and look I think John.
Said it's.
Early we've got six weeks of trends.
Going right now but.
So our view is we think we're hitting a tipping point across the world.
Where people are seeing just have simple and easy it is to use digital payments to pay for services. This isn't a matter of one to shelter in place.
Restrictions start to drop because this is about health. This about people not wanting to be in stores not wanting to.
To shop in fact, there is one survey after another that shows that people are more inclined now to do online than to go back and Stuart One last thing we track.
Transactions and TPV by country and by state and so we see where countries have like Germany, Austria, where they've released some of these restrictions over the past two to three weeks and we see no meaningful difference in the amount of usage for.
Our online behavior significantly elevated levels two to three times that a pretty cold. It. So I hope that's helpful and giving you color.
No. It. Thank you Dan really appreciate that.
Thank you. Our next question comes from 10 plane with JP Morgan.
Hi, Thanks, a lot the really interesting data here. Thanks for sharing at all I would just wanted to outcome the guidance for the second quarter. It looks like as you said April running.
20% on revenues to your second quarter guide implies quite a bit of deceleration in may and June so how much of that is.
Conservatism I suppose it's way that I assume the television unable includes boarding new clients as well as perhaps the temporary surge from existing clients you suggested John might revert NOL. So just trying to be clear on what the assumption was conservatism versus what you actually see thanks.
You bet to engine so to speak with you.
Yeah.
I can't underscore enough how difficult it's been to forecast during this time period.
As we got into March and we saw the trends that they were almost crosscurrents, where parts of our business around travel and events, we're going one way, while we saw the beginning stages of a sharp acceleration and the growth there or the increase in E commerce going in a positive direction.
And some of that went into April and we obviously April was a really good month and let me underscore this point like the 20% revenue growth that's against the backdrop or we have a vertical like travel on events, which is.
A high single digit.
Percentage of our overall portfolio that is down 80% to 90% year over year. So that tells you how strong the rest of the business, yes, but what we don't know is how long these measures stay in place like and what is the consumer behavior.
The stickiness to that.
I think we've seen Dan talked about some of the customer surveys we've seen that as many as a third of customers now say that they'll continue to buy groceries online as an example, and I think once you go through that experience and you realize that you don't get the wilted lettuce that it's actually quite good that you continue that and so there.
As some expectation around that but as I noted in my remarks people want to socialize they want to go out and do things and so.
I think theres a balance between that demand with the the concern that people have around health and safety and so when we look at the rest of the quarter. We expect that there could be some decline it might be more on the conservative side. Obviously, if these trends continued, albeit 20% for that for the quarter, but but that.
It's not what we're assuming I think as it relates to that to tension wondering things we didn't comment on was our medium term guidance.
And we're not changing that at this point there is again a lot of uncertainty we don't know what the macroeconomic backdrop is going to look like.
Six months from now much less two years from now and so there's.
I guess.
Cause for concern there at the same point in time, a lot of it means that we're seeing in our business are positives that are that are perhaps secular shifts that as Dan noted could fast forward, where we are by a matter of years and so I think theres, some some pluses and minuses to that end and we've got no.
Changes at this point in time.
Got it.
Thanks, a lot of since I was you could come back it's going to have some school or not so.
Okay.
You mean, both in China.
They're not [laughter].
No I don't remind me thanks.
Yes.
Thank you. Our next question comes from high Sito Wyatt with Bernstein.
Hi, Good afternoon. Thank you for taking my question John can you expand upon you call men allowed you had exposure to different by because we ought to give a little bit of indications.
Yes.
With regard to thinking about.
Good evening discretionary versus Nondiscretionary ecommerce.
And then just follow up.
Lastly, the current situation they fluid, but as you look to Jonathan.
Doug what it doesn't look like 15.
The puts and takes at our E commerce validating the bad relative exposure to discretionary credit okay. Thank you.
Sure Hershey them, so theres a lot to that I will try to be as same as possible here. So let me first address the verticals and then talk about the discretionary nature of this.
Yes.
March was interesting in terms of how that unfolded and it mirrored society right. So the first thing people did was stopped traveling internationally than domestically in they stopped going into large social events and that had a negative impact on our business and then it when the show foot the compulsory shelter in place measures were put in place.
Yes, that's when we started to see more of the the trends that are around elevated levels of E Commerce and as we look at how that continue to the back half of March and into April.
It's quite issue when you look at it on a vertical analysis. So groceries for example, which is a relatively small part of overall portfolio, but that has consistently been up 100% plus.
Year over year.
There are things like electronics, and fashion home and garden, all verticals that somewhere between 50% to 80% up year over year the areas where.
We've seen pressure obviously traveling events.
Services is another one is.
As one would I think easily understand given the impacts of cobot and as we as we move forward and we think about how that unfolds. We'll obviously as these measures are relax like it's going to take some time to book a trip to go on vacation. So there's going to be a slower recovery with some of those verticals.
We've seen.
Greater drop offs in volume, but we also.
As consistent in the previous answer Heath, we're clearly seeing some stickiness to some of these behaviors one of the things that we've looked at very closely as like Germany, and Austria that were.
Earlier than some of the other areas or regions of the world and relaxing their their shelter in place or short social distancing measures and we're seeing the same trends continue and Dan mentioned this literally at two to three times the growth rate that we were seeing pre crisis now again, it's early on and.
Yeah.
I think quite quite probably too early to declare these as trends that are definitely sustainable but they are they're truly some cross currents in our business that we think that.
Our pretty positive with respect to.
Maybe I'll kind of take the last two parts. Your question together like the discretionary versus Nondiscretionary nature of of Paypal, and how that may impact or be impacted and.
A recession look I.
The pay Pal a 15 years ago, when someone was using us to buy baseball cards on ebay is very different today, we were not necessarily just discretionary services people use us use our platform to pay rent they use us to do bill pay they use us for subscriptions for regular monthly services and so.
No I, obviously were tied to.
Personal consumption and would expect some impact on our business in a recession, but.
These are these are not just discretionary items. These are these are must haves for many people yeah, just add to that give one example.
Just one of our services zoom, which is our international remittance service.
You know people aren't going into physical locations anymore to give money into somebody in the receiving end going to a physical gold location to get money.
So we have seen.
400% increase in people using zoom.
Net new actives coming on to zoom.
Since the January February timeframe, and here's the thing about using soon first of all it is a critical service people send money home every single month, sometimes twice a month once you use assume versus a traditional method you are never going back. It is half is expensive.
It is faster it is easier to go and do and so you know and the same thing with Hynek Honey is experiencing the same sort of dramatic increases up 180% in net new actives revenues.
Growing substantially that wasn't a year over year, when I said, 40% I was 40% more than in January and February in terms of their revenues and I think the products and services and capabilities that we've put together are crucial now for both merchants and to for consumers.
We are seeing merchants of all sizes come to us now.
With strategic conversations we've never seen before these are now merchants that are re assess reassessing, how they're going to do comps thinking now about digital and online first physical locations second you've never really seeing that.
In in any kind of scale at the at the retail level, it's a fundamental rethink and were with the scale and scope.
Scaleup consumers and merchants and scope of services I think were more relevant and and more important.
Other than we've ever been before.
Very helpful. Thank you robots.
Thank you. Our next question will come from Bryan Keane with Deutsche Bank. Please go ahead.
Hi, guys just wanted to get a clarification April TPV is up.
22% revenues, 20%, so it's pretty tightly correlated so I just want to make sure I understand that the stronger yields are probably due to people branding and lower Braintree in PDP volumes and then secondly, John any help you can give us on credit provisions on how to think about that going forward what might cause further write downs.
So much.
Sure, Brian and you're correct I think it is partly the mix in our business. It's also that we've seen a rebound in cross border, which tends to have higher take rates as well on cecil or the new accounting standards for credit losses.
Let me just explain a little bit there for the benefit of everyone what's changed versus the previous accounting method. So.
The prior incurred loss model.
We would recognize losses as we begin to see those in our book.
The new standard now requires companies to recognize those losses on the entirety of those losses that are expected losses, when things such as macroeconomic events.
Change that they think we'll give rise to those losses and so the charge that we took in the first quarter.
<unk> was our best guess at that point in time.
That the of the entirety of those losses and so.
It's not as if we were saving any to recognize at a later period now things could obviously change and and we would take that information into account and need to recognize something.
Higher or lower as the case may be.
Related to that if we had that information, but there is I think.
Also a little bit of subjectivity that goes into that as well.
I will say that if you look at our coverage ratio. So the percentage of reserves that we have related to the the gross amount on our balance sheet, we're at 17%.
Which for those of you who follow some of the other issuers that puts us at the.
Higher or more conservative range that.
That exist out there, but I think just to put this in context, though we have consistently said that we don't want to be too levered to credit to where we go through a business cycle like what we're seeing now in its disrupt the durability of our earnings and so in the quarter, we took a 237.
$1 million charge related to this put that in the context, we had $1.3 billion in free cash flow and we're still reporting a 20% operating margin even with that charge and so we we think that this is something that.
Is being managed appropriately well in terms of the risk mitigation here and and we'll obviously keep an eye on that as we go through the the balance of the year, but the first quarter charge included our best estimate that point in time.
Okay helpful Everybody's stay safe and healthy. Thanks, you two brand new to Brian. Thank you.
Thank you. Our next question will come from Ashwin Shirvaikar with Citi. Please go ahead.
Thank you Hi, Dan Hi, John.
Good deal like this appreciate the good look unit doing as an organization.
My question.
Sure my questions on on pay Pal I thought you on Ben.
Can you quantify the parse the venmo performance it looks as though there is comping nation, nothing new use cases.
And also looks like the use of Glenmont color, maybe that portion of this might get Vincent shop, the while maybe the conditional use case will post purchase shedding has reined in the current does have been paid so any parsing that you can provide.
Yes.
Maybe I'll take a stab at that and then John can.
First of all.
You know venmo is participating in those record net New act is that we're seeing.
And.
Had a.
An incredible month in the month of April and when I talked about highest.
Transactions ever on May Onest for the company is also the highest transactions ever for venmo as well just to give you an idea.
Of them Venmo TPV in Q1.
It grew at 48% by the way January and February as well over 50% what happened in March it's interesting to your point about new use cases venmo is a very much of a social payment.
Surface you go out.
To dinner or to bar with friends and you split the bill and do that kind of thing while all of that dropped wet obviously as everybody.
Went to shelter in place.
But basically venmo incredibly rapidly morphed into additional use cases, because it P to P. Now is very much it.
Core of what people are doing Brian you asked before how much.
This change is coming from PDP or Braintree, it's really predominantly braintree.
Arms of the mix P to P is actually.
Growing in many different new use cases.
We're now seeing entire families using venmo because the kids are on it they've got a sense why did that parents are back and forth and so it's becoming a cross generational platform and it is being used to pay for goods and services right now we're seeing a real significant increase in.
In pay with them, though this can be one of these things that accelerates pay with venmo quite substantially we're seeing its QR code for instance, being used.
To pick up goods at curbside add farmers markets, it's being used now by artists by musicians by Yoga and structures. Many others you know to pay for online classes that are going on we're seeing a real explosion from people donating.
Directly to charities to doing things now over then metal and so.
And finally as a result of that as you probably saw we raised the limits on venmo up to 5000, a week now we were able to do that because as John pointed out in his remarks are fraud and risk modeling is that all time.
Best capabilities, they entire venmo platform from a fraud and risk perspective is now in the pay Pal up platform and so we were able to take up limits because we had two because people were bumping up against those limits because of those new new use cases, we put on things like direct deposit so people can put their paychecks dirt.
Secondly on two venmo.
These are using it now in all these different ways and so that they could receive their stimulus check right into their venmo.
While it as well so it's been really interesting to watch the evolution.
Venmo become much more central.
But to People's management and movement of money instead of just being a social payment.
Got it. Thank you, yes, I use the has 10, let me tell so.
Yes.
No.
Thank you. Our next question will come from Jason Kupferberg with Bank of America. Please go ahead.
Hey, how are you guys, if you're doing well.
I just wanted to start with agents.
To start out with some of the longer term question, Dan you touched on this a little bit, but just as we think about the structural left in a post coded world to your business and how do we actually cross reference that with that medium term guidance, which John I know you spoke to briefly mid Twentys team.
PV, Greg I think is where we kind of left off on that.
And even in an environment.
Again categories are down tremendously you ran at the low twentys in the month of April. So it sounds like you think structurally mid Twentys is is may be too low we just any any thoughts on mount without putting specific numbers on it would love some perspective.
And then can you just make a quick comment on net adds for the year because I think you were forecasting 35 million and it looks like you'll be upwards of 30 at the halfway point.
Yep.
Okay. Thanks, a lot of questions. So let me.
Take a stab at some of them and then of course, John will come in as well.
I think John put it well.
In.
His opening remarks as well as his answers to some of the questions.
There are clearly.
Secular shifts that have accelerated there's no question about it it out E Commerce has accelerated by two three years.
And people may not be if these incredibly elevated levels, but they are going to be at elevated levels coming out of that youre going to see.
People doing digital payments.
Truly omni, it's going to happen online and offline the digital while there's going to become much more important we'll be adding more and more services to that.
As rapidly as we can because people are now want to use.
Pin down much more frequently we're seeing a lot more daily usage of it you know thats always been our aspiration to be a daily use case and so I.
I would say we are.
Structurally much more bullish on our growth profile going forward and I think there are more.
Tailwinds than than we've seen before to John's point, though you know we live in an uncertain environment right now Theres a lot of economic unknowns and so we.
No you expect us to be thoughtful about.
Guides that we're giving and how we're thinking about it and clearly we prefer to be on the more conservative side than not.
And and so, let's let's wait a little bit and see how.
These trends play out but.
But.
You could see some really nice.
Trends and by the way, we're not just going up we're going to double down on those trends to like we're going to help drive those trends and we are investing as John said.
To make those things happen in terms of.
Net new actives, yes, I mean, we're all going to rally new debt to rethink all of that I talked about we're going to do 15 to 20 million.
This quarter I think thats, good reasonable estimate on that and we did 10 million organic.
In the first quarter and so you know.
Likely going to be higher than than what we had initially been thinking but again, let us get through this quarter.
And we'll we'll update.
You on that John anything Us maybe I just.
Emphasize the point that you may Dan.
Certainly I don't think any of us can predict what's going to happen in the economy in the near term and that happened that has obviously an impact on our annual numbers, but you asked the question. Jason are we structurally more bullish on pay Pal with the emphasis on structure.
Finally, I would say we are unequivocally more structurally bullis bullish on paper the timeframe that that happens John to say that is something I just point out that.
[laughter].
He starts to be conservative ones, yes, that's supposed to buy me that [laughter].
But you know I think the other point Dan mentioned is we're not just going to sit back and what this happened to US. This is our moment, we recognize that we have an opportunity to shape. The outcome here and so we're pivoting strategies to help influence what that looks like but.
And I also don't want to.
Yes, I think we should be cognizant of what's happening in the world and.
The severe stress that people are under in our in our going through when people, losing their jobs and so.
We should not lose sight of that but there are some fundamental shifts and how people are behaving that we think a newer to our benefit longer term.
I appreciate all the thoughts to helping us.
Thank you you changes.
Thank you. Our next question will come from George Mihalos with Cowen. Please go ahead.
Thanks for taking my question guys and hope your hope you are all doing well just want to go back to this point around more sort of non discretionary spend and I'm just curious.
We'll see Kobe gap presented itself are you have more conversations are you seeing more merchants in sort of this non discretionary category grocery pharmacy, bill pay reaching out to pay Pal wanting now to Q.
To partner with you guys and then.
Somewhat related to that.
The ramp with payment this how is that going into it we expect begin to see.
Additional bill pay partners going forward.
Yep that's all.
Begin the answer at least.
Clearly, we are seeing merchants across the world reach out to us.
To help then think about.
Moving more aggressively digitally and also importantly omni.
We're seeing I think I.
I think is the largest supermarket in France reach out.
To us.
Around groceries.
To really do much more contactless payment.
And and seamless kind of offline online this merger of those but we're seeing merchants everywhere going do that in terms of.
Bill pay.
We have Larry.
Aggressive plan.
And partnership with pay mentors that's going.
Right well, but there are a host of other bill pay providers, who want to partner with us and will partner with us.
As we integrate all those into bill pay components in our wallet I do think our wallet is going to.
Expand in terms of the services it provides honey will be integrated.
Into that we're seeing.
Really nice progress.
On this I just would say this whole work from home.
We're seeing actually an increase in the velocity of releases software releases that we've been able to do I'm really impressed with.
What George and Ryan and the team at Honey have been able to go and due to react so quickly.
Two.
The need of the time right now and as John said, we want to shape. This we certainly have new shortage of people, who are looking at Paypal and a whole different way right now.
And want to much more deeply.
Partner with US I mentioned some of those in my remarks so.
I think we're at this interesting point in time, where our relevance.
And our importance.
As a company is is that this inflection point and we really want to.
Do everything we can.
To double down on that John anything you'd have nothing more to.
Thank you George.
Well.
Thank you. Our next question comes from David Togut with Evercore ISI. Please go ahead.
Thank you got good to hear your voices.
Dan and John.
As you look at the acceleration and the net new actors for Honey in April to what extent is that acceleration and honey KBR is driven by the benefit from being in the pay Pal ecosystem versus this broader search for value with honey, perhaps driving a pickup in that new.
Actives for Paypal ecosystem as a whole.
Yep.
So.
I can't give you a exact I'd like if I had two.
Give you sort of the general just of that I would say.
The majority is due to the utility of honey in this environment.
It looks honeys mission has always been about making money fair. It is finding the best price point.
Understanding demand curves of I consumer helping merchants to reach those consumers the end.
When George and Ryan and I talked about this early on they are missions aligned but they always said that they thought they were counter cyclical.
At down economy, there services would be even more important.
John said this I fully agree with and even before this crisis there was a crisis of underserved.
Communities.
In our country and around the world Honey targeted right after that and Thats just become more acute our cross selling has been incredibly.
Effective in working with any in fact, when we cross sell into honey, we see a much higher LTV customer as well.
Yes, both for Paypal and Honey and we are at the beginnings of that integration.
But all the integration we have right now is fully on track on is coming out with a number of new.
Features.
Services.
Quite.
Excited about the.
Early test results on them our.
A pretty impressive so more to come on it.
But.
We are more excited than ever about what we can do with honey and the capabilities that they provide to consumers and merchants.
Thanks for that just as a quick follow up what's your expectation for the growth trajectory of honey going forward.
It's.
We're not going to parse out elements of our.
Our platform and give the full year guidance on that but I would tell you that.
Year to date it is performing according to the plan that we had.
Yes.
Understood. Thanks, so much Dan and John.
You bet.
Thank you. Our next question comes from Lisa Ellis with Moffettnathanson. Please go ahead.
Hi, good afternoon by 10% going forward.
You have mentioned that year pivoting your strategy to shape, the evolution of consumer and merchant behavior.
At this situation to that pay Pal emerges from the number can you can you elaborate on that a bit like specifically have you adjusted your investment priority given the dramatic shift we're seeing in consumer behavior like what what initiatives are you pulling forward what things have you may be pushed out or de prioritized.
Yep.
Sure good to hear your voice to Lisa.
So there are obviously I think.
Our number of different.
Trends that are happening as a result of coded physical to digital and that blurring of that and thats across retail services Entertainment education.
Medicine.
That's a trend that is occurring hyper speed theres. Obviously this whole thing that John talked about this isn't just about relaxing shelf in place. This is about health hygiene, social distancing people don't want to touch cash something like 60% of all people want to handle cash a lot less or.
Teen trillion dollars of cash transactions.
Last year at retail and so they don't want to touch casualty don't want to touch screens and I don't think we go back to the normal of what was there's going be a new normal that emerges from that and then obviously because of the economic environment and we.
We were in before the crisis that's been just.
Exaggerated by the crisis, even more is theres a lot of price sensitivity and worries about financial health and so we think that there are capabilities that we can put into by the way. We said these things. These trends, we've always said aspirationally we.
We want to have a billion people on our platform using it everyday and we think that these trends.
Our incredibly.
Our things that we really need to take.
A double down on and make sure that we shape them, because we think that they're very helpful to those aspirations that we have and so the things that we're doubling down on an accelerating one is clearly in store.
We have a very large team.
Focused around that.
We meet on that.
Every single week, we're looking at that and we have just a across the company team recalling it one of our moonshots, because it's that important to us and and we want to we've always.
We're going to go into in store, we're now accelerating that.
And much more globally, we want to go into everyday use cases in the digital wallet, we'll try to accelerate.
I don't want to talk specifically to give away in a competitive information, but obviously, we want to integrate things like bill pay other types of budgeting tools and that kind of thing.
Into into our wallet.
We want to integrate honey as rapidly as possible because this entire thought about being much more part of the shopping journey.
It is important for our consumers and increasingly so for our merchants and so.
These are just a couple of the things that we're also focusing in on PDP services in general Pdps, becoming much more central to People's lives and so we're really looking at a number of ways to increase the utility.
Of PDP and so I would say those are.
Couple of the big things that we're looking at we basically now our rallying around.
Five things as a company that we want to get done and get done in a big way to take advantage of this moment in time, we're consumerism merchants, most need our services and products.
Wonderful Thank you, yes, well.
Ladies and gentlemen, thank you for participating in today's question and answer session that is all the time, we had for today's question and answer session I would now like to turn the call back over to Dan for any closing remarks.
Thanks, So much I'd, just close up by one thanking everybody for your time and.
And again reiterating that we hope that you and your families are safe and healthy we really look forward to being able to see all of you in first and again, we may have masks on but we look forward to seeing all of you and.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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