Q3 2020 PayPal Holdings Inc Earnings Call
At this time I would like to welcome everyone to peoples third quarter Twentytwenty earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if youd like to withdraw your question simply press it sounds good. Thank you.
Let's get to your house Gabriele Rabinovich, you may begin.
Thank you Gabriel good afternoon, and thank you for joining US welcome to pay Pal's earnings conference call for the third quarter of Twentytwenty. Joining me today on the call are Dan Schulman, our president and CEO and John Rainey, Our Chief Financial Officer, and SVP global customer operations.
We're providing a slide presentation to accompany our commentary.
This conference call is also being webcast and both the presentation and call are available on the Investor Relations section of our website.
In discussing our company's performance, we'll refer to some non-GAAP measures you.
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 expectations.
Forecasts and assumptions and involve risks and uncertainties. These.
These statements include our guidance for the fourth quarter and full year, the impact of our acquisition and our outlook for 2021.
Our actual results may differ materially from these statements.
You can find more information about risks uncertainties and other factors that could affect our results and our most recent annual report on form 10-K, and quarterly report 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 statements.
All information in this presentation is as of today's date November 2nd Twentytwenty, we expressly disclaim any obligation to update this information with that let me turn the call over to Dan.
Thanks, Kevin and thanks, everyone for joining us on today's call.
Hope that all of you our safe and well.
I'm pleased to say that people had a very strong quarter across all of our key operating and financial metrics.
Our performance is particularly noteworthy given the macro environment.
We are battling a pandemic that shows no signs of slowing down.
Economies around the world are still quite fragile and the next six to 12 months.
Well be defined by the timing and amount of additional fiscal stimulus.
And progress towards a widespread and effective vaccine.
And obviously, we sit here on the eve of one of the most important elections in our country's history.
And I hope that all of you were U.S. citizens have already voted well tomorrow.
This is the landscape we face as we go into the last quarter of 2020.
At the same time paid out was that an exciting and meaningful inflection point in our history.
Our mission is never been more important the pandemic is brought focus to the stark reality that billions of people across the world.
Struggling to get by.
In fact in the past nine months over 100 million incremental adults.
Into extreme poverty.
The current financial system is just not working for most people.
Inefficient and expensive for the underserved.
Today's environment demands new ways of thinking about our economic system.
Emerging technologies, combined with mobile phones and financial platforms like pay Pal.
Dr., if future of inclusion and financial health.
Pay Pal is in a stronger position to help shape, a future where everyone not just the offline can participate in the new digital economy.
That's the use of cash continues to decline new and innovative financial technologies are rising.
For example, central banks around the world are seriously exploring.
Or even trialing.
Forms of retail digital currencies that they issued directly.
And it's also clear that digital wallets are a natural complement to all forms of digital currency.
These trends create an opportunity for us to work with central banks and regulators to shape, a modern and inclusive financial system built on more efficient digital infrastructure designed for the future.
The digitization of the global economy can bind with the rise of digital wallet.
Will drive our growth over the next decade.
Our scale two sided network trusted brand.
Our strong relationships with regulators around the world.
And our AI and data modeling capabilities can all be leverage to ensure our Paypal and venmo apps are essential parts of our customers daily lives.
We still have a lot to do to achieve that vision, but let me be clear we are investing to create one of the most compelling and expansive digital wallets in the world.
And you can see this beginning to play out in our strong Q3 results.
In Q3, our total payment volume grew by a record 36% on an FX neutral basis.
Two $247 billion.
An annual run rate just shy of one trillion dollars.
Even more impressive is the growth of our volumes, excluding ebay, which grew 38%.
Eclipsing any previous record.
And in early October we hit our all time highest TPV day outperforming any previous day in our history.
These record results are happening even as E Bay moves their base to their manage payments platform.
Ebay is now just 7% of our total volumes and will likely be between 5% to 6% by the end of the year.
Our transactions in the quarter were just over 4 billion growing 30% year over year. This is the first time, we have processed over 4 billion transactions in the quarter.
And it's worth noting that.
At our core pay Pal daily active accounts increased 32% versus a year ago consistent with last quarter.
We added 15.2 million net new actives in Q3, our second highest quarter for organic customer acquisitions. After last quarters 21.3 million and then it's.
We added over 1.5 million new merchants in the quarter over two times, our pre Cove at rate and we now have 28 million merchants on our platform.
We ended Q3 with 361 million active accounts.
And we remain on track to end the year with a record 70 million enterprise.
This influx of new customers and record transactions growth drove strong financial results.
Our revenues grew by 25.4% on an FX and basis to $5.46 billion.
We grew our non-GAAP EPS by 41% to a dollar and seven cents, even with incremental investments into our sales marketing product and engineering teams.
In the quarter, our operating margin grew by 377 basis points from a year ago.
I'd like to detail some of our investments and how we see them shaping our future and let me start with venmo.
Venmo had a very strong Q3 with 65 million users driving $44.3 billion in TPV up 61% year over year.
Then most growth continues to exceed our expectations and we are forecasting revenue for venmo to approach $900 million in Twentytwenty, one driven by investments in new capabilities.
As it then most revenue base diversifies and scales. It's.
Its transaction margin continues to improve.
We now expect venmo to also make a positive contribution to our transaction margin dollars in Twentytwenty one.
By Q1, the Venmo checkout experience will mirror, the ease and simplicity they pay Pal branded transaction.
We anticipate a meaningful increase in merchant transactions with some of the world's largest retailers and marketplaces, incorporating venmo as a payment option at checkout, both online and offline as our QR codes are integrated into physical retail.
The venmo credit card will be fully rolled out in Q1.
I think it is the best credit card in the market.
It is a true extension of the venmo app and fully linked into its capabilities. It is the first to have a personalized QR code boss on the card as well as the contactless chip so that transactions can be split right at the table and reflected instantaneously on your vendor.
Feet.
Our cashback rewards are amongst the most generous in the industry and automatically calculate your top spend categories every month to apply the appropriate cashback percentages.
I would encourage all of you to try it soon as you can because it is truly a best in class experience.
Over the next year.
Both the venmo and pay Pal App well.
Will undergo a fundamental transformation intended to dramatically increase their functionality and drive engagement.
Our goal is to provide our customers with a comprehensive set of services and tools to manage their financial lives as well as enhance our ability to shop, both online and offline.
This expanded suite of services will include enhanced direct deposit in check cashing.
Budget and savings tools.
Bill pay invest.
Investment alternatives, including crypto.
Description management.
By now pay later Optionality and all of a honey shopping tools from wish lists price monitoring deals coupons and rewards.
An important enabler of engagement is our comprehensive push into the physical world.
Our consumers merchants and regulators all believe that Paypal plays a crucial role in allowing safe digital and contactless payments.
Our goal is to be the most ubiquitous payment capability in the offline market.
Through a combination of QR codes contactless cards.
And if we see inside our mobile apps as well as our embedded Paypal wallet experiences inside Google pay and Samsung pay among others.
As I mentioned honeys shopping tools coupons and rewards will be integrated into our omni checkout solutions assuring the best deals for our consumers wherever they shop.
And we will also enable merchants of all sizes to access anonymous demand data so that they can drive incremental sales and increased customer engagement across their multiple channels.
Our move into physical retail will no doubt be a multi year journey, but.
But we are already seeing strong early adoption of our QR code solution.
We have 10 major retailer signed including Cvs Nike to me bed Bath and beyond Samsonite, and we are in meaningful discussions with well over 100 large retailers.
We have also signed 20 channel partners and point of sale providers from Verifone to audience, who are in the process of integrating our QR codes with an additional 70 channel partners in deep negotiations.
Just the signed deals alone enable our QR capabilities at millions of merchant locations.
We anticipate ending the year with over 500000, small and micro merchants accepting our QR codes.
Finally, I'd like to discuss our recent announcement to increase the utility of crypto currencies as well as embrace new forms of Central Bank digital currencies.
We are entering a new era of financial services, where our wallet and all the services around them are moving from physical to digital.
These include identity management, new forms of commerce, and fully digital payments and financial services.
As such we recently announced that pay Pal will allow account holders to buy so an old cryptocurrency.
First in the U.S., and then expanding to international markets and the Venmo platform in the first half of next year.
Importantly, we are doing this in close partnership with regulators.
As you saw the New York Department of financial services granted tape out a first of its kind conditional license.
With this foundation in place we will rapidly move at the beginning of next year and allow consumers to use crypto currencies as a funding instrument to shop across all 28 million of our merchants.
The solution will not involve any additional integrations volatility risk or incremental transaction fees for either consumers or merchants and will fundamentally bolster the utility of cryptocurrency.
This is just the beginning of the opportunities we see as we work hand in hand with regulators to accept new forms of digital currencies.
We are at a moment in our history, where all of our past efforts, our scale brand reputation and regulatory relationships position us to play an expansive role in our customers' lives.
There's obviously plenty in the near term macro economic environment that makes us cautious as we look ahead to Q4 and 2021.
At the same time, we see multiple tailwinds from the permanent shift towards a digital economy.
Our revenue and EPS forecasts for the years ahead are substantially higher than those we had developed just a year ago.
I've never been more enthusiastic about paper sales role in shaping a new future.
I'd like to close by thanking our employees, who continue to give so much time and energy to supporting our customers.
They are doing their best to bounce a blurring work and home life.
Their dedication and commitment to pay Pal and our customers is inspiring and with that I'll turn the call over to John John Thanks, Dan.
I'd like to start by also thanking the entire plc for their efforts to serve our customers and execute on our priorities.
Hey, Pals third quarter was one of the strongest in our history. This.
The sustained momentum in our business allowed us to outperform.
Our results demonstrate the strength of our diversified platform, our global reach the scalability of our business and our sustainable earnings power.
Notably we delivered these outstanding results against the backdrop of E. Bay's manage payments transition continued weakness in the travel and events verticals and a decline in other value added services revenue.
Relative to our expectations going into the third quarter Ebays payments intermediation preceded faster than we had anticipated.
In addition, the recovery and travel travel volumes was slower than our forecast traveling events volumes, which represented slightly more than 10% of our GPV last year were down 40% year over year.
Well this is an improvement from the decline in the second quarter. It makes our overall volume growth even more remarkable.
Now I will discuss more details of our financial performance for the third quarter.
Revenue in the third quarter increased 25% on a currency neutral basis to $5.46 billion.
Transaction revenue grew 29% on a currency neutral basis, representing 11 points of acceleration from the third quarter last year.
This growth was primarily driven by strength across our core Paypal business, including strong cross border growth.
Notably transaction revenue, excluding revenue from ebay grew 31% in the third quarter accelerating approximately four points from Q2 and approximately seven points from Q3 last year.
Other value added services revenue declined 10% on a currency neutral basis.
Reduced interest income on customer balances from lower interest rates and less credit revenue contributed to this decline.
Honey contributed approximately one and a half points of growth to total revenue, which only partially offset the headwinds to other value added services revenue.
In the third quarter transaction take rate was 2.06%.
And total take rate was 2.21%.
The 15 basis point decline in transaction take rate was driven ratably by the impact of 47% growth in PDP volumes merchant volume mix, which includes incremental bill payment volumes.
The reduction of $87 million in international transaction revenue from foreign currency hedges.
The 24 basis point decline in total take rate resulted from each of these factors as well as lower other value added services revenue.
Transaction expenses hit a record low rate of 82 basis points, driven by both funding mix and volume mix in the quarter.
Transaction losses were 13 basis points as a rate of TPV, one basis point better than Q3 last year.
We continue to improve our loss performance through the ongoing advancement of our risk mitigation strategies and enhancement of our risk models.
Credit losses were one basis point as a rate of TPV.
Fewer originations in conjunction with a consistent macro outlook and no meaningful change in credit quality relative to the second quarter contributed to this lower rate.
As you'll see in our 10-Q, our loan loss reserve coverage ratio increased from 22% to 24%, which is primarily driven by the contraction of our merchant receivables portfolio.
Moving to our non transaction related expenses consistent with our remarks, when we reported second quarter results, we are increasing our organic investment spend in the back half of the year.
This environment has created a unique opportunity for us to advance our leadership and payments and extend our competitive advantages and emerge from this period stronger and better positioned to increase our relevance.
While this incremental investment is more heavily weighted to Q4, we began deploying these funds in Q3.
Non transaction related expenses increased by 23% from Q3 last year, reflecting this increased level of investment.
While sales and marketing spend was higher as a percentage of revenue this was more than offset by leverage across each of our other non transaction related expense line items.
Overall, we realized leverage of 50 basis points on non transaction related expenses.
Operating Margaret margin for the quarter was 27.2%.
This is the strongest performance we reported for any third quarter and represents a 377 basis point improvement from last year.
We continue to be focused on delivering operating efficiencies, while investing in our strategic priorities.
Non-GAAP other income declined by $57 million relative to last year, driven by increased interest expense from a higher debt balance and reduced interest income on corporate cash from lower interest rates.
From a modeling standpoint, we expect this line item to continue to be a net expense in the near term.
For the third quarter, non-GAAP, EPS increased 41% to one dollar and seven cents.
The timing of our incremental investment spend which is weighted more towards the fourth quarter contributed to the strong performance.
We ended the quarter with cash cash equivalents and investments of $17.6 billion in.
In addition, we generated $479 million and free cash flow.
Lower free cash flow in the quarter resulted primarily from higher cash taxes.
The core cash generation of the business remains extremely strong.
On average in 2020, we've generated approximately $1.3 billion in free cash flow each quarter.
And for the full year, we continue to expect to generate more than $5 billion in free cash flow.
I now want to shift to our expectations for the rest of 2020 and 2021.
In reinstating guidance in July we were we were providing our best estimate of performance for the back half of the year.
The degree of difficulty inherent and providing an outlook was and continues to be significant.
We are an important part of the foundation of global Commerce and do not operate in isolation.
Covered rates quarantine measures stimulus programs election outcomes and the normalization of economic activity all affect our estimates.
What we do know is that our business is very strong.
Our core business continues to perform at an unprecedented level.
We've seen a step change in ecommerce penetration this year.
We expect there to be a deep and permanent change to commerce and consumer behavior, both in the us and internationally.
While it's difficult to quantify the precise degree to which secular trends will be affected by the pandemic, our addressable opportunity has grown meaningfully.
Our fourth quarter forecast contemplates sustained strength in our business, reflecting the powerful value proposition of our two sided platform and the profound shift in consumer behavior. We've seen this year towards E commerce and increased digitization.
Relative to a few months ago, we expect a greater impact on fourth quarter revenue growth from E based payments intermediation, given the pace of merchant migration in the third quarter.
Heading into Q3, we anticipated this to be about a two point headwind to fourth quarter revenue growth. We now expect it to be about three and a half points over.
Over the longer term a more rapid transition of merchants to ebays manage payments platform is better for us strategically financially and operationally that will allow us to contain this impact mostly to the back half of this year and next year relative to a slower progression of merchants with a much longer tail.
All of this is to say and this is a very important point.
While headwinds to our revenue growth in transaction margin expansion will appear more pronounced over the next year from ebay. This impact will be largely contained to that period.
Even more importantly, once we are beyond this transition, we expect our volume and revenue growth rates to reaccelerate given the drag that ebay has been for the past five years.
During this period on average.
Hey, Pals revenue, excluding ebay has grown about 23% annually.
By comparison revenue from E Bay's marketplaces business, even including this year's stronger growth profile profile has grown on average only about 4% each year on.
On a volume basis, the divergence between these growth rates is even more stark.
In addition, we expect the slower recovery and travel to persist.
While we still travel volume strengthen in June and July we've not seen these levels sustain.
We believe this is likely due in part to continued high Corona virus infection rates and the impact of the virus on global mobility.
Similar to ebay the headwinds from travel volumes are transitory and exhaustion us.
As a result of these dynamics, we expect our fourth quarter revenue growth to be in the range of 20% to 25% on both the spot and currency neutral basis.
For the full year. This will result in a range for revenue growth of 21% to 22% on a currency neutral basis or 20% to 21% on a spot basis. This guidance is approximately three points higher than our expectations at the start of the year.
To put in perspective, we expect to add more than three and a half a billion dollars to our revenue base. This year, which is more than one and a half times. The revenue we added in 2019.
On our call last quarter, we stated that we expected to deliver 25% EPS growth for the back half of the year.
We are raising that outlook to 29% increase.
Incorporated into this outlook is 17%, 18% growth in EPS in the fourth quarter, which reflects the increased weighting of investment spend relative to the third.
For the year. We now expect this will result in approximately 27% to 28% growth in non-GAAP EPS, marking the fourth consecutive year in which we delivered at least 25% growth in EPS.
Again to put this in context relative to last year.
On an essentially flat share count.
We'll be adding more than 80 cents in earnings for each share outstanding.
And relative to our medium term outlook, which calls for approximately 20% EPS growth. Each year. We are now more than 30 cents per share ahead of this plan.
I'd now like to discuss how we're thinking about our outlook beyond 2020.
The strong acceleration we've experienced this year along with the pronounced shift in consumer behavior sets us up exceptionally well for the years ahead I don't think we've ever been more excited energized about our prospects. We are clearly on a trajectory to deliver stronger long term growth than our previously guide.
Good medium term outlook of 17% to 18% currency neutral revenue growth and approximately 20% earnings growth on average annually.
That said 2021 still presents a hurdle.
Given the transition off of ebay next year was always going to be a tougher comp for us are very strong performance. This year adds to this dynamic.
In providing guidance this year, our goal has been to responsibly balance transparency with reliability and certainty.
Looking at the range of outcomes for the entirety of 2021 requires us to look out over the next 14 months.
We're very confident in our opportunity set positioning and ability to drive increased engagement.
However, there continues to be significant variability in macro related factors and we feel that providing guidance for that period right now would require a wider guidance range than we believe is constructive.
Once we close out 2020 will be better positioned to provide our thoughts for 2021, which we will share in February when we report our full year results.
In addition at our Investor Day later that month, we look forward to providing more context for our longer term outlook.
Our ability to sustainably deliver strong growth at our scale is indicative of the network effects of our business.
Our performance demonstrates our ability to successfully execute in the face of a more challenging operating environment as well as the strength diversity and resilience of our platform.
This is really a year.
Unlike any other.
In many ways our collective experience has demonstrated that we've never been more connected or more dependent on one another to help each other drive prosperity and development and realize the promise of globalization.
Pay Pal stands at the center of this and.
In 2020, we will process more than $900 billion in payment volume and serve approximately 375 million customers.
We are the largest open digital platform for payments globally and.
When the events of this year have served to strengthen our value proposition and relevance.
We have an important role to play in facilitating commerce and payments and we're executing our plans with an urgency to meet the growing needs of our customers in this increasingly digital world.
With that I'll turn it over to the operator for QNX.
Thank you at this time I would like to remind everyone in order to ask a question press star.
Number one on your telephone keypad.
We ask that you. Please limit yourselves to one question at a time that simply queue up again, if you have any follow up questions.
Pause for just a moment to compile the couponing roster.
Well first question will come from the line of Darrin Peller of Wolfe Research. Please go ahead.
All right. Thanks, guys I know, you're all holding off at this point on guidance, given the macro variability, but coming off the year with 70 million net new ACV gains, which was at least 30 million more than you would have expected and a lot of these are new demographics, rather than a pull forward. As you guys have talked about can you just talk maybe touch on the types of anyways.
Expect for either 21 or even longer term.
Kind of additions you can add in and really thinking about that in context to 32% growth in daily active users. What are we talking about in terms of opportunity there and really what are the drivers of it is that international all the partnerships and seems like there could be a long runway, but lot of people I think just want to hear what the sources are.
Thanks, guys.
Hey, Darren it's Dan Thanks for your question.
So.
We had another strong quarter for and anyways.
Our second highest organic.
Quarter, four net new actives.
By the way interestingly.
The shape of that.
It was very consistent.
Proximately 5 million net new actives each month.
Coming in no fall off no pull forward just consistent growth.
In that metric and as you know we're still targeting.
And feel comfortable with 70 million number that we gave.
Last quarter for an EPS for the year.
I think a couple of important things to point out here first of all the number of new merchants that are coming on the platform.
It is and remains quite elevated over 1.5 million merchant accounts.
This quarter, our run rate pre Cove, it was somewhere around 500 to 750000.
So now he's got 28 million merchants on the platform and and.
361 million total active accounts in many ways here scale, we get scale.
As.
As we grow as more and more merchants have Paypal, you probably have noticed as well more and more merchants are putting Paypal front and center.
We are creating new and more compelling ways to buy our buy now pay later.
Has exploded into the marketplace just rolled that out to the vast majority of our consumer base, we're seeing huge take up in that an incremental halo.
As a result of it and so my view on net new actives is.
We're going to continue to see good growth on that for a couple of reasons one.
Our checkout experience and the number of products that we're putting out there is just increasing you heard me say in my remarks.
We are very focused on expanding.
Our digital wallet capabilities, both on Venmo and Paypal, we are very serious about driving.
Towards being in everyday use case why is it so important when somebody uses two or more of our products say checkout and PDP there churn reduces by 50% and think about as we approach 400 million.
Consumer customers on our platform.
Every basis point churn reduction matters, a ton in terms of our anyways.
Going forward and so I think.
Got.
A continued drive every industry towards digitization, more and more merchants coming on more products more functionality and reduce churn.
And I think.
As we look forward.
I think M&A will continue to remain elevated versus pre cofins levels.
All right. Thanks, a lot.
You bet.
Your next question comes from the line of tension of JP Morgan. Please go ahead.
Hi, Thanks, so much I wanted to ask on the.
On the Capex I think the related if you don't mind me just putting them all together so.
PV accelerated while transaction revenue growth held pretty constant and I know you talked about the take rate here, John but can you maybe unpack it for us a little bit more and help us on how it might trend in the fourth quarter, and maybe even 2021 with ebay and Pimentos and Paypal and everything.
And then separately, but somewhat related.
Just looking at the fourth quarter Guide I know you are assuming some deceleration from the third quarter I heard the ebay being out point in the have incrementally weaker here any other call outs beyond.
Conservatism I totally get why you're not giving 2021, but I know a lot of moving pieces going into the end of the year here. Thank you.
Sure. Its engine, it's good to speak with you. So we did see a strong acceleration in TV TPV in the quarter and aside from just growth overall in the business. There's couple of things to call out I think notably.
PTP volume was up almost 50%, 47% I believe is the exact number.
And then we saw.
A lot more volume from bill pay with the 100% ramp of a payment to us in the quarter. So good strong growth there as it relates to revenue, we had a $17 million hedge loss in the quarter and that relates to usseventy million hedge gain in the prior year. So you've got.
The difference there that really put pressure on the on the revenue side relative to two TPV on take rate. There is theres a couple of dynamics to think about too.
You got it.
Well PDP and bill pay tend to have.
Lower take rates. They also have lower transaction expenses and so what we we consistently focus on in our business is not necessarily take rate, but the incremental transaction margin dollars and a way to think about our business in the quarter to engine like for every dollar of revenue of incremental growth that we brought.
In the quarter, almost 70 cents of that sell to the transaction margin line and so it shows that there is a good balance between those items that maybe have a lower take rate, but also have a lower transaction expenses. So were very focused on the the margin profile of those different elements of our business.
With respect to the fourth quarter that the only thing I'd call out in addition to ebay, which we talked about in our prepared remarks.
The travel and event vertical as I also mentioned has been slower.
Slower to recover to recover than we anticipated again, we saw some green shoots back in June and July.
And.
Those havent persisted to the extent that we mentioned but.
Again, I'll point out both of those things are transitory.
And they really in terms of the long term impact to our business.
It's not going to matter for us we're very excited about not only what next year holds but each year thereafter.
That's the math of each of those is that yes, it's a tougher comp for next year, but when we lap that will be at a place where we actually have accelerated growth from from that time period, and I'd just add to that.
Giving a wider range in Q4, just makes sense to go do it's the prudent thing to do it in no way takes away from the underlying strengths in our business I mean, our core remains extremely strong core paper now growing at 30% plus.
In revenue October was a good month for us.
You know you've got.
Everything from virus numbers Lockdowns, which.
Probably have the benefit of.
Of helping us as more people are at home spending online, but we balance that with what is consumer confidence going to look like what's the economy due to stimulus payments, what's the holiday shopping season going to look like we've got an election coming up tomorrow potential social unrest when we put all of that.
Together it just is prudent to give a wider range and so.
That wider range to us it does nothing.
To takeaway from the strength, we see in the business, but we felt it was the right thing to do.
Great.
Makes sense. Thank you all yep.
Yep.
Your next question will come from the line of Jason Kupferberg. Please go ahead, sorry of Bank of America.
Hey, Thanks. Good afternoon, guys. So just wondering as we think about the puts and takes for 2021 I mean is it fair to assume that the ebay headwind of 3.5% in Q4 20 is a decent proxy for next year and then how we should think about some of the other puts and takes whether it be the ongoing travel headwind.
And obviously, you've got a whole host of new initiatives like paying for an in store et cetera.
So that's the first part of my question and then just on the second part.
Regarding this notion of acceleration in the core business due to covert any way to give us a rough idea about I mean, if you just take ebay out of the equation how.
How much do you think your revenue growth profile has structurally accelerated with it with a multiyear view again, excluding ebay.
Thanks for the question Jason I appreciate it.
Trying to kind of parse out what 2021 would look like let me just say this.
There are there are a number of puts and takes for our business next year.
On the on the sort of headwinds side, obviously ebay will continue to be a headwind next year as they ramp through the year, we've been pretty consistent though with.
Our expectations around the pace of that.
And we've long thought that they would be largely complete by the end of next year.
And at the same time, we are still maintaining a share of checkout, which is north of 50% and so this has been very consistent with our expectations from the onset.
Your travel event is going to be largely tied to.
The path of the virus, that's an overused term I know, but.
Largely outside of our control and win the World regains mobility I'm sure we will see a resurgence in that but the other area that I think people perhaps havent.
Quite take into account yet is.
The ongoing headwind that credit should be next year. So those would be on the headwind category in terms of.
Things that we're excited about that can.
Help mute that are completely offset that theres, a number of things that we're doing that we called out but the continued monetization of venmo the launch of a paying for something that we're very excited about and then expanding.
Consumer wallet with things like Bill pay and subscriptions and so forth. So.
It puts us in a.
[music].
Pretty good position as we as we look at the new products that we're rolling out, which I will say is like our product and technology team has never rolled out more products.
The rate that they are at anytime in my five years here. So we're exceedingly pleased about about the progress there yeah, I mean I think.
We would expect our core business to remain strong maybe even get stronger.
About 21, as we add more and more capabilities.
We're seeing really nice adoption very early obviously and what we're doing in the offline space.
The crypto announcement, and just very early reactions to that well beyond our expectations. Our buy now pay later value proposition.
It's a great one I may from merchants, it's no incremental cost.
Increased sales to them.
It is and we get to leverage.
The large base that we have right now and as I mentioned we've.
Got a host of new services.
Coming on board next year.
As Darren talked about $70 million.
Two active set will ride on increased.
Transactions with each of them counterbalanced by what we always knew was E Bay, which is as John mentioned, a transitory event.
Play itself out next year and will accelerate.
Out.
From that so I think the really important thing to emphasize here is.
Is that when we come into our Investor day.
In February we will be raising our medium term guidance, we feel quite confident about that given everything that we've seen.
2021 was always going to be.
A year that we would transition away from ebay, frankly, I'm happy that thats going as.
As well as it is right now and as fast as it is so that as John mentioned, we take that part of our business that is the slowest growing part of our business and we replace it with the faster growing parts of our core business and other marketplaces and so.
So for US this really couldn't come at a better time the transition from ebay.
And all the things that we're doing to build our business and shape. The future gives us a lot of confidence as we look out at.
Over the next several years.
Okay. Thank you.
Yep.
Your next question comes from the line of James Faucette of Morgan Stanley. Please go ahead.
Great. Thank you very much I wanted to just build on on some of the questions, particularly around next quarter and that teens. It looks like it sounds like John from what you are saying is that there is going to going to be some incremental spend in the fourth quarter. Maybe they got started late in the third quarter Ondeck is going to impact margins.
You talk a little bit about I guess, the contributors to the very strong margins in the third quarter.
A little more color on on how to think about the spending and impact on the fourth quarter and then how we should think about what that margin trajectory looks like.
On that and in particular as we head towards a normalized world.
Sure well first James.
Exactly right the the.
The balance of spend of that $300 million that we we earmarked on the last call.
It's going to happen in the fourth quarter and that's that really gives you the different margin profile from the third to the fourth but looking out on a more sustainable.
Level or run rate basis, whether it's 2021 or beyond.
There is a data point in the in our third quarter results, which I think really illustrates the potential that we have and thats the incremental operating margin that we had in the quarter. So what I mean by that is for for every dollar of growth that we had in revenue how much of that fell to the bottom line.
And if you if you normalize for acquisitions. It was roughly 50 cents 48 cents fell to the bottom line and that demonstrates two things, which I think are relevant and hopefully answer your question, but one is just the trends that we're seeing around our core checkout and.
And we have an expectation that those persist at a higher level than we entered this pandemic period and so certainly that has implications on our business, but the second and equally as important as what it says about the scalability of our business. We in the past have not always done the best job.
Of of of growing at a low marginal cost and for the past two or three years now we've we've very we've demonstrated very well our ability to do that and and ours is a platform that performed very well in a growth environment because it we can do it at a very low marginal.
Cost and so thats, what you see in that operating margin performance, So I would say that.
There is a natural tendency as we grow that margins are going to want to increase that said. We also recognize we have a tremendous opportunity in front of us with the change that's happening and we clearly want to invest into that Thats. The right thing to do in the fourth quarter and it will be the right thing to do going forward I think.
Fortunately given the financial profile of our business. We've been we've been able to demonstrate that we can both do that and expand our margins and we anticipate doing so going forward.
Thank you very much.
Your next question will come from the line of David Togut of Evercore ISI. Please go ahead.
Thanks, so much.
Can you dimension the impact on paper sales ecosystem from introducing cryptocurrency is both to buy sell and hold and to use as a funding mechanism in the Paypal wallet and if its use as a funding source can you help us think through.
The impact on transaction expense would that be similar or let's say chr or debit funding.
Yep.
Hey, David I'll take that question.
So, let's just take a step back.
Clearly the world.
Rapidly move moving from physical to digital on that so true for payments.
And and financial services.
Yes, my conversations.
With.
Central banks with the regulators.
With a number of folks in the.
In this crypto field.
Theres no question that digital currencies are going to be.
Rising in importance, having increasing functionality and increasing prominence.
CBD sees from my perspective, and all my conversations are a matter of when and how they are done.
Not if.
I think that our platform.
With its digital wallets.
And the scale that we have right now.
Can help shape.
Utility of those currencies I can range from interoperability between wallets between the currencies themselves and importantly.
Into our.
Network of merchants for Commerce.
And I do think that our platform.
And all the new digital infrastructure that were putting in place right now.
Can help make that management and movement of money more efficient and less expensive and faster.
Just in terms of what we've introduced.
With viable cell, there's a lotta research on that.
Our base.
Is it very eager for us to offer these capabilities.
It really came up very high on on.
Their wish list and we are seeing that.
Coming to fruition very quickly and now we've only rolled this out to 10% of our base, we did that a couple of days ago, but.
But are waiting lists was two to three times when our expectations, where we're going to take up our 10000 dollar limit per day to $15000 per day based on the demand that we're seeing and we will roll out to a 100%.
In the us.
In the next two to three weeks, they're going to expand internationally and will expand.
Into venmo on the first half of next year. So that's what we're starting off with.
Correct.
And we're seeing people who have already bought.
Crypto open their wallets several times a day to check on what's happening.
With their crypto investments were beginning to already see some halo effects that go on with that but what I'm really excited about is what we're going to introduce next year, which is.
I think going to dramatically increase the utility of crypto currencies by enabling somebody who holds a cryptocurrency.
In a paypal account to instantaneously transfer that crypto into fee at currency at a set rate. So volatility is taken out of the equation.
No incremental fees charged for them to do that transaction from crypto.
Into a fee and then immediately settle in CEOC with all 28 million of our merchants and our current take rates and so.
You have no additional integration.
Needed at any of our merchants.
And this is just an elegant way of using crypto currencies as a funding mechanism.
Yes, it is a lower cost funding mechanism.
For us in terms of those transactions, but that's just the start of things that we want to go and do.
With crypto capabilities.
Over the course of next year, you'll see us move into a couple of different areas those.
Those are the only two we're talking about right now, but I see a lot of.
Of interesting things, we can do.
With crypto currencies with functionality, increasing functionality and again working hand in hand with regulators every step of the way, which is so important and what they expect from us in order to be a market leader in the digital currency space.
Thanks, so much.
You bet.
Your next question comes from the line of Heath Terry of Goldman Sachs. Please go ahead.
Great.
And you've done a lot.
Over the last year in terms of product development between crypto and pay later, so I realize it's a bit of a greedy ask but when you look at the size of the point of sale opportunity and the success that some startups are having and taking share against the incumbents I'm curious where youre in person payments strategy stands at this point and how much of a priority.
It is for you.
Yep.
So.
I think the best way of thinking about the seeds is every five to seven years Theres a replacement cycle.
Four point of sale.
And we are really entering a period of change right now where the operating models for Pos have.
Kind of literally changed overnight.
Payments clearly need to now reside in the cloud not at the physical retail location and need to be fully on eight they need to reside on.
A full platform experience across channels, and I would say that being an incumbent.
The space is not add any advantage in fact, you know they will need to change fundamentally.
The way they think about point of sales and clearly the tailwinds are moving towards mobile oriented point of sale.
And we want to capture.
What is a huge in store opportunity.
The one of the first movers to move to an online full omni solution and then set that up to take advantage of our two sided network.
And we have a.
A number of plans underway.
With our eyes settle and paid out here.
Our teams.
Really to try and become.
As a market leader over the longer term that could be five to seven years.
But you will start to see us make moves in that I think that really complements all the things we're doing as we move in store with our consumer base.
Our QR codes, our contactless payments.
NFC inside our App as.
As well as embedding our sales and other star pace.
But we're beginning to see as I mentioned, a lot of early traction in our move in the offline space and I think there's.
A really huge opportunity and we are as I mentioned.
Last quarter, we are being pulled into that space.
By retailers and by consumers and.
The faster we move more opportunity I think we can gain there.
Great. Thanks really appreciate it yes.
Your next question comes from the line of Bryan Keane of Deutsche Bank. Please go ahead.
Hi, guys just wanted to ask about the new products in particular, the B MPL just trying to get a sense of how much incremental volume opportunity is there versus replacing other paypal payment options. Just thinking about are you going to be able to gain share or checkout at the merchant side and then second.
Only on the Venmo monetization I heard the $900 million revenue number.
Any sense of how that breaks out next year with growth rates for.
Venmo credit card, it's had a big percentage of that versus pay with venmo et cetera. Thanks, so much.
Yep.
So starting now with buy now pay later.
And then quickly go into to Venmo.
I'm extraordinarily pleased with the success that we're having with buy now pay later, we rolled this out in France.
Several months before we introduce this into the US and then into the UK and the.
Uptake that we are seeing.
In the French market is well beyond any of our expectations and we just rolled out in the us and.
The demand is tremendous and you probably if you opened up your pay Pal App very recently in the last couple of days to pay for something on a merchant location, you're probably seeing pain for.
Pop up.
As an option.
I think our value proposition there is second to none.
And the reason I say that is a beautiful experience.
In terms of the ability to simply easily from a consumer to take a larger purchase and divided in four payments interest free.
We know our consumers we have a very high acceptance rate as a result of that and for merchants. Unlike any of the competitors that are offering by now pay later functionality. We're offering this as part of our service or no incremental fees, except for the basic transaction.
Fees that we charge merchants today and so what we are seeing is.
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Just use of it thats well beyond our expectations I think it's going to be one of our big growth drivers as we go into next year and into 2022 I'm quite high on the potential of.
What we will see with buy now pay later.
And by the way, there's a ton more we can do on that too and we've got a.
Large roadmap around that on venmo.
Look we put out a couple of things.
Here that are new we do expect venmo.
To approach about 900 million in revenues next year by the way, we expect venmo to reach profitability in 2022.
And Thats another big thing.
Thing to think about that most clearly turning the corner right. Now. These are just like these incremental steps that people have been waiting for.
But we are seeing that come to play and venmo has a host of new things.
Coming out they've got the Venmo credit card, which is one and by the way I said, it's best in the market like I've been I've been using the venmo credit card for the last month or so.
He is an incredible experience.
Really cannot wait for all of you.
Two.
To use it and and see just what I mean second we are really revamping the whole pay with venmo.
Experience, it's been a little clunky more clunky, then I would have liked but by first quarter that will be as seamless as a papal transaction and we have a ton of extremely large merchants and marketplaces that are anxious.
To integrate venmo as a payment mark.
And then we obviously have business profiles crypto capabilities more basic financial tools show.
Wrapping tools coming into that all of those.
I will add to the to the venmo revenue there isn't one.
One thing that's dominant in that they're all adding to that and so really pleased with that most growth and trajectory and you know to see an acceleration in its TPV growth now two quarters in a row.
At the scale that it has.
It's pretty impressive.
Great. Thanks, so much.
You bet.
We have time for one last question from Lisa Ellis of Moffettnathanson. Please go ahead.
Terrific. Thanks, guys. Thanks for speaking yes.
Hey, Dan you highlighted a number of times on the call the transformation underway with the Paypal and venmo consumer apps to add.
Cases, like bill payment pain, or quick sales timing et cetera.
Can you just talk a bit more about how we should think about the operational and financial rollout of the transformation, meaning what's sort of the road map or timing of when these functionality will be rolled out how you're going to be driving adoption. How should we think about monetization et cetera, just as we look out over the next 12 to 18 months.
Yes, Hi, Lisa good to hear your voice.
Happy to do so.
This is probably one of our not probably this is one of our top focus areas. This building out a comprehensive and compelling digital wallet.
For our consumers.
I don't think Theres any question as we move into the digital economy.
That.
Apps that.
Provide a comprehensive suite of inter linked functionality around financial services payment shopping identity management.
We'll be an essential part of our customers I mean, a daily part of their lives now.
With the wallet the capabilities that we're talking about are both online and in store. So that's sort of.
Online offline shopping capabilities rewards management being able to use rewards points translate those the fee.
Hey.
At any one of our of our merchants and also incorporate that in in store as well.
All sorts of financial services, you mentioned, a couple of them Bill pay it.
Increasing focus on direct deposit check cashing savings goals investments PFM.
And then integrating all of our honey shopping tools crypto capabilities by now pay later.
And by the way Lisa importantly, not just putting all that functionality out into our digital wallet, but creating a you X a user experience that enables somebody to simply and easily move from one experience to another and have each of those experiences.
Build on each other and so we will start to rollout bill pay this.
This month.
Towards the end of the month will start to roll that out I think you can see.
Expect and as that ended the first half of this year for us to have a pretty large you X.
Completion.
Design in our customers' hands with a lot of functionality coming out in my view in the second core.
Quarter end the back half of the year, but I expect that.
The predominance of what I've just talked about in place by the end of next year.
And as John said.
We're investing behind this I am really pleased as John mentioned with.
The delivery.
The on time delivery and the excellence of the.
The applications that are coming out.
Into our market and so expect to see a step functionality the back half of Q2 of this year and then to build on that as we go into into the rest of the year.
Very exciting thank you yep.
Yep It is exciting.
Okay I.
I want to thank everybody for all of your great questions is really.
Im glad we had a chance to talk about all those things and.
Look forward to talking to each of you more.
In the weeks and months ahead. So thank you very much everybody have a good day.
And we'll talk to you soon bye bye.
This concludes today's conference call you may now disconnect.
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