Q1 2021 PayPal Holdings Inc Earnings Call
Yeah.
Good afternoon. My name is Gabriel and I 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 and after the speakers' remarks, there'll be with question and answers session. If you'd like to ask a question. During this time.
And some press star followed by the one on your telephone keypad, if you'd like to withdraw your question simply press the pound.
And I would like to introduce your host for today's call and escape and he and Rep and Fitch Vice President corporate Finance and Investor Relations. Please go ahead.
Thank you Gabriel and good afternoon, and thank you for joining US welcome to Paypal is earnings conference call for the first quarter 2021.
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.
And 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 will refer to some non-GAAP measures you can find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures and 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 second 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 and this presentation is as of today's date May five 2021, 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 today I'm.
And I'm pleased to say that on the heels of the strong this year and Paypal history, we just completed our strongest quarter ever with it.
Our record financial and operating results.
Customers across the world have clearly embraced the digital economy and.
And Paypal has become an essential platform for both consumers and merchants.
Consequently, I am pleased to share that we are raising our annual targets for revenue.
EPS T PV and net new active accounts.
And as much of the world begins to shift its attention towards a post pandemic recovery. We continue to see strong demand for a comprehensive set of services from both our merchants and consumers.
Over the coming year, we will accelerate our customers' digital engagement.
Through the rapid innovation of our digital wallet and merchant Commerce platform.
Our addressable market continues to significantly expand.
Driven by accelerating secular trends and the proactive steps, we are taking to become a full commerce and payments platform.
We believe that the shift and consumer digital behavior will remain essentially unchanged and a post COVID-19 world.
[noise] tumors have expanded their digital lives into a seamless online and offline experience.
Our products are and essentially enabler of the digital economy and.
And our mission to shape, a future where everyone can participate fully in this new digital paradigm has never been more important.
Our Q1 trends are strong across the board and we're further accelerated by favorable comps from a year ago.
Our G. P V grew by 50% on a spot basis, or 46% on and FX and basis to $285 billion.
Ebay now represents five 5% of our volume and we expect their <unk> to be approximately 3% of total volumes by year end.
Excluding ebay are and as volumes grew by an all time high of 54% on a spot basis, and 50% on and FX and basis.
Our transactions and the quarter were approximately 4.4 billion growing 34% year over year.
We added $14 5 million net new active accounts and.
Ending the quarter with 392 million active accounts up 21% year over year.
We added one 4 million new merchants in the quarter, continuing the heightened pace from prior quarters, and we now have 31 million merchant accounts on our platform.
By the end of Q2, we expect to exceed 400 million active accounts.
And for the year, we now believe our and then <unk> will be between $52 million to $55 million.
Up from our previous expectations of approximately $50 million last quarter.
And I'm, particularly pleased to see our transactions per active.
Account begin to accelerate due to increased engagement across our portfolio.
Normalizing for Honey, our Q1 GPA grew by eight 3% year over year to 44.1.
We generated six point <unk> three $3 billion of revenue in Q1, growing a record, 31% spot and 29% on and FX and basis.
Ebay revenues declined 12%.
And we expect they will substantially complete their migration to managed payments by year end.
On the back of the strong revenue growth, we delivered non-GAAP EPS in Q1 of $1.22.
And 84%.
Venmo continued its strong performance in Q1 with $51 $4 billion and PPV.
63% year over year.
We recently launched the ability for venmo customers to buy sell and hold crypto currencies.
We are heavily investing in venmo commerce capabilities, which include rapidly upgrading the pay with venmo customer experience with initial rollout beginning this quarter.
And the Venmo credit card is outpacing our expectations for both new accounts and transaction.
And we're also making it easier for small businesses and casual sellers to accept venmo payments. We now have over 300000 small business profiles currently established including 200000 in Q1 alone.
Our venmo commerce, TPB and revenue growth continue to accelerate and we remain confident and our $900 million revenue target.
We expect to roll out our next generation digital wallet in Q3 it.
It will be all in one and personalize that that will empower our users to make the most of their money and strengthen their financial lives every day.
We will provide increasingly customized and unique shopping financial services and payments experiences for our customers.
Consumers are turning to brands that they trust when it comes to choosing a super App.
That clearly plays into our strength.
As a recent external survey of over 300000 consumers across the globe.
Selected Paypal as the second most trusted brand in the world.
Merchants continue to turn to Paypal in record numbers as we are now and a central platform to enable their transition into the digital economy.
Small businesses, who use Paypal during the peak of the pandemic saw their overall revenues grow by 25% versus a negative 9% for all other small businesses and the same time period.
Small businesses, who use Paypal last year drove 75% of their online sales from outside their local neighborhood.
Clearly expanding their addressable market.
And 65% with small businesses and the U S who use Paypal have cross border sales.
Versus less than 5% of all other small businesses.
Across the shopping journey merchants, who use Paypal see a substantial lift.
According to market research reported by Nielsen and.
Merchants with Paypal experience, 17% more repeat buyers and their checkout completion goes up by 34% and.
And Paypal consumers spend an average of 12% more at Paypal merchants and.
And finally, Paypal consumers are loyal to Paypal merchants buying 11% more often with Paypal is accepted.
These are powerful facts that support our brand promise to retailers as we add more and more capabilities to our platform.
For instance, our buy now pay later product continues to move from strength to strength.
And the short time from our launch with processed over $1 billion and TPG and the U S alone.
Early results continue to show, a significant 15% engagement lift and transactions and TPG.
In addition, nearly 30000 merchants have implemented our buy now pay later capabilities upstream on their product pages with a corresponding lift and our overall share of checkout.
Demand for our Paypal and Venmo QR codes and in store payments remains strong with and additional merchant signing up every 28 seconds.
We now have nearly 1 million merchants accepting our QR codes with continued momentum across our large enterprise merchants.
Our early adopters of QR C are spending 19% more key PV on the Paypal platform.
Our overall in store efforts across QR and cards equaled $6 $4 billion in Q1.
As I discussed during our Investor day, we believe the current technological underpinnings of our financial system will be substantially upgraded over the coming years.
Both crypto currencies and Central Bank issued digital currencies can play a critical role in shaping a more inclusive recovery and.
On a more equitable financial system.
Our leadership and all forms of digital currency and has been widely embraced enabling numerous positive conversations with central banks regulators and government officials around the world.
I'm also pleased to share that we closed our curve acquisition last month and.
Curves talented team will bolster our existing technology resources and accelerate our efforts to shape, a new financial infrastructure that is efficient low cost and inclusive.
We have and extensive roadmap ahead of us and our innovation will be pursued and partnership with governments and in compliance with local national and global regulatory frameworks.
The exploration of our operating agreement with ebay has enabled us to launch and extensive partnership with Alibaba.
This global agreement will enable hundreds of millions of consumers outside of China to shop across Alibaba sites in China pay.
And now available as a payment method on Alibaba wholesale marketplace as well as aliexpress and its global retail marketplace.
We are excited at the pace of our current ramp.
And the ultimate potential of this new partnership.
Additionally, our commercial agreement with flutter wave enables businesses across Africa debt.
Significantly more access to Paypal consumers in order to receive and make payments online and this quarter. We also collaborated with <unk> and the middle East, allowing merchants in the UAE to accept Paypal for customers shopping online.
These efforts serve to significantly broaden our reach and tap into rapidly growing marketplaces across the globe.
We clearly have a lot of momentum as we exit Q1, we will continue to accelerate new product innovation throughout the year.
Our increased expectations for 2021 reflect our conviction that we will continue to grow share and increase our addressable market by capitalizing on the accelerating shift to digital.
I'd like to thank our employees, who continue to work tirelessly on behalf of our customers.
Their hard work drives our market leadership and positions us to continue to deliver value for all of our stakeholders and with that let me turn the call over to John Thanks, Dan.
And I want to start by thanking our customers partners and employees for helping us deliver and outstanding quarter.
We recently marked one year into the COVID-19 pandemic.
Notwithstanding the challenges that our teams have faced.
Our focus on execution and culture of collaboration are allowing us to deliver very strong results. We're off to a great start to the year and Q1, we outperformed on both revenue and earnings and built on our operational and financial momentum exiting 2020.
And looking on our and our results for the quarter the year over year growth rates benefit from the comparison to a softer March last year, when we absorbed the most meaningful negative COVID-19 impact.
That said our business is growing at structurally faster rates than pre pandemic.
And as a result, we're raising our guidance for this year.
Before discussing our updated outlook I'd like to highlight our Q1 results.
Total payment volume grew 50% at spot and 46% on a currency neutral basis. This is the strongest quarterly growth we've ever reported.
Our Q1 <unk> grew at a two year compound annual growth rate of 33% accelerating from 30% and Q4, and reflecting our strong momentum and user growth.
<unk>.
While we typically experience a sequential decline in volumes from Q4 to Q1 this year, our volume grew 3% quarter over quarter.
Versus the first quarter last year and merchant services volume grew 50% currency neutral and volume contributed by ebay marketplaces declined 3% on the same basis.
And Q1 ebay represented five 5% of our volume down 53 basis points sequentially and down 260 basis points from Q1 last year.
Revenue increased a record 31% on spot basis, and 29% currency neutral to $6 billion.
Transaction revenue grew 33% to $5 6 billion.
Representing 20 points of acceleration from last year on a spot basis and eight points of acceleration sequentially.
Strong performance across core Paypal, Braintree and Venmo drove these results.
Excluding ebay transaction revenue grew 42% indicative of the ongoing strength of our diversified two sided platform.
Other value added services revenue grew 2% on a spot basis, and 1% currency neutral to $412 million. These results were driven by strengthening credit performance, which was partially offset by lower interest income on customer balances.
And the first quarter transaction take rate was 197% and total take rate was 211%.
Nearly one third of the 24 basis point decline and transaction take rate resulted from the mix effect of ebay.
A reduction of $101 million and international transaction revenue from foreign currency hedges gross and bill payment volumes and accelerating venmo volumes also contributed to this decline.
The 31 basis point decline and total take rate resulted from these factors as well as lower growth and other value added services revenue.
Volume based expense performance was the strongest and our history.
These expenses increased only 9% to $2 5 billion.
And on 31% revenue growth and.
As a result transaction margin dollars grew 52% and the first quarter and transaction margin reached 57, 8%.
Normalizing for the macroeconomic related credit loss provisioning last year transaction margin dollars grew 38%.
Going into the expense highlights transaction expense improved 12 basis points as a rate of TPB to a record low of 80 basis points, driven by both volume and funding mix.
Continued improvements and our risk Decisioning and mitigation strategies resulted in transaction losses, improving three basis points to another record low rate of 10 basis points overall.
And discussing our credit losses for the quarter I want to provide additional context, given the increased provisioning last year and the complexity and the year over year comparison.
As a reminder, and Q1 and 2020, we increased reserves by $227 million for expected credit losses due to the deterioration and the macroeconomic environment after.
After taxes. This represented a negative <unk> 17 per share impact.
During 2020, we increased our reserve coverage ratio and ended the year at 23%.
In addition, our gross receivables balance declined from $4 5 billion at the end of the first quarter last year to $3 6 billion at the end of 2020.
Tightened underwriting and strong repayment activity contributed to lower balances and our merchant loan portfolio.
This decline was partially offset by growth and our consumer portfolio.
These trends continued in the first quarter of 2021, and we ended the quarter with $3 5 billion and receivables.
More favorable economic conditions and portfolio performance resulted in a partial release of reserves and Q1.
This reserve release benefited credit losses by approximately $87 million and provided an approximate six cent benefit to EPS and.
As a result at the end of the first quarter, our reserve coverage ratio declined to 21%.
In the quarter non transaction related operating expenses increased 31% and represented 30% of revenue remaining essentially flat to last year.
We are prioritizing growth.
And to advance our key initiatives, we're continuing to invest more and sales and marketing and technology and development on.
On a non-GAAP basis operating income was $1 67 billion.
And our operating margin was 27, 7% our strongest performance for any first quarter.
Normalizing only for the macro related provisioning last year operating income grew 46%.
And operating margin expanded approximately 300 basis points.
And Q1 on this normalized basis and inclusive of our elevated investment spend we earned an incremental 38 cents of operating income for every additional dollar of revenue generated.
Non-GAAP other income declined by $39 million relative to last year.
This was driven by reduced interest income from lower interest rates and higher interest expense from our debt issuance last may.
The negative impact on non-GAAP EPS from the decline and other income was largely offset by a lower effective tax rate.
For the first quarter non-GAAP EPS grew 84% to $1 22.
Again normalizing for the 17 negative impact last year related to increased credit provisioning non-GAAP EPS still grew 47%.
We ended the quarter with cash cash equivalents and investments of $19 1 billion.
In addition, we generated 154 billion and free cash flow, representing 27% growth from the first quarter last year for.
For every dollar of revenue and the first quarter, we generated 25 or <unk>.
Free cash flow.
Now I'd like to discuss our updated guidance for 2021, and our guidance for the second quarter.
This updated outlook reflects our ability to accelerate growth at scale and increasing rates of profitability as well as the underlying strength of our core business.
For the full year 2021 based on our record first quarter performance and sustained momentum we are raising our net new active PPV revenue and earnings outlook.
Relative to our prior expectations ebay's managed payments transition has accelerated and we now expect a greater percentage of the migration to be complete by the end of the third quarter.
This acceleration puts more near term pressure on our revenue and earnings growth.
And at the same time this more compressed timing allows for a cleaner exit and 2021.
Broad based strength and our merchant services business and improving credit performance allows us to more than offset this impact.
We now expect revenue to be approximately $25 75 billion.
Or growth of approximately 20% on a spot basis for the year.
We are raising our expectations for revenue growth by one point, while at the same time absorbing an additional two points of pressure to revenue growth from ebay.
In addition, we expect to generate approximately 100 basis points of operating margin expansion. This year relative to the more modest margin expansion, we had guided at the start of the year.
As a result, we now expect non-GAAP earnings per share to be approximately $4 70.
Representing growth of approximately 21%.
Relative to the guidance we provided at the start of the year. This is an additional four points of non-GAAP earnings growth and 2021.
We're executing from a position of strength and seeing strong adoption of our new products and services.
Our updated guidance includes increased investment and our digital wallet initiatives to drive further innovation adoption and engagement.
The strong underlying trends and our business and Q1 outperformance are allowing us to offset these incremental investments and the more pronounced ebay headwinds to deliver stronger earnings growth than we previously expected.
For the second quarter, we expect revenue of approximately $6 $2 5 billion.
Representing approximately 19% growth at spot and.
In addition, we expect non-GAAP earnings per share for Q2 to be approximately $1 12.
Representing growth of approximately 5%.
As a reminder, last year operating margin expanded more than 500 basis points and the second quarter phase.
Favorable volume and funding mix dynamics combined with COVID-19 related understand and non transaction related expenses contributed to the strong margin performance and resulted in 49% growth and non-GAAP EPS.
And this record growth last year creates a tougher comparison on.
On a two year compound annual basis, our earnings guidance reflects 25% growth.
I'd also like to discuss our updated net new active outlook.
We're raising our guidance for 2021 net new active accounts.
Based on the $14 5 million additional accounts and Q1 and our current trends. We now expect to add in the range of 52 to 55 million net new users this year.
This is an increase from the 50 million net new actives that we guided to start the year.
On top of the approximately 73 million users added last year and our current pace, we'll add more new users users between last year and this year than we did in 2016, 17, 18 and 19 combined.
As a reminder, and Q2 last year, we added $21 3 million accounts and are now lapping this growth given.
Given this tougher comp and the ramp of our initiatives throughout the year. We expect Q2, net new actives to be lower than Q1, and for Q3 and Q4 adds to be sequentially stronger.
It's worth noting a couple of points related to our guidance and our business overall.
And the environment in which we are operating while more stable than a year ago continues to be very dynamic and more challenging to predict and in normal times and.
And many of our core markets. We're on the threshold of some degree of a return to normalcy people are getting vaccinated vaccinated theres a return to physical experiences travel is resuming.
Some of this is certainly pent up demand from the void that resulted from COVID-19 over the last year for some perhaps it may be a reversion to the way things were prior to 2020.
The pace and degree of this change and its impact on the trends on our business is challenging to predict from one quarter to the next with the same level of certainty that we have in normal times. This brings me to my second point, which is unassailable, our business has and will continue to benefit from the changes and consumer behavior.
That have resulted from this pandemic, namely the acceleration of the continuing trend of the growth and e-commerce penetration and importantly, the growing ubiquity of digital payment experiences. We continue to see elevated e-commerce spending well above pre pandemic levels even.
And countries and markets that have begun to reopen.
We're positioned to be a long term beneficiary of the secular trends and as we've repeatedly said are investing heavily to help shape. This outcome.
That said, our short term forecasting is susceptible to more variability than normal.
To wrap up our first quarter results underscore the ongoing strength diversification and relevance of our scaled two sided global platform.
We extended our leadership position and digital payments and delivered some of the best performance and our history on both on absolute and relative basis and.
Our strong trends across the business reflect enduring secular trends and continued business momentum.
We're continuing to invest aggressively to drive accelerated growth and a post pandemic world and capture the significant opportunity ahead.
At the same time, our meaningful scale enables us to realize additional efficiencies expand our operating margin and support significant free cash flow generation.
With that I'll turn it over to the operator for questions. Thank you.
And at this time I would like to remind everyone and ask a question. Please press Star then the number one on your telephone keypad.
We ask that you. Please limit yourself to one question and then return to the queue for any follow on.
Thank you and your first question will come from Darrin Peller with Wolfe Research. Please go ahead.
Hey, Thanks, guys and great results here, when we look at coming out of last year's record M&A as we thought 50 million with a good number and now you are raising that.
If you could just touch on the dynamics youre seeing around the net new actives, what's driving the upside even after these kinds of record rates and especially as we go on to reopening and the market. If you could just talk through the activity and the churn levels and then maybe on the other side of the funnel.
Touch on the incremental users coming on and even as the World Reopens is it partnerships like Bob you mentioned today or other kinds of international or just really what's the big driving force for that conference. Thanks.
Thanks, guys.
I think maybe.
Start with the answer to.
To that turn on and see if John wants to supplement anything.
And we had a strong Q1.
<unk> is up 46% X the onetime honey adds that we had last year.
On ended the quarter with 31 million merchants 392 million active accounts.
And we're really getting to a scale right now there and that has a huge network.
Effect on it and we brought on in Q1, two new customers every second throughout the quarter, we brought on a new merchant every five seconds.
Half the quarter.
With Brian and somewhere between 141 5 million, new merchants and that was up over 100%.
From a year ago.
And I think the drivers.
It's predominantly Paypal, it's predominantly still on our core markets.
Selling and still seeing great growth from from Venmo.
But.
My view on net new actives is.
I say that is that being too aggressive.
Look I think I hope you have a lot of opportunity yet here.
We have a lot of expansion into international markets I think our marketing programs are really beginning to deliver excellent results I think we're just scratching the surface there.
And when I think about what's going on inside the base on.
Our engagement levels are going up substantially and you saw kind of our tpa grow by 7% if you normalize for honey.
Tpa went up 8% and the quarter.
But if you normalize for the huge amount of M&A is that John just talked about because when you put on huge amounts of NH and they don't have the full year to do their full tpa, maybe a bunch came on this quarter.
Ed.
One five months to do transactions, and we count them and that Tpa, but if you normalize that to say the $37 million, we used to be doing.
And then that Tpa grew by 14% in the quarter and and that is really a.
On a result of our daily active users coming on our daily active users were up 33% in Q1 across the base, but our new products and services right now on.
And are driving huge engagement level and so I'll just give you a couple of examples buy now pay later I'm sure somebody will talk about it later, because we have a lot of fun things to talk about but 50% of the customers who have used buy now pay later have repeated within three months and 70% have repeated.
And within six months, if you look at our in store cohort now they are driving an incremental 60 to 120 incremental transactions and we've talked about this last call and it's holding true.
About half of our crypto users open that our App every single day and.
So we're clearly beginning to see both at the top of the funnel the potential for increases and so at the top of the funnel and really narrowing the bottom of the funnel which is why.
We're bullish on <unk> and then <unk>. The one thing I would point out Darrin that I think is really important is the cadence of those and then as <unk>.
Q1 with a good good solid quarter for US Q2 is always going to be the lowest quarter of the year, because we did $21 4 million net new actives last year, even though our churn rates are down and that was one of the best cohorts, we ever activated it puts incremental.
Pressure at the bottom of the funnel for Q2, and then we see really.
Increasing amounts of M&A as we go through the year. So in general really strong on the M&A front really strong on the engagement front and hopefully more of that to come yes, I'll just add real quickly.
And like.
If you go back to a year ago, or maybe three quarters ago and you saw the record amount of net new actives that came and the second quarter I mean, I think that.
And when can we probably surprised everybody right that was an enormous number and.
And then you think about it sort of like okay, well now what.
And because we've got and make sure that we're engaging these customers and they are using us and all the ways that they can and we even going back to that point and time a year ago. We knew that the second quarter of this year was going to be our toughest comp.
Comp from a net new active perspective, and as Dan said, despite the improvements, we've made and reducing churn and theres still a lot of pressure there and so Q2 is going to be sort of the low point for the year for US and then we expect <unk> and <unk> to see strengthening and acceleration there, but the thing that I will say that sort of gives us.
Confidence on this.
And we've talked about this for a period of time, but we've consistently said that these are been our most engaged cohorts that we've ever seen and and we're continuing to see those trends they haven't waned.
What you might expect related to people returning to the physical world and so that gives us.
The conviction around raising this and and really what it bodes for the rest of our business as well.
Okay. That's great. Thanks, again, guys congrats again.
Thanks, John.
Your next question will come from pension Huang of Jpmorgan. Please go ahead.
Thank you. Thank you are really impressive results on many fronts I wanted to ask on the.
On the first quarter revenue. So you beat your revenue guidance it looks like by three percentage points I think that's the widest margin of upside that we've seen.
And a few quarters. So I'm curious what surprised you can you rank for us what surprised you with what drove the upside and how does it change your revenue outlook for the year. It sounds like it's enough to offset the bigger ebay drag, but would love. It if you could make it force maybe thanks Tien.
Tien tsin, and starting to and yes.
I think starting with the full year Youre right.
Momentum that we're seeing and the business really has allowed us to overcome the headwinds that we're seeing from a more accelerated.
Gration for ebay to its managed payments to specifically address your question on Q1, and there's actually a handful of things.
With that I think performed differently than what we expected starting with January. So there was an extended holiday shopping periods like the first couple of weeks of January we saw much stronger e-commerce activity than normal.
On sort of the other booking on getting to March we saw on resumption and travel that happened quicker and more quickly and what we had estimated and then sort of in between that and <unk> got the stimulus and I don't want to overstate the effective stimulus because we we had assumed some of that in our forecast I think it was pretty clear at that point.
And time that that was going to happen.
But I think fundamentally if you step back and you think about these things that I described that maybe are more transitory what has been I think a more permanent shift is what we're seeing around.
Call it the displacement of cash.
And Youre just seeing.
More and more digital experiences that are replacing cash and I'll give you one sort of showing example, Tianjin, but last Saturday night, and I went out to dinner and.
And our restaurant had reopened and I'm sitting inside and when it gets time for me to get my check.
Handing off my credit card to the waiter for them to run and put it through the machine there.
Printing a receipt with a QR code on it right there I'd say physical world experience that is happening digitally and this is the transformation that is happening right in front of our eyes right. Now we are on the threshold of this and Thats fundamentally I think it's a small anecdote, but it's I think it's a good example of kind of what we're seeing and our business where there is.
This convergence of online and offline that is really benefiting our business.
I'd just add on to that because I think that is.
Is the strength that we're seeing even in markets that are opening if you think about we did a 100 point.
Raising guidance for revenues you had 200 incremental points of pressure from ebay, that's really and effect of 300 point raise on our core business.
And Thats, because we are now seeing people living a digital life.
And what used to be and for us as well take a year year and a half ago services' separate distinction between in store or the physical world and E Commerce and the online World and now what we're seeing is it's <unk>.
Just the digital world, even as economies open more and more of those payments are moving to digital and think about it like.
<unk> would be a good example, as more and more rides start there and they're moving into a physical environment, but it's all done through our digital platform and digital payments and so on.
And clearly.
That is something that we see as a sustaining.
And growing trend.
Going forward and I think John mentioned cash is definitely being replace.
And Theres just a study done.
Weak or two ago by one of the major networks that said anywhere between 60% to 70% of consumers are going to use cash less frequently and that's moving to digital is moving to digital forms of payment and it's moving to PDP and by the way when it moves to digital it's moving predominantly to.
Debit, which obviously is also great from a.
From a funding perspective.
On that and so I think we have this portfolio of services right now, whether it be Z or braintree or QR codes, or just whats happening and the physical world that compliments now what's happening and the online world with our true.
More traditional products and Thats kind of a one two punch that I don't think any of us really understood the extent of or the depth of the transition to a digital economy and just.
If I can add one more thing.
And for those reasons that Dan mentioned, it's also why we are investing as heavily as we are.
No point in time, and our six years as a public company have we invested.
Heavily as we are right now and because we want to we want to capitalize on these secular tailwind and we think it's really important and and.
And that's why you see.
Not rolling through the entirety of that in terms of our EPS guidance, because we think it's more important to invest right now and that is clearly our bias and Fortunately for us we're able to do that while still expanding our operating margin in terms of our guidance of 100 basis points for the year.
Yeah.
Very clear thank.
Thank you both.
Thank you.
Your next question will come from Lisa Ellis with Moffett Nathanson. Please go ahead.
Hey, good afternoon, guys. Thanks for taking my question and follow up on your comments, Dan on digital currencies and and their ability to.
To potentially drive financial inclusion globally.
We're engaging with governments around the world that are experimenting with EBITDA how are they thinking about the role of the private sector and specifically what role are bolt could you see Paypal claim.
And moving you know more broadly how should we think about and how it.
Could impact your bad debt.
Yeah.
Yep.
So.
We have had quite a number of <unk>.
Conversations here and the U S and really across the world.
With.
With the leaders of those regulatory bodies.
And.
Some of the key players and government.
And we'll kind of obviously you talk about the specifics of any of our conversations that we've had with them.
And what I would say is.
It is a conversation that.
It's very much one of learning from each other.
Understanding the capabilities that each of us have what some of the concerns.
On that.
Some of the central banks might have on governments with some of.
The benefits of our platform like Paypal.
Could do and various forms of how <unk> could be issued.
And I believe.
Based on all my conversations that each country is going to go at.
At different speeds, you're going to have different regulatory oversight.
On it but.
And there isn't one.
Country around the world and which we've engaged in and where I don't think that they're envisioning and future that isn't one of a digitized Fiat currency I think obviously, there's a lot of synergy with digital wallets. There is a lot of interesting.
Things as you think about next generation technology that can add utility to payments that can take down.
Perhaps costs and the elimination of.
Of unnecessary intermediaries.
And certainly can speed, the time and which somebody can.
Can access their money.
So.
Hi.
We've got a tremendous amount of really great.
Our results going on tactically with our crypto currency efforts right now.
And we're excited about those we're investing and those but this whole idea around and establishing a digital currency and blockchain business unit inside the Paypal.
Let's just think about.
What is the financial system going to start to move towards and how can we be.
Shaper of that a leader within that and and not a reactor to how that's happening and that those conversations.
Have been have gone well beyond my expectations in terms of the openness of governments and central banks to think about.
New ways of managing and moving money through the system.
Very exciting and.
It is actually yes.
Our next question will come from Sanjay <unk> of <unk>. Please go ahead.
Thanks.
I had a question on the reopening trends seen thus far this year and any discernible trends that you might have observed like how what's affecting volume mix funding mix and just overall engagement with the Paypal ecosystem.
Sure Sanjay I'll start there and Dan may want to add a little bit I think theres a number of things their debt.
And that we're observing.
And building on your question around debit and Thats, certainly something that stands out we see.
On a shift and funding towards more debit versus credit and that's across our broad portfolio of products, but.
Good examples even might take buy now pay later, where and the previous quarter about 78% of that was funded with debit that moved up to 82% and and most recent quarter and so clearly we're seeing.
A shift there and again going back to an earlier answer we believe some of that is the displacement of cash and two.
Overall kind of trends that we're seeing around reopening certainly travel has.
Has picked back up and.
That happened a little bit earlier than what we had anticipated.
Among the verticals that sort of standout fashion still is one of the single largest growth verticals and in terms of overall volume for us, but in terms of the highest year over year growth rates still food and groceries and and incidentally even in markets where.
You've seen some reopening so again it just it really supports what consumers have been telling the world and surveys for 12 months now now we're seeing it and behaviors and so again.
And just sort of plays into a lot of the themes that we're talking about here in terms of this convergence of the physical world and online and the need to have these omni experiences for your customers, but those will be a couple of things that I would I would call out that we're seeing.
Okay. Okay. Thank you.
Our next question will come from Colin Sebastian with Baird. Please go ahead.
Colin Thanks Han Moe.
Are you doing.
How you are feeling at this point about the original full year revenue target for that business and related to that if you have any feedback on how crypto integration and business profiles are impacting how people are using venmo and if you could just remind us how the pipeline of other enhancements to the app will sequence over over there.
Most of the year. Thank you.
Yes sure.
So first of all Venmo had another really strong quarter TPB up 63%, it's off to a great start in Q2 as well.
And one really interesting income that John and I were remarking on the other day is if you look at the annualized TPB of Venmo right now.
And at about $205 billion to $210 billion of TPB.
Back when we when we went public Paypal our T PV for the year with 285 billion. So you basically have another paypal in sight.
Paypal, but when we went public a year ago and there is such a huge monetization opportunity on that I think obviously, we feel very confident and the 900 million, but that is scratching the surface of what of what.
Got venmo can be this is a huge base that's growing and the great thing is that the team. There is executing on all of their initiatives credit card. We knew was a great experience, but it's performing beyond our expectations new sign ups transactions and that's what happens when you have a great value.
Proposition consumer experience crypto launch and launch at 1% ramp just went to 5% ramp it will be 100% ramped.
By the end of this month the end of May and.
And obviously.
And if you look at again surveys that have come out recently and you look at millennials something like 74% of them.
Anticipate that youre going to use crypto and the next year or two and some way business profiles grown above plan, we're going to be introducing things like goods and services by our protection and Thats a huge revenue generator on the Paypal PDP side same thing will be happening.
On the venmo side pay with Venmo, which by the way is very little of this years.
900 million, but that pay with venmo is going to be the majority of revenues as you look out.
Years from now and so we're really excited about that rolling out and.
Eventually.
And then though is going to move down the same path that the Paypal.
Super App digital wallet is going down it's going to become.
Super App itself, pulling and more and more.
Capabilities and services around again shopping and.
Basic consumer financial services and payments it is international expansion and front of it and there's just so much opportunity I think we've all been.
And bullish on the potential of Venmo, we're now beginning to see it.
Realized and we just think that just want to keep investing and that because the opportunity is quite large.
Great. Thanks, Dan.
Net.
Our next question will come from David <unk> of Evercore ISI. Please go ahead.
Thanks, so much and and good to see the strong growth and <unk>.
<unk> from buy now pay later customers can you talk about you.
Your expectations for buy now pay later for the balance of this year.
More broadly how you expect that.
<unk> engaged buy now pay later customers to engage and the Paypal ecosystem overall.
Yeah sure I'll start and then maybe John can go and first of all.
It's a great value proposition and the market I think everybody clearly understands that and sees that.
No incremental cost.
For a merchant to have.
And buy now pay later.
As part of their take rate easy integration.
And by the way Paypal as a trusted brands so consumers see it a recognize it and have no problems.
Taking part in that value proposition and because we have now 392 million customers on the platform. We know with them. We know their behaviors, we have higher approval rates and less defaults.
And then what we're seeing out and the buy now pay later.
Just to give you a sense.
David.
Results and thoughts with you have over $2 billion of TPB globally.
Since launch over 1 billion and the U S. Over 14 million loans have been done over 5 million unique customers with over 500000 unique merchants more hundreds of the LTE customers.
As I mentioned 30000 upstream and Thats growing every single day.
And one of the great things, we're seeing with customers that are engaged and buy now pay later is there is a 15% halo lift in TPB and on the platform and.
Because of funding it with debit debits, increasing there's like a 16% reduction and our cost.
Per transaction, so it's a great proposition for merchants tons of conversations going on with all the leading merchants.
Big uptake with consumers and we're going to expand into Australia by the end of Q2 and and much more of Europe by the end of the year.
Thanks for all those great metrics, just a quick follow up on the bottom of the funnel impact from the growth of buy now pay later.
Yes.
Again, it's a little bit early because we've launched all of these things and like.
Last six or eight months or so.
So given we look at 12 month active so, but if you look at the repeat behavior and the increased engagement that probably bodes pretty well for both tpa and churn reduction, especially given that this is now scaling quite.
This is meaningful scale, even for a company of our size.
Thanks, so much congratulations.
Thank you.
Your next question will come from Bryan Keane with Deutsche Bank. Please go ahead.
Hi, guys I wanted to ask John on the impressive operating leverage and we saw the res and non-GAAP operating margins.
And two I think it's about 100 basis points, so just thinking about it.
What caused the increase and confidence there and even though ebay is a bigger headwind and you're investing more youre still increasing operating margins. So there's a lot of things going on the positive direction. There. So I'd just like to get the details from me. Thanks.
Happy to address that Brian and so again I want to repeat the number because it's it's a whopping number 38% incremental operating margins and the quarter.
And it really demonstrates the scalability of our platform, particularly particularly when you think about the level of investment that we've had internally and you can look at some of the year over year comps and our expense items line items and and get an idea of that but I think there's a number of different areas, but a couple of it obviously stand out are the.
Transaction related operating expenses of transaction expense and transaction loss to have record lows and both those.
Again, Mike.
The improvements that we've made and our risk capabilities to drive down transaction losses has just been tremendous and we started talking about this probably five five or six quarters ago, and and look I don't know if were going to come in at 10 basis points.
Every quarter I, certainly would hope so but that is that has a performance that was really hard to imagine a couple of years ago.
But the improvements there that we've made in terms of the capabilities are definitely sustainable and transaction expense look I think you can you can pick at any one part of our P&L and like take take rate as an example, we saw declines there some of that is related to mix like we're obviously doing as an example, more bill payment right now which carries a low.
Sure.
Take rate while at the same time and carries a lower transaction expense and so we've always focused on that day on that margin between the two and again to have a margin of transaction margin approaching 60%. This quarter, we're really pleased about it and so.
The obvious question is where does that level out over time does it go down from 80 basis points does it go up from 80 basis points.
Tough to tell but I, certainly don't think debt, we're going to see levels that we saw pre pandemic there may be some inflation.
But I think all with a mix changes and our business and what we're seeing around the pull forward of E. Commerce, We would expect transaction expense to remain at lower levels pre pandemic, which again gives us the just amazing leverage that we have on this platform.
Got it congrats on the quarter.
Thank you.
And last question for the call today, I will now pass the call back to Dan for closing remarks.
Thanks, so much and thanks, everybody for all of your questions.
And thank you for the time, you spent with us today.
I hope that on.
All of you and your families are safe and healthy we look forward to.
And not just speaking to all of you soon but hopefully seeing all of you soon as well. So again. Thank you for your time take care and Goodbye.
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