Q4 2020 PayPal Holdings Inc Earnings Call
Okay.
Good afternoon. My name is Gabriel Mann will be your conference operator today at this time I'd like to welcome everyone to Paypal Holdings earnings Conference call for the fourth quarter and full year 2020, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session. If you'd like to ask the question during the day.
Time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question press the pound key.
I would now like to introduce your host for today's call, let's get rid of it ramping of Itch, Vice President corporate Finance and Investor Relations. Please go ahead.
Thank you Gabriel good afternoon, and thank you for joining US welcomed the Paypal earnings conference call for the fourth quarter and full year 2020, joining me today on the call are Dan Schulman, our president and CEO and John Rainey, Our Chief Financial Officer, and EVP Global customer operations, we're providing a slide presentation to accompany.
Many of 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 for furnished from non-GAAP measures you can find the 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 statements include our guidance for the first quarter and full year 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 reports on form 10-Q filed with the SEC 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 todays date February three 2021, we expressly disclaim any obligation to update this information with that let me turn the call over to Dan.
Thanks, Kevin and thanks to everyone for joining us today.
Im pleased to report that Paypal, just completed the strongest year in our history the.
<unk> record growth and net new active customers volume revenue operating income earnings and free cash flow.
Consumers and businesses of all sizes have embraced the new digital era.
Racing the distinction between online and offline.
Digital first world.
Is no longer our future. It is our current reality and it will forever change the way we interact across almost all elements of our lives.
At the beginning of the pandemic consumers in Lockdown had no choice, but to do all of their shopping online.
Today, the vast majority of consumers state that post pandemic. They will continue the shop online at their current elevated levels because it is more convenient easier and saves time.
Retailers are rapidly adapting to a new landscape.
Adjusting their strategy from encouraging consumers to visit the stores.
Two optimizing for home delivery.
The pandemic has accelerated a digital wave of change.
Across almost every industry by three to five years unleashing of profound and permanent structural transformation.
Our results in Q4 highlight the strength.
In the quarter, we added 16 million net new active customers.
<unk>, an incremental $1 4 million new merchants.
For the year, we delivered a record 73 million net new actives, ending the year with 377 million active accounts.
24%.
We now have over 29 million merchants interacting with nearly 350 million consumers.
In 'twenty 'twenty, one we expect to add another 50 million net new active accounts.
Equally important our daily active users remain elevated versus a year ago.
29% from Q4 of 2019.
Our expanding scale and increasing engagement drove a record for <unk> 4 billion transactions in the quarter up 27%. Our total payment volumes in Q4 for $277 billion up 30.
The 6% on an FX basis.
Our <unk>, excluding ebay was up a record 40% as we continue to gain market share.
Ebay <unk> grew at 1% and exited the year at just under 6% of our total volume.
For the full year, our <unk> was up 31% to $936 billion.
In Q2 of 2020, our quarterly revenue surpassed $5 billion for the first time.
In Q4, we surpassed $6 billion for the first time with our quarterly revenues growing by 23% to $6, one $1 $6 billion.
For the year, our revenues grew by a record 22% on an FX neutral basis to 21 four of $5 billion.
Our non-GAAP EPS grew a record 31% the $3.88 and our free cash flow increased by 48% to $5 billion.
Venmo continued its strong performance with Q4 T PV of $47 billion up 60% year over year.
Then most customer base grew by 32% in 2020, ending just shy of 70 million active accounts.
This continued momentum reinforces our conviction that revenues will approach $900 million in 2021.
In early January eligible customers were able to cash the stimulus checks within the venmo app for the first time.
Later this month, our venmo credit card will be available to 100% of our base and in the coming months, we will launch the ability to buy hold and sell crypto via the venmo App.
And finally, our revamped pay with Venmo experience will launch in Q2 offering a best in class checkout experience.
Today's digital reality is rapidly accelerating the need for of digital wallet that encompasses payments financial services.
And shopping.
This year, our digital wallet will change more than it has ever changed before significantly increasing its functionality within a single integrated and beautifully designed app that should meaningfully increase consumer engagement.
In 2020, we made significant progress in expanding the functionality of our Paypal and Venmo wallets.
We added the ability to buy sell and hold crypto currencies the option to buy now and pay later.
<unk> deposit check cashing and bill payment capabilities.
We introduced the venmo and Paypal QR codes for in store purchasing as well as our venmo credit card.
This year, we expect to work with our financial industry partners to introduce even more functionality, including budget and savings tools investment alternatives, including but not limited to crypto and enhanced bill pay options.
We also intend to fully integrate the entire suite of honey shopping tools, including wishlist price monitoring deals coupons and rewards for use in the physical and digital worlds.
I'm very pleased with the early reception of our Paypal and Venmo QR codes, which are now accepted at over 600000 retail locations.
In 2020, we signed 29 large enterprises, including Cvs foot locker, Nike five below Levis, Bloomingdale's, Macy's and uniqlo.
And our early in store results are encouraging.
Merchant are experiencing double digit increases and the average basket sizes with consumers, who frequently use our QR codes.
And we are seeing a 19% increase in PPV from consumers, who use our QR codes.
Across all of our in store efforts, including QR tap and pay and cards, we processed over $20 billion of TPB with almost 10 million consumers using Paypal in store.
We also saw an exceptional response from our crypto launch.
Even with high initial expectations.
The volume of crypto traded on our platform greatly exceeded our projections.
We are excited to build upon this early success by allowing customers to use their crypto balance as a funding source whenever they shop at our 29 million merchants.
We anticipate the rollout of that capability to begin late this quarter and we hope to launch our first international market in the next several months.
These initial steps are just the beginning of an extensive roadmap around crypto blockchain and digital currencies.
We are already working with the regulators and central banks.
To re <unk> and shape. The next generation of the financial system as consumers no longer wanted to handle cash.
We all know the current financial system is antiquated.
And we can envision a future where transactions are completed in seconds not days of future where transaction should be less expensive to complete and the future of that enables all of people to be part of the digital economy not just the affluent.
We are significantly investing in our new crypto and blockchain and digital currencies business unit in order to help shape this more inclusive future.
I would also highlight the rapid growth of our buy now pay later functionality.
We saw tremendous and growing demand throughout the quarter.
And witness the fastest start to any product we have ever launched.
Millions of consumers transacted at hundreds of thousands of merchants in Q4 alone.
As with QR codes, we are seeing a meaningful halo effect on overall transactions and keep EV <unk>.
Including over $750 million of TPG, and our first quarter out of the gate.
It's exciting to see that each new service, we launch drives incremental increases in our overall consumer lifetime value.
Consequently, I would expect that our engagement levels will increase beyond our historic run rates.
I'm proud to see that the Paypal platform was especially leverage during the pandemic for philanthropic, giving and community support.
Enabling over $17 billion for charities and those of neat and.
And we also put our $535 million commitment to black and minority owned businesses and communities into action we.
We have already invested over 50% of those committed dollars and we plan to report on their impact as results come in.
We have entered the next chapter and Paypal history.
The efforts of our employees along with the investments we have made over the past five years have transformed our technical and compliance infrastructure.
Enabling rapid product development.
We released more products and services in 2020 than in any previous year and.
And we will step up that pace in 2021.
Merchants and consumers are turning to Paypal in record numbers as we accelerate into the digital age.
Our opportunities over the next five years have never been greater.
We remain focused on democratizing financial services, assuring that everyone has access and can thrive in the new digital paradigm.
We intend to shape that future and in doing so become one of the worlds, leading digital payments financial services and commerce platforms.
I look forward to expanding on this vision during our Investor Day next week.
With that I will turn the call over to John.
Thanks, Dan I want to start off by thanking our customers partners and employees for helping us deliver a record breaking year.
2020 was pivotal for Paypal and the broader payments industry marked by rapid acceleration and digitization cash displacement displacement and E commerce adoption.
These secular trends have been shaping our sector for some time.
That said the rate of change we experienced last year, resulting from the widespread implications of the COVID-19 pandemic with profound and transformative.
Crisis.
Which has led the hardship and suffering for so many.
Increase the urgency across our organization to serve our customers in new and innovative ways.
Notably the isolation defined by Lockdowns and working from home actually resulted in greater collaboration and brought our teams closer together.
We've entered 2021 energized by a greater sense of purpose and responsibility and.
And ready to build on our strong momentum.
Now to our fourth quarter results.
Total payment volume grew 36% on a currency neutral basis. This is the strongest quarterly growth we've reported in history and represents 14 points of acceleration from 2019.
Our merchant services volume grew 40% another record for Paypal accelerating each quarter in 2020.
Volume contribution from ebay marketplaces continued to decline.
We exited December with ebay, representing less than 6% of our overall volume.
Revenue in the fourth quarter increased 23% on both the spot and currency neutral basis to $6 1 billion.
Relative to the fourth quarter of 2019.
U S revenue grew 18% and international revenue grew 29% as the U S has a greater proportion of revenue from credit in the travel and events verticals.
Transaction revenue grew 25% representing eight points of acceleration from last year on a spot basis.
This growth was primarily driven by strength across our core Paypal business, including strong cross border activity.
Our core payments platform continues to deliver exceptional growth with transaction revenue excluding revenue from ebay growing 30% in the fourth quarter also an acceleration of eight basis points from 2019.
Other value added services revenue increased 1% on a currency neutral basis, reflecting incremental honey revenue offset by lower interest income on customer balances and less credit revenue.
Hunting contributed approximately one seven points of growth to total revenue and approximately 20 points of growth to other value added services revenue.
In the fourth quarter transaction take rate was 2.5% and total take rate was 221%.
The 22 basis point decline in transaction take rate resulted primarily from changes in volume mix with ebay's contribution continuing to decline bill payment and PDP volumes accelerating.
And the reduction of $97 million in international transaction revenue from foreign currency hedges.
The 28 basis point decline in total take rate resulted from these factors as well as lower value added services revenue.
In the fourth quarter, our volume based expense performance was exceptional.
These expenses delivered 216 basis points of leverage in the quarter increase.
The increasing 18% to $2 7 billion.
Transaction expense improved 12 basis points as the rate of TP, the to 84 basis points, driven by both volume mix and funding mix.
Transaction losses improved five basis points to a record low rate of 10 basis points.
Credit losses were three basis points as the rate of TPB.
Our credit loss reserve coverage ratio at the end of the quarter was approximately 23% decreasing slightly from the third quarter.
The combination of strong revenue and volume based expense performance resulted in transaction margin dollars, increasing 28% to $3 4 billion.
In the fourth quarter, we generated incremental transaction margin dollars of $753 million.
More than two times, the incremental contribution last year.
Non transaction related expenses grew 28%, reflecting increased investments in our key strategic priorities as well as growth related to our acquisitions.
This higher level of investment contributed to a 56% increase in sales and marketing expenses and of 27% increase in technology and development spending in the quarter.
Leverage across customer support and operations and general and administrative expenses, partially offset this increased level of investment.
On a non-GAAP basis operating income in the fourth quarter grew 29% to one 5 billion.
Our operating margin was 24, 7% expanding more than 100 basis points and representing our strongest performance for any fourth quarter.
We continue to demonstrate our ability to deliver operating efficiencies and scale our platform at low incremental cost while investing in our strategic growth priorities.
Non-GAAP other income declined by $62 million relative to last year, driven by reduced interest income from lower interest rates and higher interest expense from our debt issuance last may the.
The negative impact on non-GAAP EPS from the decline in other income was offset by a lower effective tax rate.
For the fourth quarter, non-GAAP EPS grew 29% to $1.08.
We ended the quarter with cash cash equivalents of investments of $19 2 billion.
In addition, we generated $1 1 billion and free cash flow, representing 50% growth from fourth quarter last year.
I would now like to discuss our guidance for the full year in the first quarter.
We've just completed the strongest year in our history.
Achieving record growth and net new accounts volume revenue operating income earnings and free cash flow.
We delivered these results, while absorbing meaningful macroeconomic headwinds affecting our credit business the revenue and income effects of lower interest rates idiosyncratic pressure on the travel and events verticals and the initial step down of volumes from ebay post operating agreement.
These headwinds persist as we move into 2021.
And yet.
Our core business continues to perform at unprecedented levels.
Our addressable opportunity has never been more expensive and we're confident we've never been better positioned to capture the benefits of this accelerated secular growth.
We believe the effects of the pandemic on consumer behavior and business transformation are enduring and sustainable.
We also expect E commerce to drive continued strong payment volume and transaction growth globally.
While it appears that additional stimulus measures will support the path toward a more sustained economic recovery.
The backdrop continues to evolve and much remains uncertain.
And as we've commented on several occasions over the past nine months, we're focused on balancing transparency with certainty as we develop our outlook.
It's with these considerations that we're providing our full year guidance, which is our best estimate at this time.
For the full year, our plans contemplate TPB growth in the high 20% range.
We expect to generate revenue of approximately 25 and a half billion.
Representing growth of approximately 19% based on current spot rates.
Included in our guidance is a headwind to revenue growth of approximately 400 basis points from ebay's managed payments transition.
In addition, our current forecast contemplates an approximate 200 basis point impact from foreign currency translation as the U S. Dollar has weakened relative to 2020.
As we've discussed previously in 2021, we will absorb the greatest revenue impact from the loss of volumes from ebay in.
In the face of this pressure, we're pleased to be guiding spot revenue growth at 19%.
Equally important.
Once we are beyond the ebay transition, we expect our rates of growth for total payment volume revenue and earnings to accelerate.
In 2021, we also expect to deliver approximately 17% growth in non-GAAP earnings per share.
This earnings guidance contemplates ongoing elevated levels of organic investment.
We believe the structural tailwind for Paypal.
I have never been stronger.
To fully realize these opportunities strengthen our competitive positioning and advance our leadership in digital payments sustained investment in our business is critical.
Cost discipline together with our ability to efficiently scale of our payments platform will allow us to generate modest operating margin expansion in 2021.
In addition, we anticipate that below the line factors, namely higher interest expense and a higher tax rate in 2021 relative to 2020 will offset much of this margin expansion.
For the full year, we expect to generate approximately $6 billion.
And free cash flow.
Before I discuss our Q1 guidance I'd like to contextualize, how to think about the trajectory of our revenue and earnings performance for the year.
This year there are several dynamics that we believe will contribute to more variability in our year over year growth rates from quarter to quarter than our historic trends vs.
These include lapping our 2020 performance.
This year's cadence of planned investments in product introductions.
The roll off of ebay volumes, and our timing expectations related to the recovery of travel and events volumes and of a more normalized growth in our credit portfolio.
Underlying our guidance for 19% revenue growth on a spot basis is our expectation that we will report our highest rate of revenue growth for the year in the first quarter, followed by relatively stable, but more moderate growth in the second third and fourth quarters of 2021.
Our full year earnings guidance of 17% growth also contemplates delivering the highest highest rate of growth in Q1.
In the second quarter, we anticipate non-GAAP earnings to be relatively flat year over year, primarily due to the outsized EPS growth, we experienced in Q2 last year, which exceeded 49% as.
As well as the expected timing of our investment spend.
Then in the back half of 2021, we expect a meaningful and sequential reacceleration in earnings growth importantly.
Importantly throughout the year, we expect the absolute dollar performance of our business to be very strong.
As we move through the year, we'll keep you updated on how we're tracking relative to this expected cadence.
Consistent with my earlier comments in the first quarter, we expect revenue growth of approximately 28% on a spot basis with non-GAAP earnings growth of approximately 50%.
In summary.
Last year was a year like no other.
But in all of the turmoil of difficulty that people encountered.
One thing was clear in our business.
Pay Pal has never been more relevant and needed than we are right now.
Our industry our company is moving forward.
The next five years will be very different than the last five and were striving to shape that outcome that the future.
The future where E commerce and digital payments are not just a fallback when one can't make it to a physical store or don't want to handle cash, but instead of necessity of.
The necessity that of sort out as the preferred way for people to transact every single day.
It's a future where I expect that our scale, our brand of trust and security and our leading solutions for merchants and consumers alike will allow us to continue to create immense value for all of our stakeholders.
With that I'll turn the call back over to the operator for questions.
Thank you.
At this time I'd like to remind everyone in origin of ask a question Press Star then the number one on your telephone keypad.
We ask that you. Please only ask one question at a time and then queue up again, if you have any additional questions. Thank you.
Your first question will come from the line of Jason Kupferberg of Bank of America. Please go ahead.
Good afternoon guys.
That's on the results I wanted to ask about the new growth initiatives in two part question here, maybe one for John and one for Dan first part is does your guidance assume that the aggregate revenue contribution of these new growth initiatives will be enough to offset the 4% EBIT headwind in 2021, and then the second part.
Is among the various new growth initiatives, which have surprised you. The most of the upside so far and which did you perhaps think we'd be seeing a little bit more adoption to date than they have been to.
To date.
Hey, Jason I'll start with the the.
The first part of your question then turn it to Dan if that's okay.
With respect to offsetting the headwind from ebay the.
Fact that we're expanding or better said that our projected guidance suggests that we're expanding our operating margins.
Would certainly indicate that we think between the momentum in the business and the additional initiatives combined debt, we can offset the pressure related to ebay certainly the initiatives.
All of all initiatives take a while to ramp up the.
The bulk of our new initiatives are really we would expect the financial impact of B in the second half of the year, but when you combine that with the momentum in the business. It certainly allows us to offset that headwind.
Yes, Jason.
China and some of your.
Second question there.
So that's like asking me to choose which of which of these are my favorite kit.
Brian and number of of product managers that are hanging.
[laughter].
So look we put out a couple of big initiatives into the market from our in store to our crypto to our buy now pay later and honestly all of them surpassed our.
Our internal projections.
All of our creating a halo impact that.
It's really pleasing to see.
Talked about kind of.
Q are having a 19% haynesville.
Fact, crypto, yes started off with a bang and just kept going and is continuing to go but.
And the surprise the winter.
Winner.
If I had the envelope I would talk about buy now pay later honestly as surprising me most of the upside.
I see.
Since I've been here I've never seen a product launch with that kind of scale. So quickly I mean, we talked about moving into the U S. In October we announced and we had almost.
3 million customers using.
Buy now pay later.
Hundreds of thousands of merchants by the way that's not the total number of transaction, we already saw in the quarter of 40% repeat rate on that as well and so it's not just that you add customers in it I mean, there are just voting with their feet and moving forward and we think.
That we have a value proposition that is second to none.
Out there.
First of all we've got 350 million customers that we can bring the trust Paypal, we know them and so our approval rates are higher and we think than anybody else out there when people sign up for buy now pay later.
The second.
It is no incremental cost to the merchant.
I mean, all of the other competitors charge of pretty significant incremental cost and for US. We're just charging the same take rate that the merchant hat.
Very very light integration, which is why we saw you know.
Well over 10000 merchants integrate buy now pay later up the funnel really on the product pages and not at checkout and we're beginning to see more and more of that as we come into the <unk>.
Into the year.
Another thing that's really interesting to me here of the Halo effect by the way very early days of the Halo effect, it's about 15% increase in <unk> and we think all of that PPV. So far is incremental TPB for us, but the other thing is we're seeing a meaningful double.
<unk> digit reduction in the cost of those transactions as well.
And so when you look at kind of the scale. When you look at the value proposition the take up of merchants and that's continuing on into the first quarter. This is clearly a homerun for us.
And the winner and.
And it is not to dismiss any of my other favorite kits per se.
All had great years, but buy now pay later was probably the biggest surprise.
Okay, well, thanks for all of the commentary.
You bet.
Our next question will come from the line of Tien Tsin Huang of Jpmorgan. Please go ahead.
Okay. Thanks, a lot of really really enjoyed the presentation here I wanted to ask on M&A. If that's okay I just wanted to.
Check your appetite on the on.
On the acquisitions and especially at this point in the cycle given that so many of these are digital.
The the had been inflated in terms of the valuation during the pandemic here any any change in your thinking around M&A I saw on the slides you had some great detail on your the strategic investments, but the.
How about M&A.
Tension I'll start and maybe Dan will jump in but I think there's two really important points to consider when we think about.
Acquisitions for Paypal. The first is that we are somewhat unique in the fintech ecosystem and so far as we enjoy outsized growth rates, but we also are extremely profitable and that results in the type of free cash flow generation with 20%.
Plus free cash flow margins and that it is that uniqueness that allows us the ability to have this.
This effectively an asset where we can go out and look at inorganic.
Opportunities to.
To complement what we're doing organically. So I think thats one important point to think about the second and it really gets to your point around some of where some valuations are but we exercise of tremendous amount of discipline in the way that we look at this and from an overall capital allocation perspective the <unk>.
Our view is every dollar of capital has to compete with the other alternatives out there whether that be organic whether that'd be returning cash to shareholders or going out.
<unk> acquired the company and so we will remain disciplined and really view our.
Acquisitive strategy over a multi year longer term timeframe.
Yes, I'd just add to that.
Jim.
If you think about our need for acquisition.
Net weighs against like what is our pace of organic innovation.
And in 2020, we put out more products and services and we've ever put out for I said in my remarks that we're going to step up that pace in 2021, and we're going to go do that.
When I look at all of the investment we've made over the past five plus years, and our tech infrastructure and our compliance and risk management.
That's enabled us to do now is.
Pretty radically accelerate.
The amount of software releases that we have we put out last year between config releases and software releases.
Some 60000 releases that was up 30% year over year at the time of raw working from home the Saar.
Our productivity has gone way up our developer Toolkits are much improved for using modern programming language, we have of service oriented architecture and by the way all of that's happening while the number of Bugs has gone down 25% and all of our leases from 2019 levels.
And so I'm really happy with the pace of organic.
The innovation and our ability to deliver products and that takes away a lot of our need to do acquisition I would just build on Jon's point, we obviously of a strong balance sheet strong cash flow.
We'll be acquisitive going forward, but we're going to look at that as John said, a very disciplined manner, we're going to look at talent type of acquisitions, where can we do maybe a smaller acquisition to bring in great talent in a particular area. We'll look at geographic types of acquisitions, where we may want to go after.
The geography, and there may be of player to there that could help us leapfrog into that market.
And we'll look at that carefully and if there's a real capability that not that we can't develop and do but it is kind of take us too long to get there because what we're trying to do on our roadmap.
We would take a look at that as well those are kind of the basic areas.
I would say so I think we've got a good one two punch between.
What we can do internally and what we can do.
From an inorganic perspective.
No, it's very clear, it's going to be fun to attract the youre going to products for sure. Thanks, a lot guys. Yes. Thank you.
Your next question will come from the line of James Faucette of Morgan Stanley. Please go ahead.
James are you there.
I won't be the first one to say this but are you off mute.
[laughter].
I'll tell you what.
It's James here.
Why don't we go to the next question and we can put James back in the queue.
A little bit later Gabriel.
Alright. So your next question will come from Darrin Peller of Wolfe Research. Please go ahead.
Alright, Hey, guys. Thanks, Congrats on the year also.
Like your expectation for adding 50 million net new actives from 'twenty. One was clearly an impressive number when looking at the 72 million you guys. Just added and then the pre pandemic normalized levels around $35 million I think per year range.
Does that I guess first is that underscore the incremental adds your confidence that the incremental adds in 2020, we're really not pull forward, but they're just new demographics and just looking off of last year. If you could walk us through the different drivers, whether it's geography of products, giving you the confidence in adding 50 million net new actives in 'twenty, one versus the pre pandemic.
$35 million or so levels.
Great. Thanks, guys.
Yeah.
<unk>.
Yes, Darren I think of.
When we look at the <unk>.
Cohort of net new actives from last year.
Well, it's clearly incremental people coming on the.
Over 50 demographic 50 years old demographic, it's one of our strongest growth of <unk>.
<unk> that we've had so you're really seeing new.
Demographics come onto the platform.
But what's really interesting to me is the.
The engagement metrics of that cohort are also up substantially we have double digit increases in of value for net new active our 90 day engagement rates are up 13% plus over traditional.
All cohorts.
If you look at a normalized transaction per active.
Spent because this kind of gets a little bit loss, because we were including honey.
Net new actives in the denominator and we also as you said, we put on $72 7 million.
Net new actives last year.
If you normalize that for $37 million that we would put on on the typical year because when you put somebody onto the platform. They don't have all of the transactions because they all of Didnt come in on January one they come in throughout the year and so that puts pressure on it but our tpa, which is the real measure of engagement.
At a normalized basis would have grown 11, 5% that's above any trend line that we have up to about $45 one times of year and so.
Our churn rates in general because of that are coming down and when you have of base as big as ours right now it is as much maybe even more about the churn rate and it is the new adds coming in there is plenty of demand to come onto our platform.
When we see churn reduction like we're seeing right now because of increased engagement and that increased engagement.
I guess people are just moving online and because we have these new products that are out right. Now that people are just using a ton more of like crypto as a great example, everyone who sign on for crypto.
Is opening up their wallet App two times the level of what they did previous.
And so.
I think that 50 million is a real good guide right now, we'll obviously update.
As we go on but.
But we're seeing a lot of really encouraging trends.
In the underlying cohorts that we're bringing on which gives a lot of confidence for that 50 million number.
That makes sense really helpful. Dan Thanks Yep.
Your next question comes from the line of David <unk>.
Evercore ISI. Please go ahead.
Thank you good afternoon, Dan and John could you discuss the drivers of operating leverage both of the transaction expense and the other opex level and in particular are you seeing the sustained volume mix shift towards the branded Paypal wallet versus Braintree, and PDP benefiting transaction margin.
Well as the continued funding mix shift towards debit.
Sure David you packed in a lot in that question. So let me just I'll take them in reverse order.
We still are seeing elevated levels of debit and thats consistent with what others have said across the the ecosystem, although not at the levels that we saw in <unk>.
And likely driven by the impact of stimulus measures at that point in time.
Braintree continues to perform very well for us, but it it really suffers the brunt of the impact from the travel and events vertical which was down 50% five zero percent for us and so that's a it's a pretty meaningful impact when you consider that.
In excess of 10% of our volume.
But when you look at.
The the areas of leverage for our business. So I think we will continue to see strong core Paypal.
Trends of Paypal volume.
And those tend to comment of at a higher transaction margin by the same time, we've seen record performance and transaction expense and transaction losses and.
Transaction of expense will be impacted more by the mixes in our business, but we expect those will be below the levels that we entered this pandemic with and we expect transaction losses to stay at these levels, we're performing very well there, but as you think about the the remainder of our of our income state.
I mean, if you will and all of the other sort of non volume related expenses.
We've invested a lot obviously in the back half of last year, and our guidance assumes that as well, but we also demonstrates the ability for our business the scale very efficiently and so if you just we don't give expense guidance for for the year, but you can back into it based upon our revenue and earnings growth.
And that expense growth that we're assuming in 2021 about 75% of that.
Is related to investments, we're making in the business discretionary go to market initiatives all of the things we're doing to help accelerate or continue these trends and so that leaves the remainder of 25%, which is really just demonstrating the scalability of our model and I'll end My question with one data point that I.
It is reflective of how successful that model is so David I, often talk about the incremental margins in our business and so for every dollar of revenue that we brought in in the quarter what was the profitability related to that and then the fourth quarter the.
The organic incremental operating margin was 32% for Paypal. So for every new dollar of revenue, we're bringing in it's got a higher margin on it than what the rest of the business for us.
That's the model that we find very appealing and one that we want to continue to.
To keep our foot on the gas on it and Thats why that even in a year like 2021, when we have meaningful investment in our business. We can still at least guide to a point, where we're expecting modest operating margin expansion.
Thanks, so much and congrats John and Dan.
Thank you.
Your next question come from the line of James Faucette of Morgan Stanley. Please go ahead.
Hey, Thank you very much and I'm really sorry, I'm sort of clumsy with my phone.
I don't want it.
I wanted to.
I wanted to I wanted to ask John and Dan, obviously, the time and where appropriate but you alluded in the mentioned specifically John kind of your guidance and that kind of thing for this year.
If we think back of just over the last few months, even though the fourth quarter as there's been just a huge amount of volatility.
You know closures and what consumers were doing or could do or couldn't do et cetera. So how are you trying to think about like all of those puts and takes.
As you formulate your full year 'twenty one outlook today.
And what are the things maybe that you've seen as we've gone through particularly the flatter of few months of the of 'twenty. The kind of give you confidence in alright, our forecasting methodology is pretty sound at least from where we stand right now.
Sure James.
Look the revenue guide of 19% growth for the year.
We sit here in February of 2021.
There's still uncertainty there is uncertainty with.
The level of stimulus measures the.
The pace of the vaccine rollout.
But there are some things that we've seen that certainly give us a lot more confidence than where we stood nine months ago.
Sort of at the peak of the concern and trepidation that people had around what could happen to the economy and the impact on everyone's respected company.
Some of the trends that we're seeing that Dan talked about in his prepared remarks their debt.
The sustainable in.
This movement to Digitization and the pull forward of E commerce debt that certainly stands to benefit us and others in the space.
But we provided the sort of of.
And the approximate number right, we said approximately 19% so theres not a range around it like we normally do because.
Frankly that range would be somewhat.
Artificial or arbitrary.
There are a wide range of outcomes that could happen, but we feel pretty good about.
What we see in the business and I think it's important to note that we are a pretty diversified portfolio of products and so we're not just reliant on one thing and I'll give one example, before I close my answer, but the travel and events for so I mentioned that in an earlier answer like our our baseline assumption.
That 19% revenue growth is that as the as people begin receiving vaccines, there's pent up demand for for.
The trout people want to take that summer vacation in 2020 that they missed and so we're assuming that we start to see a rebound in travel and events from the second quarter.
And that certainly stands to benefit the Braintree side of our business, but you know of things arent. If that's not the case, then you'll likely theres been.
Other concerns that result in people sort of lacking mobility that still stands to benefit us on the on the core Paypal business. So you know it's.
<unk>.
I know, it's 11 months out is that we're projecting here but.
As we've moved through this we have gotten more confident with some of the trends that we're seeing and so feel really good about that guidance.
Okay.
Our next question will come from the line of Colin Sebastian of Baird. Please go ahead.
Great. Thanks, guys. Good afternoon, everyone a lot of good stuff here, but hoping you could provide a little more color on the strategy to build out the presence in China.
You see the combination of go pay and Paypal position from a competitive standpoint, both within the country as well as the cross border perspective, thanks very much.
Yeah I'll take this.
Thanks for the question Colin So obviously, we're really pleased.
The.
We now own 100% of.
Go pay.
And we're the first and so far the only foreign payments company to operate a full domestic payments business in China and that obviously gives us a very strong.
Legal foundation for the business, we have there and for the business.
We intend to drive.
Very recently.
The deputy Governor upon from the <unk> C. At an article in the financial times.
And that was really kind of as clear statement of.
Of China's commitment to trying to strike the right balance between innovation, along with prudent regulation and.
The.
That plays right into what we wanted to do inside the market, we really want to work with the regulators there on both of those objectives and assure that we've got of <unk>.
Safe and secure digital commerce, and we really have.
Three goals over the next couple of years in China. So first obviously is to make sure we invest to have the right compliant infrastructure.
Inside China. The second is to really leverage all of our cross border expertise and that goes in two directions.
First we want to significantly increase.
The amount of.
Of cross border.
That Chinese merchants cash.
Can I get from the 350 millions of consumers, we have outside of China, and we also want to work inside China Chinese consumers purchased from the 29 million merchants that we have the outside of China. Both of those are already growing elements and we think that debt those can grow quite nicely.
In the years to come and it really plays into our strengths. The third thing, though is that we do want to work within the ecosystem inside of China with companies like China Union pay with the banks there with the tech platform companies there as well.
To drive.
The new types of payment services or incremental payment services inside the domestic market like that could be.
Payouts could.
Could be.
Unbranded full stack processing it could be QR codes.
For instance, I will just give you an example.
China is holding the Olympics in the next couple of years, they're going to be a tremendous amount of visitors going into China.
And we want our QR codes to be deployed so that people coming into China don't necessarily have to download.
Wechat pay or and I can use their paypal wallet inside China to make purchases at merchants and I think theres a lot of ways that we can leverage our strength.
<unk> of our partners.
Inside China and our strong.
The regulatory relationship that we have right now.
Both grow cross border and then to start to slowly, but surely add incremental services into the domestic market as well.
Very helpful. Thanks again.
Net.
Our next question will come from the line of Dan of Mizuho. Please go ahead.
Hey, Thank you for.
Great quarter question for Dan really kind of looking into the long term. It looks like Paypal is increasingly becoming sort of my view of the world's best Super App, especially now that you're offering bitcoin you are buying up the later in the county can you maybe talk a little bit what youre seeing in terms of engagement.
Paypal closer to becoming an everyday super App, maybe touch on your broader engagement strategy given the 73 million of accounts that you added in 2020.
And what are your long term digital wallet conviction as you introduce the traditional conditional functionality and services. Thank you.
Yes.
Yeah.
Dan that's a great question kind of.
At the heart of a lot of our strategy.
And we're going to be talking a lot of about that at our Investor Day next week as well.
So let.
Let me just very quickly.
Say that.
We are seeing engagement levels of already I talked about it a few.
Normalized for honey and all of the incremental net new actives that we brought in that are pending are traditional cars, we've never really been above nine or 10% normalized worried about 11, 5% of growth of churn rates are down all of the new functionality that we've put into place.
Whether that be crypto without the buy now pay later the venmo card QR codes are adding two usage, they're adding incremental PPV theyre, adding incremental transaction.
Once that I didn't mention is that people, who use paypal product in store and again. These are early days on this but those that are using it in store, we're seeing Dan 50 for incremental transactions that are just in store that don't displace the online.
It's basically doubling the number of transactions, we have and so as we start to build out our digital wallet really into the Super App that transcends across payment commerce and financial services all of that on a common platform all of that leveraging common day.
The elements of machine learning on top of that to give next best recommendations.
I think we are going to see as I mentioned in the amount.
My opening remarks of real bend in the historic rate of of engagement and.
It's going to be all around.
That's super App functionality and that digital wallet, moving well beyond just payments.
So I think.
Dan Thank you.
For that.
Great kind of closing question.
And I want to thank everybody for your time today, and I really hope that all of you and your families are safe and healthy.
And we are looking forward to speaking with all of you again next week at our Investor day. So thank you for your time and everybody take care Bye bye.
This concludes today's conference call you may now disconnect.
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