Q2 2020 PayPal Holdings Inc Earnings Call
At this time I'd like to welcome everyone to pay Pals Q2, 2020 earnings call.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks there'll be a question answer session. If you'd like to ask a question during that time simply press star followed by the number one on your telephone keypad.
I would like to withdraw your question simply press the pound Keith.
Gabrielle Rabinovitch. Please go ahead.
Thank you Gabriel.
Good afternoon, and thank you for joining us.
Welcome to pay Pal Holdings earnings conference call for the second quarter of 2020.
Joining me today on the call or Ghansham in our president and CEO and John rainy, our Chief Financial Officer and E V P global customer operations.
Please note that we were taking this call from separate location. We appreciate your patience as we adjusted eat and use it just gets.
We're providing a slide presentation to accompany our commentary.
This conference call is also being webcast.
But the presentation on 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.
Management will make forward looking statements that are based on our current expectation forecasts and assumptions and involve risks and uncertainties.
These statements include our guidance for the third quarter and full year as well as the impact of our acquisition.
Our actual results may differ materially from these statements you.
You would 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 place undue reliance on any forward looking statement.
All information in this presentation. It hasn't today's date July 29, Twentytwenty, we expressly disclaims any obligation to update this information.
With that let me turn the call over to Dan.
[music] Thanksgiving meal, and thanks, everyone for joining us on todays call.
And I hope that all of you are safe and well.
I'm pleased to say that tape out just had its strongest quarter since becoming an independent public company five years ago.
Simply put our business has never been more relevant an important then it is today.
In the mid upper Cobot pandemic, we have seen substantial macro changes that we believe well have a lasting and profoundly positive impact on our business.
The world has accelerated from physical to digital across multiple industries, including retail.
Merchants are embracing a digital first strategy and these trends fuel the rapid rise of digital payments.
These are durable and meaningful tailwinds.
And we are fortunate to have the scale.
Scope of services and brand reputation.
To capture the benefits of these trends.
And extend them to our customers.
Consumer behavior has shifted in a dish continuous manner.
And pay about clearly has a unique opportunity to accelerate its path to becoming an everyday.
Essential service.
The strength that we saw across our business in April.
She knew to gain momentum throughout Q2.
Our transactions grew by 26% to 3.7 billion.
Consistently rivaling the volumes that we usually experience during the five days between Thanksgiving and cyber Monday.
Transactions on our pay Pal checkout experiences remain especially strong.
Growing almost 40% year over year.
GPV grew at 30% on an FX neutral basis with a record $222 billion a processed volume in Q2.
GPV accelerated throughout the quarter and June marked our highest growth rate since our separation from me back.
We added a record 21.3 million new customers in the quarter, increasing nearly 140% year over year.
To put this in perspective this quarters net new Actavis work greater than our total net new active in 2016.
Nearly 1.7 million merchant.
Signed up for tape out in Q2.
Honey net new active.
Were nearly three times that of Q1.
Importantly, we continue to see increased levels of engagement.
Our 10 day adoption rate for our newest cohorts grew by 20% to 30% over last year.
And across our pay Pal base, our daily active users have accelerated by almost 40% from last year.
We ended Q2 with 346 million active account.
And with over 26 million merchant account.
Given our momentum I believed that we will add approximately 70 million net new active this year.
These trends that drove record financial performance in the quarter revenues grew by 25% on an FX neutral basis to $5.26 billion.
Accelerating after a strong 20% revenue growth in April.
This is the first time, our quarterly revenues have exceeded $5 billion.
[laughter] due to the strength of our pay Pal branded transactions, our non-GAAP operating margin increased by a record 500 basis points to 28% this quarter.
As a result, our non-GAAP EPS grew by 49% year over year to one dollar and seven cents.
And all of this led to record free cash flow of $2.2 billion in the quarter, Oh hundred and 12%.
In the first half of 2020, the penetration of ecommerce as a percentage of retail sale.
Out paced prior external forecast by an astonishing three to five years.
In this environment the demand for our products and services has dramatically increased and unleashed multiple opportunities.
We are focused on several key initiatives to fully leverage this unique moment in time.
First and foremost is our push to accelerate in store contactless payments.
Both consumers and merchants are rapidly moving towards digital payments across their online and offline experiences.
This is an existential issue for merchants, who realize that reopening the retail stores depends on touchless forms of payments to keep both their employees and customers safe and healthy.
There are numerous market research studies, highlighting that consumers are no longer want to handle cash.
Other forms of payments that require any physical touch at checkout.
We are significantly investing to accelerate our presence in all forms of omni channel commerce.
From point of sale in store.
To buy online pickup in store.
Order ahead.
Hey at cable and home delivery.
In addition died settle contactless cards and integration with both Google pay and Samsung pay.
We announced that our QR code functionality is now available across 28 countries for small and micro merchants.
And we are working with leading retailers through out the U.S. and Europe to aggressively rollout in integrated point of sale QR solution, beginning this quarter with expansion plan throughout the year.
For instance, we're working with Cvs pharmacy to enable pay Pal and venmo QR codes for payment at their cash Register.
And we expect a full national rollout to their 8200 Standalone store locations by the end of the year.
Our merchants and our consumers want us to expand in store.
And we will not let this opportunity passes by.
The rollout of QR functionality will also accelerate our venmo monetization efforts.
Then, though also had a very strong Q2 with record and then as an active base that now exceeds 60 million consumers.
In Q2, then no grew its GPV by 52% to almost $37 billion.
Revenues continue to outperform our expectation.
With a year over year growth rates of greater than 60% during the first three weeks of July.
We are seeing substantial increases in the use of venmo. That's the pandemic continues on its more consumers turn to venmo to live their financial lines, including adoption of direct deposit functionality.
And later this year the venmo credit card.
We recently introduced business profiles are.
A unique new way for consumers and merchants to connect on venmo.
And exchange goods and services with the same protections enjoyed by tape out customers.
These initiatives will drive significant additional value to venmo users and consequently drive new vectors of monetization.
We're also expanding functionality beyond omni checkout in both our pay Pal and Venmo digital wallet.
We will roll out additional services over the next several quarters, including Bill pay.
Subscriptions and rewards management.
Wrapping tools from honey.
And new forms of credit and budgeting tool.
To name just a few.
Our goal is to meaningfully expand the range of services provided inside our wallet.
We believe these and other actions will bring us closer to having a full set of capabilities for consumers to use on a daily basis.
Our rapidly increasing scale.
Makes us highly relevant to merchants of all sizes and provides us with large sets of data.
Offer customized services and solutions.
Over the last few years, we've developed or acquired grown a strong and diverse portfolio capabilities that address many of the current needs of our merchants.
These range from end to end digital payment processing.
This takedas risk management.
And shopping tools that ultimately help to drive increased sales and engagement so that our merchants can thrive and the era of digital commerce.
And it's the combination of these assets together.
Provides unique competitive differentiation for enterprise merchants channel partners and small business customers.
Providing merchants with a comprehensive consistent simple and unified experience remains a guiding principle for us as we continue to add new products and services.
And as is evident by the number of merchant signing up for pay about.
Our integrated platform has never been more relevant or needed.
We continue to extend our platform capabilities around the world.
We recently entered into an important commercial relationship with go check a leader in mobile commerce in Southeast Asia with 170 million users.
In Brazil, and Mexico tape out is available as a payment option in the Mercadopago online checkout for shoppers.
And pay Pal is now available for cross border transactions I'm Ricardo the bright.
We continue to build our team and capabilities in China as we integrate with our go pay platform.
Partner with China, Unionpay and other leading Chinese players.
Covert 19 was not the only set of issues we address this quarter.
As the all of you know we are witnessing in outpouring of emotion and determination to address centuries of systemic racism.
In June we announced a comprehensive 530 million dollar commitment to support black and minority businesses and to fight economic inequality.
We felt it was necessary to not just can dan racism, but to commit to doing the necessary work over the long term.
Help create a more socially just society.
Even as we navigate these unprecedented times as a business.
We have the ability to act in a way that clearly represents our values, especially around inclusion.
We still have lots of work to do but we are fully committed to a future where all people can live with dignity and respect.
This is also a special quarter for pay Pal because it marks our fifth anniversary as an independent publicly traded company.
During that time, we've dramatically expanded our platform capabilities value proposition geographic footprint and our market leadership.
However, I believe the next five years, we'll bring about even greater opportunities.
We have an ambitious vision for paper out to be a central player in the future of the digital economy.
Im confident we can drive towards that goal.
We have a solid track record an unwavering dedication to delivering essential differentiated and best in class services.
Merchants and consumers.
This is our time and we intend to seize the moment.
Our products and services have never been more important and we are ready and well position to capture the opportunities that lie ahead of us.
And with that I'll now turn the call over to John John.
Thanks, Dan.
Start by thanking the entire PPL team for their efforts to serve our customers and execute on our priorities. During these unprecedented times.
Since our last earnings call the encouraging business trends that we've called out have persisted and we're reporting the strongest quarterly results in our history.
As Dan Scott in the current operating environment, our business has inherent advantages.
By many estimates the pace of ecommerce penetration has accelerated by several years in a single quarter and there is greater demand for card payments than ever before.
These shows play directly to our SPRIX and will enable us to advance our competitive position.
At the same time, there's ongoing uncertainty as it relates to both the progression of the Corona Iris as well at the state of the macroeconomic environment.
We are carefully monitoring the pace of recovery.
And these interconnected dynamics.
Yes overall level of a macro related uncertainty has resulted in increased complexity and building our forecast.
It is with this backdrop then we're updating you today on our business and our outlook for the remainder of the here.
Our second quarter performance.
Benefits and paid our diversification and scale in our resulting earnings.
We deliver 25% revenue growth on a currency neutral basis.
49% growth non-GAAP earnings per share and generated $2.2 billion in free cash flow.
We did all of this sorbion ongoing pressure from reduced travel when he bennett spending and lower revenue from our credit products.
I'll now provide the details of our financial performance for the quarter and then our expectations for the rest of the year.
Revenue in the second quarter increased 25% on a currency neutral basis to $5.26 billion.
Transaction revenue grew 30% on a currency neutral basis, the strongest growth we've ever reported.
Growth accelerated 13 points year over year, and 13 points sequentially.
Transaction revenue growth was primarily driven by strength across our eight checkout experiences, which more than offset the approximately 60% decline we saw within our travel and events volumes.
For context traveling to advance represented slightly more than 10% of our TPV and the second quarter last year.
In addition, cross border volumes increased 24% in the quarter, which also supported transaction revenue growth.
Other value added services revenue declined 26%.
Lower revenue in the quarter resulted from a number of effects. These included.
Customer lean Maximus fewer merchant loan originations.
The lapping a $50 million an interim servicing revenue from seem pretty recognized in Q2 last year.
An approximate 17 million dollar impact from increased expected credit loss provisions related to macroeconomic adjustments.
Lower interest income due to lower interest rates globally also contributed to this decline.
Revenue from Honey also part of this line item only partially offset these headwinds in the court.
In the second quarter transaction take rate was 2.23%.
In total take rate was 2.37%.
Compared to the second quarter last year. These declined two basis points and 13 basis points respectively.
Transaction take rate increased sequentially, excluding the effect of person to person volumes increased year over year, as well, reflecting strong volume growth from pay Pal checkout experiences.
Moving to our volume based expenses.
As a rate of TPV.
We are reporting record low transaction expense and transaction loss performance.
Transaction expense was 83 basis points as a rate of TPV a decline of 11 basis points versus Q2 last year, primarily due to the filing based on our platform in the quarter.
Transaction loss was 12 basis points and improvement of two basis points year over year, and the fifth consecutive quarter in which we report perform in this range.
Risk mitigation strategies in risk modeling enhancements continued to drive improved loss experience across our platform.
Together transaction expense and transaction law provided 335 basis points of leverage.
At the same time, given current economic forecast, we increased our macro related reserves for expected credit losses by $117 million.
This flows directly to our income statement, increasing credit losses by $100 million and reducing other value added services revenue by $17 million.
After taxes this adjustment to our provision representing a seven cents per share impact tumor.
Entering the quarter, our reserve coverage was 17%.
With this additional increase in our reserve, we exited the quarter at 22% carriage.
Overall, the combination of our strong revenue and volume based extends performance resulted in transaction margin dollars, increasing 26% to approximately $3 billion.
Our transaction margin expanded 179 basis points to 56.6%.
335 basis points of margin expansion from transaction expense and transaction loss was partially offset by a 156 basis points of de leverage from loan losses.
Non transaction related expenses increased by 10%.
Resulting in 326 basis points of leverage.
Customer support and operations as a line item contributed more than 40% of this leverage.
Excluding the impact of our recent acquisitions non transaction related expenses increased 3%.
We're only four sets for every incremental dollar at rabbit once again, demonstrating the scalability of our business and our operating discipline.
Operating margin for the quarter was 28.2%.
Improving more than 500 basis points year over year, the highest level operating margin expansion, we reported in our history.
Strength across all parts of our business contributed to this performance.
Non-GAAP other income in the quarter declined by $60 million relative to last year.
Predominantly driven by increased interest expense from a higher debt balance and reduce interest income from lower interest rates.
For the second quarter, non-GAAP, EPS increased 49% to one dollar and seven cents.
Our earnings performance demonstrates our ability to successfully execute in the face of a more challenging operating environment as well, it's the strength and resilience of our platform.
Excluding the macro related charge for expected credit losses, non-GAAP EPS would have increased 59%.
We ended the quarter with cash cash equivalents investments of $16.2 billion.
In May we raised $4 billion in long term debt with a weighted average effective interest rate of 2.26%.
We ended the quarter with $9 billion in long term debt.
In addition, we generated $2.2 billion and free cash flow in the quarter were approximately 42 cents a free cash flow for every dollar revenue.
And year over year free cash flow through 112%.
We're very well positioned from a balance sheet and liquidity perspective.
This solid footing gives us the flexibility to successfully navigate this environment and emerge stronger.
We've identified several opportunities to accelerate our long term growth and advance our leadership position in digital payments.
As a result in the back half of the year, we plan to invest heavily in support of these plants, which I will discuss in more detail shortly.
And now with the shift your expectations for the rest of 2020.
With more than half of the year behind us our strong results and ongoing momentum as well as the secular tailwinds have accelerated this year, we are reinstating our full year guidance.
While the timing of the end of the pandemic than the eventual path to economic recovery remain unclear, we have more visibility and confidence in our trajectory for the remainder of 2012.
Our updated full year outlook is a significant rates relative to our prior guidance for revenue earnings and free cash flow.
For the back half of your our overall expectations are that TPV at a revenue.
Perform in line with the second quarter, with 30% volume growth and 25% revenue growth on a currency neutral basis.
We also believe non-GAAP EPS will grow approximately 25% on a spot basis in both Q3 and a few for based on the strong leverage we're seeing and our investment plans.
As a result of these expectations for the full year on a currency neutral basis, we now expect TPV to grow in the high Twentys percentage range and revenue to grow approximately 22%.
In addition for the full year, we now expect to grow non-GAAP EPS in the range of 25%.
I'd also like to note that included in this guidance for 25% EPS growth.
As our expectation that the other income line item for reflects a net expense for the year given lower interest rates on our corporate cash and the debt. We recently raised.
Relative to the guidance we provided in January our updated guidance represents a raise of approximately three and a half points of growth to revenue.
Nine points of growth to earnings.
In addition, we now expect to generate more than $5 billion to free cash flow. This year, an increase of $1 billion relative to our prior guidance.
I'd like to give some context for this improved outlook.
The revenue growth. We expect reflects continued strong performance and transaction revenue, partially offset by ongoing pressure in our credit products.
It also reflects a one point headwind to growth from the E Bay managed payments migration.
The rate of growth, we're expecting for the year represents a seven points acceleration from 2019.
And it's indicative of the elevated and sustained engagement, we're seeing across our platform.
In addition, we now expect our operating margin to expand by at least 100 basis points relative to our prior guidance that would have been flat versus last year.
Based on the merits of transaction volume and our strong business trends, we expect to continue to show transaction margin expansion throughout the rest of the year.
At the same time included in this guidance and partially offsetting transaction margin expansion, our plans to invest approximately $300 million in the back half of the year to advance our key priorities and accelerate our growth initiatives.
We believe that we have a unique opportunities to strengthen our competitive positioning and extend our leadership.
We've never been more relevant to our customers around the world and we're focused on doubling down in several areas to help ensure that we sustain and enhance our strategic advantages.
This is quite costly inflection point and the growth of E commerce and digital payments.
So we're electing to invest much of our margin improvement to help ensure our long term success.
We believe that the guidance, we're providing today is consistent with the significant advantages from which our business is currently benefited.
Relative to when we last reported earnings nearly three months ago, we have more confidence and the sustainability of the elevated E commerce trends we're seeing.
When it first felt like a potentially short lived phenomenon, resulting from additional panic and pantry packing and even stimulus checks has become a much more durable and profound behavioral shift.
We've seen the strongest and most encouraging new customer volume and engagement trends in our history.
At the same time, given our exposure to travel in light of events, we watched demand and these verticals essentially grind to halt.
Our business has demonstrated its ability to withstand exogenous shocks.
And the diversity and scale of our platform is allowing us to outperform even while absorbing meaningful pressures.
Three months ago, the idea is that our.
Branded experiences would enjoy tpd growth for an entire quarter and allow consistent with an only previously seen during high velocity holiday selling days like Black Friday, cyber Monday, with Bolton, even somewhat even conceivable, especially in the Midwest.
Global pandemic and the highest levels of unemployment in our lifetime.
And while we know more today than we did a few months ago about both the virus Andy economy. There continues to be helpful uncertainty.
As we sit here today the concept of normalcy is being redefined and at times fills elusive.
Well, we do know is that this is a pivotal moment in payment history.
We believe that Weve never been better positioned to realize our ambition for greater relevance ubiquity and impact as a global payments leader.
We recognize that this is our time to capitalize on our strategic position and financial capacity to serve our customers better and to advance our platform.
And we're committed to achieving our full potential.
In addition through this period, we learned a lot about organization and its resiliency and what we can accomplish and we're focused on delivering against a defined set of key objectives.
We're committed to continuing to us to support our employees.
Customers and our communities through these challenging times and to create sustainable long term value for all of our stakeholders.
Ill now turn it over to the operator for questions.
Thank you at this time I'd like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Ask participants please limit themselves to one question out of time, then queue up again for any further or follow up questions. Thank you.
First question will come from the line of Tensing Hong of Jpmorgan. Please go ahead.
Thanks, so much really.
Terrific results here, it's just trying to think opposed to ask upfront here, but.
You got record new ads volume engagement numbers all great. So is there a way to maybe hone in on.
What changed since April what's driving the performance. If you had to rank. The biggest factors you know enough to give you confidence reinstate guidance and call for sustainability in the third quarter.
In relation to what we talked about last quarter, just trying to maybe summarize that if you don't mind.
Yep sure.
I'll take the crack at that.
So.
Obviously, you know our best quarter, but far both on the.
And then is and engagement, particularly just to give you some color around since then.
21.3 million.
You knew at April was but May and June were equally strong.
Our net new actives and these are high quality LTV and then is that come from our core markets around the world.
Merchants were up about three times, what we typically see.
This is really a reflection.
Of industries.
Moving towards digital first strategies and we see that.
Continuing.
Honey I talked about being up three times Q1.
Scott.
Perfect value proposition for these economic times.
No obviously had a record and then a quarter.
Zoom, which we didn't talk about last time zoom. She has a great value proposition zoom and then days were up over 600% in Q2 versus.
Q1, and because of all that we're beginning continuing to see substantial.
Year over year growth and.
We believe will add about 70 million, an ace which is at least double what we typically do.
In a year.
On the engagement side.
I think its possibly even better news the DNA side.
We look at 10 day engagement for our new cohorts like how many of our new cohorts are doing four or more engagements within the first 10 days and that's up even further than what we saw in enable that's now up 20% to 30%.
Versus previous cohorts.
Daily active user versus last year.
Is up and consistently so by about 40% versus last year in our churn, which is a really important numbers. We think about and then A's going forward is also meaningfully decline.
As well and so what why is the whole that happening I think in you know obviously volumes I talked about very quickly, but I think what's important on the volumes is that.
April was our low June was our high in terms of volume growth.
So you can see the acceleration.
The quarter and that.
By the way is with travel and ticketing events down 60%.
Sure so.
And outside that range is experiencing some of its best growth in a long long time.
So.
Volume continues to accelerate but the reason for all of this from my perspective is the following first of all we see a tremendous amount of new cohorts coming in that have never used ecommerce before that's mostly silver tech we talked about that continues to be the fastest growing segment.
Of net new Actives, we're also seeing a huge amount of new use cases people are giving in different ways.
They are basically doing pizza and.
Activities for like workouts that are streaming.
We're seeing new industries coming on to digital because like the digital economy is everything right now and so you're seeing healthcare education fitness restaurants entertainment, Oh swinging dramatically to online you're seeing brands.
Now for the first time sell directly to consumers online and verticals that have been online, but people had been experimental with them like groceries and home and garden are booming it closed triple digit.
Percentage growth and if you look at it from a tape out specific basis.
With the scale, we have now and.
Corresponding network effects, it's very hard for merchant not to have tape out.
On their when they have tape out they see the sales lift.
As a result of that sometimes up to 50%.
Yes, and by the way we are placement in merchants now is improving as well as they see how critical pay Pal is for their sales.
And then our brand reputation the experiences that we're giving new products and services that we have right now, including QR codes coming out.
All of that kind of gives us confidence and also that the results were seeing will be quite resilient as we look forward, which is why we felt comfortable reinstating.
Guidance for the year, John you want to maybe add a little bit today. So I just had one small common attention I think for everyone. The sustainability of these elevated levels of E Commerce and digital payment trends is the big question and I think the things that gives us a little.
A more conviction as.
Were three months further along than we were on the last call is just seen the elevated levels of these trends and particularly and regions that have relax some of their.
Shelter in place for social distancing measures and even when.
Consumers are going back to somewhat normal activities like eating out at restaurants are shopping and grocery stores. The the level of ecommerce penetration is still much much higher than what we saw.
Pretty confident that team and so I think thats one of the things that we've watched closely that I think is is a fairly good indication of.
The trends going for the rest of the here.
Yes, so it sounds good thank you both.
Okay. Thanks.
Your next question will come from the line of Heath Terry of Goldman Sachs. Please go ahead.
Great. Thanks, Dan and John really really appreciate the level of detail and all of that.
Just to dig into one area with the ebay exploration can you update us on the strategy and positioning in market places, particularly how you're servicing some of the faster growing ones like shopify, given what's going on there today.
What is the strategic roadmap look like and what does it mean for pay Pal.
Yeah, It's a good question he.
I'll start off.
With that.
I'd say first of all.
Ebay.
It's going to remain a very important customer.
Over the foreseeable future.
Jamie and I have had.
Good conversations about that they've been quite positive.
I thought you saw that reflected in some of his comments yesterday about our partnership.
It is what our mutual customers want.
And.
You know the impact of manage payments.
Has been forecasted bias for quite some time John mentioned.
Part of what we're putting into our guidance.
For the rest of this year and.
Honestly on that front.
You know from what we see.
With a very high share of checkout.
With merchants, who have move to into mediated payments are checkout share can be.
From 50% to 75% depending on the on the country.
And when we do research.
And we do a lot of it.
With merchants, who use both Paypal and ebay the difference in NPS.
In terms of how they think about an interim mediated approach and the Paypal approach.
Quite substantial.
In favor of pay pounds, so we really.
I have seen obviously some merchants move.
But not a large number to date and.
And if anything we're feeling better about our projections than we have but we're just beginning.
The.
End of the operating agreement right now so we feel comfortable that this a very manageable transition going forward.
I think your point is a really interesting one about other marketplaces.
And if you look at the top 15 marketplaces that we serve today shopify being one of them at sea for instance, being another and you look at their growth rate.
The growth rates of all 15 of those.
Marketplaces, and we're quite close partners with approach 100%.
In Q2, yes.
Amazing growth.
To go and see that it was three times the growth of what we saw on ebay.
If you look over the last year or so it's something like.
Seven times.
The growth of ebay and we have.
Spend a lot of time working with those marketplaces to be quite close partners with them from shopify. Some others that are just beginning but may have the potential of being meaningful marketplaces like Facebook and Google.
We're Facebook what are the underlying payments platform.
For.
Facebook marketplaces, and instead of shopping.
We just announced.
Comprehensive.
Partnership with Google and we're working with other major marketplaces as a result of the expiration of the operating agreement and so I think it's a huge growth vector for us we are participating in that growth in our roadmap.
These quite focused.
Providing additional.
Value added services for those marketplaces, but things like payouts, which we really have taken a good lead and other things are are crucial as well as all the regulatory elements around the world that we can provide.
Surfaces and capabilities to those marketplaces, because we are global player.
John anything you'd add on that.
Okay. So nothing to add then.
Okay. Thanks, Dan Thanks, John right Yep.
Your next question comes from the line of Lisa Ellis of Moffettnathanson. Please go ahead.
Good afternoon. Thank you for taking my question, Dan and John can you elaborate a little bit on the QR codes strategy.
Specifically what types of merchants are you targeting what steps are you taking that are going to drive consumer adoption of actually you know whipping outside the pay pollo venmo, while it at the physical point of sale and and then what's the monetization strategy for Q are meeting in which case is it monetize all for pay Pal versus being a pass through thank you.
Yep.
I think I'll take the first crack at that look obviously in you've heard this in my remarks upfront. This is a key strategic priority for us I think its critical.
In driving daily use and we will make the investments we need to do in order to be successful here.
This can be an ongoing process you say this doesn't happen.
Overnight and the next quarter too.
But we have to patients and we have the.
Conviction.
At this can be a meaningful part of our business as we look over the medium term.
Part of the reason for this is this is really demand driven in other words consumers and merchants are reaching out to us.
They're asking us working with us.
To implement this and I'll talk about why that is but look 70% of people have health concerns about shopping in person and.
Of course, they want to use touches payments.
In store retailers realize that consumers want it.
And we are not only rolling out to small and micro merchants crust 28 countries and by the way seem very.
Expected, but very encouraging growth expected because we know that demand is there, but we are actively working right now at least with more than 100 large enterprise merchants.
Across the us in Europe that doesn't mean that all hundred happened this year, but.
Over 100.
Large merchants as well as quite a number of channel partners on those range from terminal providers to point of sale providers to acquirers to networks to distribute our QR codes all of that across venmo and tape out and of course, we announced today.
Our our partnership with Cvs and those are the kinds of merchants that we won peep merchants, where people shop. There every day.
There.
You know highly known merchants or use cases that people can use touchless every day. So why do I think you'll be successful first of all as I said, it's demand versus push and by the way we're going to put aggressive marketing dollars behind this to make sure that consumers you know.
So they can use QR codes promotions around it and as John said, it's a large part of the investment that will do in the back half of this year.
Second merchants love the scale.
And the brand that we have no in the U.S. alone we've got between Zen tape out caught a 150 to 175 million people, we're using our digital wallets you know they can go after the venmo demographic and by implementing this QR code.
Unlike some of the other.
Touchless tap and pay options that have much less.
Customers associated here you have the scale and that is something that they are eager to tap into right away.
Third this isn't just about.
Touchless payment.
You know just.
Scanning a QR code. This about this value proposition around that this is about being able to use rewards.
Being able to have the integration of some of our honey capabilities into that so merchants can do.
Proximity messaging in it offers inside of that.
You can use your wallet into full funding.
Any of the funding instruments, including your rewards points.
In in that QR code and so that's the functionality that will roll out over the next six months. So this value proposition is one that I really like a lot as well that goes beyond just be safe and healthy when capping.
Our scanning your phone and of course, QR codes are platform and less agnostic.
Any handset any operating system.
And.
In terms of the economics for the most part you know its a.
You know a certain percentage.
You know a little bit like what we have in online not necessarily exactly the same percentage but.
Even at alleys larger merchants it'll be similar rates to other in person rates that you have so.
We think the economics over over the medium term quite positive.
For us some will be pass through but most will be incremental economics.
On anything thank you.
At least I would just had one one other thing because we think about what this offering provides for our consumers, but also the economic benefits pay Pal.
Not just in the direct unit economics, they come to a point of sale transaction.
Very importantly to US is what this will due to the overall level of engagement for consumers. So carefusion essar and offline setting your you're much more likely to use us when you have the opportunity online. So there is.
A halo benefit that comes along with with this usage that it's very important to us as well.
Terrific. Thank you congrats guys.
Thanks Lisa.
Your next question will come from line of Darrin Peller Wolfe Research. Please go ahead.
Thanks, guys.
Nice results just you know look just given the substantial incremental margins were seeing margins overall up over 500 basis points.
What can you just touched on your strategy on the balance between the investments you want to make in the business versus margin expansion.
It's great to see the higher base, but when we think about we'll hear from clients that you guys really should be stepping on the gas in terms of the opportunities you could have so just love to hear more in terms of where youre going to be putting those dollars and the balance thanks guys.
Thanks for that Darren I'll start off and John can come in.
Look first of all just.
In general, we invest where we see opportunity that's been.
What we've done over the years I think it's why we've had the results that we have we can always have either higher margins without investing in the business, but that's not what I think all of you and our shareholders want from US there is huge opportunity in front of us I think.
Probably more opportunity than we've ever seen before and we have the opportunity.
To invest in new areas of the business that we think can be meaningful contributors to our growth as we look forward, but even more importantly meaningful to our customers merchants and consumers in terms of the capabilities that they're asking for us and so as Joe.
John said.
Plus or minus in just in the back half of the year, we're investing an incremental.
$300 million or so and the places we're investing in you know is in store just talked about that and why that's so important but also we want to invest in our digital wallet capabilities, we have an aspiration to be an everyday use case.
And to be a central part of a customer's life in the digital economy.
And so.
In the next several quarters, we plan to roll out.
Quite a number of additional capabilities.
Not just in store from Q, our to tap to paid to cards, but rewards capabilities by the way rewards are being used much more because people aren't being able to user rewards for travel.
We're seeing an uptake in people using their rewards points.
Two.
To checkout using a pay Pal.
Well obviously.
Are pretty much now almost 100% complete with our pay mantis.
Integration. The next step is bill pay into our apps.
And that.
We intend to have probably towards the end of this year, we're going to integrate honey shopping tools around wish list coupons rewards.
Into our paper now apps eventually into our venmo apps as well subscription management and other capabilities other financial services that.
I won't really go into any detail around today, but.
I think you can think about like a substantial change in the amount of capabilities that we offer you are digital wallets across pay Pal.
And and Venmo and then finally, there a couple of international markets.
Where we think investment makes a ton of sense, whether that be China, which were obviously investing in through go pay.
We're seeing explosive growth in Mexico, Japan, Brazil.
Really frankly across western Europe, it's been amazing to see.
What's happened there.
So we will invest continually in this business.
And we invest what we think is the right amount.
To drive results and.
If we need to invest more we will invest more and if we don't have.
You know things to invest in will return netback shareholders, but weve given.
Guidance that we believe enables us to do the proper amount of investment.
To take advantage of the opportunities in front of us because this is a moment in time for us.
There and if I can just as quickly.
You reference arm our margin profile in your question and I think Thats, that's pretty important into this discussion because.
What we're demonstrating right now is the real scalability.
Our operating model and you know Darren like I said I frequently focus on the incremental margins in our business how much how much profit did we bring in for every incremental dollar revenue and then the quarter those incremental margins were the highest they've been for us ever at 50%, but actually I think that theres better.
Our way of looking at that is more apples to apples and Thats if you exclude.
Losses related to.
The credit reserve and you exclude acquisitions that incremental margin was actually 70% 70, ROE and what that does result in.
Free cash flow like you saw us generate in the quarter it over $2 billion and so.
It's too how we spend that we've always done balance between M&A organic investment in returning cash to shareholders and we've also been opportunistic and.
For the points that Dan was making this a time that we think it's very important to invest and a lot of these initiatives because as I said over the last call. While these trends are you know.
Seemingly changing it right in front of US. We don't want is just want to be on receiving end of that we want to help shape. The outcome here and so we want to invest into that.
Thanks, guys.
Okay. Thanks.
Your next question will cover the line of Bob Napoli of William Blair. Please go ahead.
Hi, Thank you and congratulations on.
Everything on the trends on Venmo wanted to follow up on Venmo 60 million customers now I think.
Lost revenue number we've gotten was a 450 million revenue run rate exit exiting 2019, it's a lot going on the direct deposit strategy commercial strategy, obviously, the QR codes integrating honey.
What can you can you give an update on.
The month the revenue run rate and then maybe a little color on the direct deposit strategy or which of these strategies are going to be the biggest movers and I think direct deposit can be a game changer bank Im not sure your customer is it in venmo.
Is.
It is going to be easy to crack on direct deposit so since some color on venmo and different strategies.
And revenue trends would be really helpful.
Sure, Bob it's going to stick with you.
We don't provide an update on demos revenue each quarter and we don't have once a quarter, but want to say that you know I think across the board. This was one of them most best quarters ever.
We saw growth on their platform reaccelerate from the depth in Q1 to where it was over 50% growth in volume.
And I think what's what's notable about that is.
We all recognize that much of the venmo usage historically, it's been around social experiences.
And as those have by and large gone away for the most part.
We're seeing new use cases developed within the which really demonstrate its relevance and importance to our customer base I think as good as anything so with respect to the monetization strategy. It's not just one strategy. It's a multifaceted approach that include things like direct deposit to increase usage include things.
Business profiles include things like QR code and then.
Of course, you know were eventually launching the venmo credit card later this year and we'll continue our efforts as well around the.
Hey within mill in an ecommerce site.
Yes, just that.
One quick.
In addition to that Bob.
I would not underestimate.
How.
Zealous the.
The customers of Venmo are about living their financial by phone on the platform.
I think.
Each of these capabilities, whether it be direct deposit whether it be.
Business profiles, the credit card and a number of other things that we'll be adding you are being rapidly.
Adopted.
The new use cases, as John said, so interesting to see.
As millennials.
So instead of going to the restaurant you know are now eating at home or outside or at the table instead of going into a Jim are doing fitness classes through streaming said im going to concerts or other entertainment are now doing things online and we're seeing all of the.
That reflected.
In the usage of Venmo, and so I think as John said this is obviously its best quarter.
But I think you know.
No as out.
We're it continued to invest in brim venmo, because it's got a really bright future and is really a crown jewel of ours.
Great. Thanks, Dan Thanks, Don Yeah.
Your next question will come from a line of David Togut of Evercore ISI. Please go ahead.
Thank you good afternoon, Dan and John could you drill down into the sequential tripling of.
The drivers of the sequential tripling in net new accounts for a honey and any pull through benefits you see on the for the pay Pal ecosystem as a whole.
Yep.
I think.
And this economic environment frankly in even before this because you had so many people struggling to make ends meet at the ended the month and that's just been made even worse.
Yes.
Economic ramifications from the pandemic, but honeys key capabilities are a perfect fit for consumers and merchants at this time in.
Increasingly yes, I see the possibility to establish honey is one of the most efficient market, making platforms for the both shoppers and merchants I mean consumers get the best price on the merchandise that they want and then they receive rewards based on that which incents them to do a deal.
Additional activities build out their demand curves and then merchants can customize offers.
Right into that demand curve, so they know exactly what to do too.
To get X amount of demand off of that and.
It's really interesting when you think about we've always known the identity of people and we've always known that they've made purchases what we havent seen is intent.
Upfront and you really have this perfect set of data that helps both sides of our two sided network when you put all that together.
And it wasn't just said honeys and an eighth grade three times by the way the revenues were up.
Basically a triple digits or so almost double.
As well and I'd, just say a couple of quick things on that one the integration is fully on track there's been no delays in any of our initiatives, we will start that export through a rise.
The honey tool sets into our paper wallets and within QR codes and this to your point about part of the pay about ecosystem. We hope to have a seamless one quick pay Pal checkout experience when shopping at Hyundai merchant insights to say.
All in yes, I'm really pleased with the integration so far it's right on track and I think we've got a real powerful set of capabilities ahead of us.
Thank you congratulations yep. Thank you.
We have time for one last question from James Faucette of Morgan Stanley. Please go ahead.
Hi, Thanks, a lot for taking my question.
And John you guys have highlighted a lot of the strong trends and your increased confidence that those can sustain if we look at your your second half guidance and and the the strength you're anticipating there how should we think about extrapolating that into the into the future in terms of what makes sense to think about.
From a growth and margin expansion and perspective going forward and kind of what are the key things that we should be looking for and 21 and beyond thanks a lot.
Sure James It's John I'll take that.
There's.
[noise] still some uncertainty out there I think macroeconomic uncertainty as well as.
Our via the overall path to the virus plays out so it's.
It's still a difficult environment to forecasters, we feel comfortable enough about the.
The things that we're seeing our business right now, though to provide second half guidance, but I think the broader question is what is due to our medium term guidance and.
I think.
It's very difficult to argue that there.
Our not structural benefits to what's happening to our business I mean, it there are definitely secular tailwinds that I think are going to have us really rethink.
So what that growth trajectory is over the longer term, we're obviously not prepared prepare to provide that today. We're.
Just updating our reinstating our guidance for the year, but.
There are definitely compounding benefits that are coming to our platform.
And some other things that we've all talked about has been.
You know trends that would eventually they take place like using contactors payments in store. They are happy right now we've talked about the death of cash per year. So maybe this is that inflection point that seminal moments. So we believe that paypower, given our position as a structural where in that scenario.
Yes, and certainly I think it's because cause to rethink that medium term guidance, but it's it's definitely premature to do that at this point in time.
Yes, I can do.
Yes, I can just that into John's.
Comments.
I think it's clear that we've kept into a digital first economy.
Look at the number of merchants that are coming onto our platform 1.7 million in just one quarter.
We have conversations with merchants around the world large and small all of them all of them trying to figure out how did they implement their digital strategies in an accelerated fashion.
If you look at market research that just came out from for instance, the business round table that.
Where 70% of consumers say, they're going to shop online more frequently and expect to continue to do so because it's easy and convenient.
And so yes, I look at all the different industries, we are clearly, becoming a digital everything moral and that acceleration has happened and it's going to continue to happen going forward and theres sort of one market research study after another and as John said earlier when we.
Look across the World. We look at you know countries that have opened are now 80% of retail is open before there is maybe only 30% of retail open.
You are still very very high levels.
And still high levels of daily active users compared to last year. So my view on our medium term is there way more opportunities.
Then there are challenges around that.
We need to see another quarter too, but it's likely that that goes up I mean, that's probable and we are investing into.
Our growth as well.
And when we invest we expect to return on that investment and so I would say.
You know, we we feel good enough right now.
That weve reinstated 2020.
You know, we feel great about the opportunities, we're investing in them and give us another quarter too.
And we'll.
We'll provide updated guidance on on medium term as well.
Okay.
Well listen I just want to thank everybody.
For your time today I, just want to say again that I hope all of you and your families are safe and healthy and we should look forward to being able to see all of you in person again and so thank you for your time take care have good rest of the evening Bye bye.
This concludes today's conference call you may now disconnect.
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