Q3 2021 PayPal Holdings Inc Earnings Call
Good afternoon. My name is smell and that will be a conference operator for today at this time I would like to welcome everyone to Paypal Holdings earnings Conference call for the third quarter 'twenty 'twenty. One all lines have been placed on mute to prevent any background noise. After your speakers remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question press. The pound key. Thank you I would now like to introduce your host for today's call Ms. Gabrielle Rabinovich singer Senior Vice President Corporate Finance and Investor Relations. Please go ahead.
Thank you Mel and good afternoon, and thank you for joining US welcome to Paypal earnings Conference call for the third quarter of 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.
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 our Investor Relations website.
In discussing our company's performance, we will refer to some non-GAAP measures.
You can find a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the presentation accompanying this conference call.
Management will make forward looking statements that are based on our current expectations forecasts and assumptions and involve risks and uncertainties. These statements include our guidance for the fourth quarter and full year 2021, and our outlook for 2022.
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 our Investor Relations website, you should not place undue reliance on any forward looking statements all information in there.
This presentation is as of today's date November eight 2021.
We expressly disclaim any obligation to update this information.
With that let me turn the call over to Dan.
Thanks, Gabriel and thanks, everyone for joining us well the big news today is that for the first time, we are teaming up with Amazon to enable customers in the U S to pay with venmo at checkout.
Starting next year customers will be able to make purchases on Amazon dot com and the Amazon mobile shopping app using their venmo account.
This is obviously a very significant moment in our venmo monetization efforts.
In March the beginning of an exciting journey with Amazon now.
Now that we are no longer constrained by the contractual obligations of the ebay operating agreement.
The increasing scale and brand trust associated with our two sided platform continues to set us apart from the rest of the market.
And enables us to expand our footprint with existing merchants.
And attract new partners.
And now to our results.
Our overall Q3 results were generally in line with our expectations. Our total payment volume grew 26% on a spot basis to $310 billion.
This comes even as ebay's PPV declined by 45% in the quarter.
And is now approximately 3% of our overall PPV.
Excluding ebay our volumes grew by 31% on a spot basis with an annualized run rate of one two trillion dollars.
Our active accounts were up 15% year over year, reaching $416 million.
Added $13 3 million net new active accounts in the quarter, including another $1 2 million merchant accounts.
Our total merchant count to $33 million.
And we remain on track to deliver more than $52 million and then as for the year.
Importantly, our diverse suite of products and services.
Drove double digit growth in our transactions per active account.
Up 10% to 44 two times.
Revenues in the quarter grew to $6 $182 billion growing 13% on a spot basis.
This was slightly below our expectations as back to school sales and travel were weaker than we expected.
But even so excluding ebay our revenues grew by 25% in Q3.
Ebay now represents less than 4% of our total revenues.
And we delivered non-GAAP EPS of $1.11.
Even as we continue to invest heavily in our growth initiatives.
Our platform continues to drive substantial value for our merchants.
<unk> is the most accepted digital wallet with more than 75% of the top 1500 largest global merchants utilizing paypal at checkout.
And on average our Paypal checkout conversion is 34% higher than other checkout options.
In addition to our Amazon News, we are very pleased to say that Walmart now presents Paypal as a checkout option for both the grocery and marketplace business and.
And go fund me added Paypal to their checkout flow with venmo to follow in the coming months.
Well thereof, and Phillips 66 are adding our QR codes to their thousands of gas stations across the U S and United Airlines recently launched Paypal QR payments in flight.
As checkout evolves from PE now to pay on your own terms, we've seen rapid adoption of our buy now pay later capabilities in the U S, Germany, France, UK and Australia.
In Q4, we will expand buy now pay later to Italy and Spain.
Also in this quarter, we eliminated consumer late fees to assure we deliver the very best value proposition to our consumers while delivering on our mission to build an inclusive digital economy.
Since our buy now pay later launch we have processed approximately $5.4 billion in TPB with more than $2 billion of that PPV in Q3 alone.
Approximately 950000 merchants have customers, who use our buy now pay later capabilities.
And more than 65000.
Have positioned buy now pay later upstream on their product pages.
And over 9.5 million consumers have transacted more than 33 million times with our buy now pay later products, we will expand our global pay later portfolio in the first half of 2022 to include longer term installment plans.
<unk> consumers to spread higher priced purchases over longer periods of time.
This is already available in Germany, where we are seeing great initial success.
We completed our acquisition of Paty, a fast growing two sided payments platform and provider of buy now pay later solutions in Japan.
This will accelerate our momentum in Japan, a strategically important market and one of the largest e-commerce markets in the world.
We are seeing very positive trends on our new Paypal, App, which is now ramped to 100% globally.
Consumers are engaging with the app and discovering the breadth of our new value proposition.
Although it is still early initial results show that the new App has driven a 25 times lift and consumers exploring our deals and offer staff.
A 15% increase in first time users transacting with crypto and it has also driven a 35% lift in our cash card enrollments and the average revenue per account from digital wallet users is too.
Twice that of checkout only users.
We expect to launch more features next year, including equity investing capabilities.
It's quite exciting to see the initial positive reaction to our App and we will continue to refine and expand its functionality to help consumers navigate an increasingly digital and connected lifestyle.
Venmo continues to achieve milestones and break records and is on track to deliver $900 million in revenue this year.
With more than 80 million customers and $240 billion and run rate PPV Venmo scale is on par with Paypal entire U S franchise in 2016.
Most customers are adopting more and more products and we are seeing accelerating momentum with our new product introductions.
Even with all of this growth and these impressive accomplishments. We are just at the start than most commerce journey and we could not be more pleased about joining forces with Amazon.
We expect venmo to be transaction margin positive this year, while still growing its PDP business at very healthy rates.
The back half of 2021 was always going to be the low point of our revenue growth this year.
And we are appropriately cautious as we entered Q4 and as we think about 2022.
We are seeing the impact of global supply chain shortages in our merchant base.
Consumer confidence has weakened with the absence of stimulus payments and with the economy reopening more people may be likely to do their holiday shopping in store as confidence in delivery logistics is depressed from last year.
And of course, we still feel the impacts of ebay's managed payments migration over the next few quarters, although at a lessening right.
Almost all of these issues are temporal.
And consequently, we expect our revenues will accelerate throughout next year.
And we remain confident in our medium term guidance.
I'd like to spend a few moments on the recent rumors that made their way through the news.
We participate in a rapidly moving industry.
Quite clear that consumers and merchants prefer a more connected digital lifestyle that encompasses financial services shopping payments and commerce.
Our market research and that of others strongly supports the vision of a more connected economy and Paypal clearly has the brand trust.
Regulatory relationships and scale to be a meaningful leader in the digital economy.
Exploring all potential opportunities to enhance shareholder value is our responsibility.
But obviously only a select few deals will meet our very strict financial strategic and capital allocation criteria.
We are fortunate to be a market leader in an environment with so many potential opportunities and operate in an industry with a number of favorable tailwind.
We will continue to execute against our game plan and responsibly explore the options in our rapidly evolving ecosystem. So that we remain the leader we are today and Tomorrow's world and with that I'll turn the call over to John.
Thanks, Dan.
Like to start by thanking our customers partners and employees for helping us deliver a solid quarter.
We're now reporting our results for the seventh quarter since the pandemic began.
And it's remarkable to take a step back and reflect on everything that we've accomplished during this dynamic and unprecedented time.
Theres been a profound and enduring shifts in global commerce and consumer behavior.
Each has significantly expanded our addressable opportunity.
The powerful and accelerating secular tailwind of increasing ecommerce penetration and cash displacement have helped to advance our leadership position in payments.
To give you a better sense of the scale of growth. We've experienced it took 20 years for Paypal to reach 600 billion.
In annual payment volume, which occurred in 2019.
Only two years later, we crossed one two trillion.
Relative to 2019, we've seen significant growth across our key performance indicators, including active accounts engagement <unk> revenue EPS and free cash flow.
At the same time, we're operating in a complex environment.
The macroeconomic landscape is currently characterized by varying rates of reopening activity globally and influenced by short term supply chain challenges inflationary pressures and concerns related to consumer sentiment.
These factors contribute to a backdrop that continues to make forecasting more challenging.
Our third quarter performance demonstrates the strength of our diversified platform, our global reach and the scalability of our business, notably we delivered these results against tough year over year comparisons and in the quarter, where we faced the most acute pressure from ebay's payments transition.
For the quarter, we're reporting revenue of $6 2 billion.
Representing growth of 13% on both a spot and currency neutral basis.
Ebay marketplaces revenue declined 67% to $235 million and contributed less than 4% of total revenue versus approximately 13% last year excluding.
Excluding ebay revenue grew 25% year over year and 26% on average for the last two years. This.
This two year compound annual growth rate is particularly notable throughout 2021. This growth rate has been consistently strong at 25% and 26% in the first and second quarters, respectively.
I would also like to provide some context for our performance relative to our expectations. When we provided third quarter guidance in late July.
First travel volumes strengthened in June and July. This trend then reversed in August and September due to concerns related to the Delta variant.
Second back to school spending was somewhat softer than we had expected.
While our overall performance was well within our guidance, we saw moderation toward the tail end of the quarter and exited at a lower growth rate than we had predicted.
In the third quarter transaction revenue grew 10% to $5 6 billion.
This growth rate reflects the steep decline in ebay revenue in the quarter.
Excluding ebay transaction revenue grew 23%.
Other value added services revenue grew 50% to $575 million.
This performance was driven by increased revenue from synchrony and accelerated recognition of loan servicing fees from the PPP program.
In the third quarter total take rate was 199% consistent with the second quarter and a decline of 22 basis points from last year.
The mix effect of ebay contributed to approximately 55% of this decline.
The blended take rate on EBIT ebay volumes this quarter was 243% compared to 4% in Q3 last year.
The remainder of the decline was primarily driven by reduced currency volatility in the quarter, which resulted in a lower growth rate in foreign exchange fees as well as merchant mix and growth in bill payment volumes.
The 25 basis point decline in transaction take rate was driven by these same factors.
The third quarter was another strong quarter for volume based expense performance transaction expense as a rate of <unk> was 83 basis points, an increase of one basis point versus last year.
Transaction losses improved four basis points and represented nine basis points as a rate of TPB.
This level of loss performance is consistent with last quarter matching the lowest transaction loss rate in our history.
In the quarter loan origination activity increased and we ended Q3 with $3 7 billion in net receivables representing sequential growth of 13% and 43% growth relative to last year.
Growth in our short term installment PE portfolio was the primary driver of this increase.
Strong performance of our loan portfolio more stability and macroeconomic trends and the mix of shorter duration originations from our installment paid products resulted in our reserve coverage ratio declining to 11, 6% from 14, 9% at the end of the second quarter.
The net effect of credit provisioning on credit losses in the quarter inclusive of originations and reserve releases resulted in a benefit of $25 million.
And year to date, we've released $300 million and reserves.
Overall volume based expenses grew 20% and represented 46% of revenue.
Resulting in a transaction margin of 54, 2%.
I'd now like to cover our non transaction related operating expenses.
These expenses increased 17% representing 30% of revenue.
In the third quarter, our rapid pace of innovation continued we had an exciting cadence of product introductions, including our new digital wallet apps for both Paypal and venmo.
The launch of crypto by wholesale and the U K, our goods and services PDP experience in venmo and cashback to crypto with the Venmo credit card.
To support and advance our key initiatives, we continue to invest aggressively in technology and development and sales and marketing, including increased spending on customer acquisition and engagement strategies.
These expense buckets drove 70% of the increase in non transaction related operating expenses.
On a non-GAAP basis operating income was essentially flat to last year and our operating margin was 23, 8%.
And on a two year basis, the compound annual growth rate for operating income was 20%.
For the quarter non-GAAP EPS grew 4% to $1 11.
This includes an approximate 29 cents per share headwind from the decline in ebay marketplaces transaction margin dollars.
We ended the quarter with cash cash equivalents and investments of 20 billion.
In addition, free cash flow grew 20% to $1 3 billion rep.
Representing 21% of revenue.
I'd now like to discuss our outlook for the remainder of 2021 as well as our preliminary thoughts for 2022.
For 2021, we now expect revenue to be in the range of 25, 3% to $25 4 billion.
An increase of approximately 18% from last year.
This represents a two year compound annual growth rate of 19% and excluding ebay. We now expect 2021 revenue to grow 28%.
We expect our operating margin to be in line to last year, which was the highest in our history.
This performance reflects our strategic investment spend throughout the year as well as the negative transaction margin dynamics, resulting from ebay offset by the benefit from the release of reserves.
We now expect non-GAAP EPS for the year to be approximately $4 60.
A 19% increase on top of the 31% growth last year and on a two year basis. This is 25% growth.
In addition, we expect to generate approximately $5 2 billion and free cash flow, representing 21 of free cash flow for every dollar of revenue we earn.
As a result of this update to our full year guidance, we expect fourth quarter revenue to be in the range of $6 85 to $6 95 billion.
This represents approximately 13% growth at the midpoint.
We also expect $1 12, and non-GAAP EPS, representing 4% growth.
While the impact from ebay's payments migration came in consistent with our expectations for the quarter relative to the beginning of the year the headwind increased significantly.
Until recently, we believed we could absorb this additional pressure and still deliver on our prior guidance.
And while we came within our revenue expectations for the third quarter. The contributors to our revenue growth were somewhat different than what we had expected going into the quarter.
Towards the end of the quarter. We also began to see growth rates come in a little lower than planned.
We're off to a solid start in the fourth quarter, but growth rates still remain slightly below our prior expectations.
In addition, retail supply chain and labor market concerns, which may impact the important holiday season have led us to adopt a more cautious stance for the fourth quarter.
That said in recent days, we've seen improvement.
At this point in time, it's difficult to say definitively whether the stronger trends will persist throughout the quarter or if this improvement is a pull forward of consumer holiday activity.
Relative to the guidance provided at the start of 2021, we now expect revenue to be about half a percent lower for the year. Despite much more pressure from ebay than we had initially expected.
Adjusting for the additional pressure to revenue growth from ebay. Our revised 2021 guidance is actually ahead of the outlook. We provided at the start of the year.
And providing quarterly and annual guidance since July of last year. Our goal has been has been to responsibly balanced transparency with reliability and certainty at.
At the same time, we've also tried to emphasize the complexity of forecasting in this environment.
We are taking what we view to be a prudent step and adjusting our outlook.
But let me be very clear.
Our key strategic initiatives are on track and performing very well.
The initial response to our new digital wallet experiences has been very strong and the implementation of our new headline pricing in the U S has been successful with no discernible impact to merchant activity.
The underlying strength diversification and resilience of our business on an absolute level and relative to pre pandemic, our unassailable and position us to remain on offense, regardless of short term headwinds.
Our ability to sustainably deliver strong growth at our scale is indicative of the network effects of our business and our competitive positioning as a global leader in digital payments at the intersection of the powerful secular tailwind of e-commerce penetration in cash displacement.
Has never been stronger.
As it relates to our expectations for 2022, we'd like to share some of our initial thoughts and the assumptions, we're making for internal planning purposes.
We are currently in the midst of our budget resource and investment planning process for next year in.
In addition, how we exit the year as well as the status of some of the exogenous factors that Dan and I have already discussed are also important inputs for the year ahead.
On a preliminary basis for 2022, we expect revenue growth in the high teens, if we had to put a point on it today wed likely anchor at about 18%.
It's also important to appreciate our expected trajectory of revenue growth.
Due to the cadence of ebay's payments migration as well as the stimulus measures earlier. This year, we expect the first quarter next year to have more difficult comps and be our lowest growth quarter.
Our plans are for revenue growth to then accelerate through the year and to exit 2022, and a revenue growth rate in line with or ahead of our medium term guidance.
Similar to 2021, we expect our growth rates will exceed industry growth rates by a healthy margin.
Given the ongoing planning that we're still doing we will guide EPS growth. When we report Q4 results early next year.
That said I'd like to provide some color on how we're thinking about it.
We see significant investment opportunities across our key priorities.
In the past two years, we've accelerated our pace of product innovation to better serve our growing network of more than 400 million consumer and merchant accounts.
We are investing to advance our product roadmap increase our relevance for customers and drive daily engagement and to support these initiatives. We expect our non transaction related expenses to grow in the high single digits in 2022 on a base that will grow 20% this year.
It's also important to note two factors that will have an impact on our EPS growth next year.
First we will lap the benefit we realized from the release of the credit reserve this year.
Second we expect our effective tax rate to increase from the lapping of onetime favorable tax adjustments.
We expect these two items to result in an approximate 10 point headwind to non-GAAP earnings growth in 2022.
That said, we remain very confident in the medium term guidance, we provided at our Investor day earlier this year.
We're witnessing the pull forward of ecommerce and displacement of cash continuing at an undiminished pace, even as reopening occurs.
It's also true that the most difficult year in the transition away from ebay will be largely behind us as we move into 'twenty 2022, and we expect our revenue and TPB growth rates to accelerate.
We believe that investing in our business is more important than ever before given the opportunities we see in front of us.
And while we certainly expect our margins to increase over the long term, we don't want to be so overly focused on that for one quarter or one year to the next that we don't invest appropriately.
We are playing in this space to win.
We are well positioned to capture the immense opportunity ahead, and see a clear path to achieving our financial and strategic objectives.
Our powerful two sided platform focused on execution and mission driven culture backed by the tailwind of digital Commerce set us up for success now and in the years to come.
Before I turn it back over to the operator for Q&A I would like to spend a moment discussing our approach to capital allocation.
Our business is characterized by its very powerful cash flow generation.
Since separation, we've generated approximately $22 billion and free cash flow we've.
We've returned nearly $10 $5 billion in cash to shareholders in the form of share repurchases and allocated approximately $13 billion in cash to acquisitions and investments.
We remain committed to both disciplined capital allocation and to balancing organic and inorganic growth investing to drive shareholder value creation.
Inorganic opportunities are accelerants to our growth plans and to achieving our long term aspirations.
It's important to note that our medium term outlook does not rely on acquisitions.
At the same time, we will continue to be opportunistic in executing our strategic priorities shaping the future payments and advancing our leadership position.
With that I will turn it back to the operator operator. Please go ahead.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad and as a reminder, please limit yourself to ask one question only and you may return to the queue for a follow up question, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Tien Tsin Huang with Jpmorgan. Your line is now open you may ask your question.
Hey, thanks, so much a real exciting to hear about the Amazon News I noticed a lot to talk about here, but I wanted to ask on the the market rumors on Pinterest, if you don't mind.
No you're not pursuing a deal at this time, but just wanted to ask if your appetite to do a large deal is still there and if your longer term outlook hinges on adding any assets like that with different revenue sources like advertising I know John you. Just said you don't you're not counting on M&A for for midterm, just thinking longer term here. Thank you.
Yeah, I'll start off with that and then John can.
A chime in on this let.
Let me just take one step back.
And start a little bit with the big picture because that may help put everything into context.
We're obviously focused on becoming an essential everyday app for consumers.
And that's on the consumer side and on the merchant side, we want to provide a comprehensive platform for merchants to participate in the digital economy and you know that.
That includes everything from consumers engaging at the beginning of their shopping journey to purchase in post purchase and if you look at all of the acquisitions that we've done over the past five years, they kind of play into that overall strategy, whether it be what we've done in.
<unk> with the Paypal app or QR codes acquisitions, like honey, which have been essential to our shopping and deals tab fully integrated now into the Paypal App happy returns charge town that are part of our post purchase a process that will integrate into our app and.
Put it into our platform.
For merchants Zettel hyper wallet now is our.
Our payouts product going forward so.
I'm very pleased with all the acquisitions, we've done they fit into our strategy.
They're executing.
Many of them well above what we initially thought some were delayed in terms of their integration for various reasons, but overall really.
I'm pleased with the way our acquisition and acquisition strategy.
Is gone and the integration into our strategy.
The truth is we review hundreds of potential acquisitions every single year and we put every single one of them through a very strict set of strategic financial integration.
Filters and we look at it like are we going to buy build or partner and you know John and I have been here now for.
Well I've been here a little over seven years. He's been are closing in on that and we've never done a large acquisition, so far and the reason for that and by the way. We look at a couple of those every year. There are very few that we look at but we look at a couple every year.
They have a much higher hurdle rate or.
Our smaller acquisitions I mean, we want to look is it going to be a distraction. How tough is the integration we fully understand what it means to do a large acquisition versus the smaller acquisition and in seven years, we haven't done a single large acquisition because they haven't met.
Hurdles I'm, not saying that we might never ever do that but.
It.
It's not a likely event.
As we look forward and our M&A philosophy. It remains the same we're going to focus on high quality assets.
That would accelerate our growth in areas that are more efficient than us doing it inorganically and to your question specifically, we don't need to do something large to small frankly to deliver on our medium term guidance all of our acquisitions are supplemental to our medium term.
Guidance and clearly we are going to be acquisitive going forward I mean, we've got incredibly strong balance sheet $20 billion cash and cash like investments on it we're generating between five and $6 billion a year of free cash flow, but we are going to maintain the same.
Strict.
And disciplined manner that we look at acquisitions that have looked at acquisitions over the last couple of years, John anything that you I mean.
I think you've covered a lot of it Dan I, just would add Tien tsin that we.
So we laid out what we believe to be.
A very compelling case at our Investor day around value creation over the next five years that was entirely an organic plan and remains so.
But that said.
We don't want to sit here on our hands and think that that's good enough. If there are opportunities that are out there that create even more value creation. It's our responsibility to look at those and so that's.
That's where.
Deals of this size may come in sometimes but that's.
That's what we take capital allocation with a.
A very serious activity for us arguably one of the most important and so as Dan said, we have a lot of rigor around that and thus far nothing has met those rigorous hurdles for us, but I think in the management team shares our belief that we have the same opportunity over the next five years to create value that we've just realize.
Over the last five years, but if we can do more than that then we should do more than that and so that's why we explore every opportunity, but the growth plans that we laid out in the early part of this year at our Investor day are entirely organic.
Thank you next question comes from the line of Colin Sebastian with Baird. Your line is now open you may ask a question.
Great. Thanks, good afternoon everybody.
So pretty big news here with with Amazon and Venmo integration, especially given how protected if Amazon is over their checkout flow. So congrats there and it might be helpful to expand a bit on what you talked about Dan <unk>.
Around the agreements such as you know are the economics with Amazon similar to other marketplace.
Deals that you have in place are there opportunities to expand the relationship.
Two other Paypal brands and services and maybe when in 2022, we can expect them out to show up on the site. Thanks very much.
You bet. Thanks, Colin good question.
First of all I'd say on one of the things we talked about.
Early on is.
Sure.
Being free of the restrictions of the ebay operating agreement.
We're going to have the possibility to open us up to working with a number of marketplaces that we were previously prohibited.
Prohibited from from doing so.
And youre seeing some of that Youre seeing.
What we're doing with Ali.
Ali Express that continues to expand in terms of the volumes there we are.
Getting closer and closer.
With Walmart.
Amazon is the latest example.
Being able to team up.
With obviously an extremely significant.
A player in the e-commerce space and what I really like about this is like ebay results are like a pig through the Python right now, but these that we're talking about right are much more of a permanent nature of these of what will be with us going forward as E Bay kind of as a temporary phenomenon.
Working through our results, we're still working through.
The launch Timeframes.
We are both eager to get this out into the marketplace.
But but we're still working those through we obviously have a large teams each of us on this.
It is.
It is the beginning of <unk>.
Journey.
Our two companies teaming together.
No I wouldn't.
Hum.
Venture at this moment as to.
Where it will go together, we're both very focused on the substantial opportunity on that there is with venmo.
At checkout and.
We couldnt be more pleased.
To be able to team with Amazon on this obviously, if you think about.
The amount of market share that Amazon has and in the U S.
<unk>.
Quite substantially.
Is increases the addressable market for pay with Venmo and pay with Venmo is one of the key rare.
Our revenue drivers.
For for Venmo going forward.
Just as I think about.
The journey that Venmo has been on this obviously is a punctuation point for sure but even this year <unk> will be transaction margin positive that is a major.
A milestone.
For that team right on track to deliver the $900 million and obviously.
Exit the year.
At an accelerating growth rate.
And this partnership.
With Amazon will no doubt take.
That to the next level.
Collin I'd just add real quickly.
Dan and I, both appreciate that.
The Investor community probably is.
I'm getting tired of us talking about ebay and <unk>.
Results.
Arguably not more so than we are but but.
This is the other side of that coin, it's as simple as that I mean, this would not be allowed.
Had we not taken the steps that we had and so we're quite excited about this and what it bodes for the future.
Thank you next question comes from the line up Lisa Ellis.
Your line is open.
Thanks, Good afternoon, I'm going to focus on the rollout of the new Paypal and Venmo App.
Can you I know you made some comments in the prepared remarks, but can you elaborate a bit further and get a little more color on the early impact you're seeing maybe on user growth engagement growth et cetera, including maybe start by some aspects. So far that have surprised you.
Yeah.
Thanks, Lisa good to hear your voice.
<unk>.
So anytime we put something substantial out into the market and this is really the first giant revamp that we've done.
Of our Paypal consumer happen.
It's pretty massive.
A complete redesign typically on that so what you find is you've got declines in engagement as people kind of like work their way through discovery.
And then what do you what you have is over time that that really starts to accelerate at least that's your hope.
This is Ben.
Clearly the opposite of that which is I guess.
Biggest delay I am not sure its a surprise to me, but we are seeing really meaningful lifts in terms of discover ability of the breadth of our product and service line right now we've talked about.
Paypal shopping the full integration of honey.
Into the Paypal App hunting now is completely mobile.
And not just desktop.
And that's powering our whole tab of that we've seen a 25 times lift in people exploring that tab and starting to put deals into their wallets and that kind of thing it's pretty.
Pretty amazing actually and then.
On things like Crypto first time user once we did the App went up by 15%.
Our strongest week ever for first time users was like last week.
And we've had strong weeks for first time user growth on that but clearly the new app is driving both discover ability.
And conversion on the crypto side then.
Quite excited about what's happening with cash card because cash card is kind of like a debit card right. It links into the balance and it can be used.
Offline.
And obviously online and.
This is a big part of our omni.
Strategic thrust and to see.
That go up those enrollments go up by 35%.
And remember this is this is really early days right, we fully ramped in the middle of October globally. So.
This is early on it.
I, usually think of early on as Okay. How do we start to claw back to where we were and then start to move forward as customers get at this.
<unk> was a leap forward look there are a lot of things that we're going to do to improve the customer experience we are putting.
F I ask now into <unk>.
Into our bill payment expanding our bill payment quite dramatically expanding.
The usability and.
Just the simplicity of it but each and every one of the products and services. We are looking at the feedback we're getting.
And just making small little changes to keep increasing this is going to be you know I I didn't think it was going to be a big Bang. It actually has turned out to be a relatively big Bang on introduction, but I really think of this as evolutionary quarter by quarter by quarter.
We will launch high yield savings.
And the next several months.
That will begin to ramp will start to put on things like equity investing we.
We anticipate doing that next year, and there'll be more and more products and services to help customers engage more and more and that's why I like that ARPA.
Wallet users versus checkout, only again early but to see that already leaping up to two times that of checkout only.
Slide John and I are.
Quite excited about the impact of the initiatives that we're putting into place and they are they are clearly going to drive a lot of growth for us as we look forward.
Thank you next question comes from the line of David.
Core IC ISI your line is open.
Thanks, so much for taking my question.
Looking at the third quarter Kpis, there is certainly strong and broadly in line with your five year guide and you've called out some short term factors and tough comparisons for for taking guidance down for the fourth quarter and guiding 2022 at least your preliminary guide below the five year model.
But when you look at 2022.
And some of the shorter term factors, you've called out like supply chain issues and return of consumers more to the physical P O S.
How confident are you that some of these issues are actually shorter term versus potentially longer lasting you know that might might stretch into 2023.
Okay David.
Let me talk very quickly about Q3, and then I'm going to have John talk about our Q4 guide.
Our guidance and in our <unk>.
Confidence in our 2022.
So you are right actually if you look at Q3, and let me just talk about revenue TPB and maybe engagement.
As three metrics on that.
Look on the way that I think about our business right now is what's happening on our EMS business because ebay as a temporal thing it's just going through the system right now it's less than 3% of our T V. It's less than 4% of our revenues and dropping.
And so really our business is our EMS business going forward and if I look at revenue revenue growth. I think this is really interesting because I've examined this quite carefully if I go back five years and look at our and as revenue growth.
In Q3 of 2017, it was 24% in 2018 in Q3 was 17% 2019. It was 23% then it jumps up to 26%.
In the middle of the pandemic Q3, 2020 in Q3 2021 this quarter, it's 25% and so like people talk about like reopening stocks and all that.
That is in us our EMS business is going from strength to strength, we've seen a leap forward in digital and that is continuing if you look at it in RMS and John will talk about it in Q4 and as we look next year same thing on TPG TPG in Q3.
2018, MFS now im talking about MFS.
27% jumped up to 29% then in Q3 2020 jumped to 40% and over that 40%. We're growing this quarter at 31% and so like these are all really really strong numbers and if I look at even like transactions.
Which I think is a really really interesting we did $4 9 billion transactions in Q3. This last quarter. If you go back a year ago, we did about 4 billion, where almost half a billion transactions in a year in the quarter and our transactions ex ebay.
E Bay are up 31% year over year, our tpa transactions for active double digit growth for the second quarter in a row again ex ebay in the third quarter, our Tpa was up 18%.
So these are yes of course, we get hit by some of these exogenous things that go on but if I look at the strength of the core business every single metric is way above even our forecast is way above our medium term guidance.
And that's kind of like well it gives us just a ton of confidence where obviously being.
I think appropriately cautious and conservative as we look forward.
At this time.
But I feel like if I, if I look at what the real part of our business is every metric just trying to be pretty strongly right now.
And David Let me hit a couple of points here.
Guarding some of the assumptions about our outlook so.
First with respect to the.
Reopening of the economy, our basic assumption is that that sort of a slow and steady pace similar to what we've seen.
Here more recently with respect to supply.
Supply chain or labor shortages look I don't see a quick fix to that so that could be with us for some period of time and I think the pressure there is probably more acute on some of the SMB segment versus large enterprises and so that that is.
Baked into our assumptions as well, we're also not going to have the benefit of stimulus next year or likely not.
Based upon what we see today.
The last point I'd make is around ebay ebay, if you think about the high teens or 18%.
Mark that we put out there for revenue growth.
The impact of EBIT year over year in terms of a headwind is about 200 basis points.
You just take what E Bay represents in our business in 2021 compared to 2022.
Ed differently, though if you were to exclude ebay and both years. The revenue growth is 22% and so that's exceedingly strong and I think the best proxy for how to think about our business going forward and so we're wrapping all of that together and sort of tying it to where we stand right now with the guidance that we just gave today.
If you go back to the beginning of the year and the guidance that we provided 50 million net new actives roughly $25 $5 billion of revenue, we're effectively right there and I think very very importantly that was the basis for the five year plan. The medium term guidance that we laid out just a few weeks after that and so.
That's a way of saying that we are right on track with what we laid out at the beginning of the year with our medium term guidance.
Thank you. Your next question comes from the line of Darrin Peller with Wolfe Research. Your line is open.
Hey, Thanks, guys I just wanted to touch on the organic trends of the business, mainly the Kpis net new actives and just maybe if you can give a little more color on the organic dynamics youre seeing now a year and a half into COVID-19 in terms of gross adds versus.
The churn levels are also getting more questions on 'twenty two guidance and some of the inputs. There I know you just touched on that Jon said, thanks, but thinking about the underlying sort of user growth potential there.
<unk> potential and then really just reminding us of your conviction in the drivers getting to $750 million of entities long term.
Thanks, guys.
Well, let me talk a little bit about <unk>.
So $13 3 million.
In the quarter up about $2 million from last quarter.
<unk>.
Growing 15% year over year, Unlike a lot of companies that experienced growth.
The Covid time, and then are unwinding our growth remains incredibly strong on the M&A side, I mean think about it and the minute that we've been talking so far derm. We've got we put on about 100 consumers and nine new merchants, we're putting on.
One and a half consumers every second quarter.
Every six seconds, we put on another merchant so really unbelievable.
And if I look five years ago, you remember five years ago, we put on 13 million net new actives for the year.
This quarter alone we've put on a 110 million net new active since January of 2020.
As we are.
Said I think in our press release, we expect to end up.
Year North of 430.
New.
Actives on the platform. So you know obviously continued strong growth, but as you look forward to that 750 million Darrin. There are two places that are net new actives come from one is top of the funnel and top of the funnel is actually pretty strong.
Right now.
And remains so.
Yeah, it's a it's kind of a must have platform.
For merchants and consumers and scale.
Get scale in.
In this business.
But as you get bigger and bigger.
The bottom of the funnel becomes equally if not even more important and so reduction in churn.
<unk> becomes a really important element.
Of our ability to to get to the $750 million.
That's why we're so excited about what we're seeing in terms of our Tpa numbers again normalize it X E Bay up 18% last quarter I think it was up 17%.
Double digit growth, even with ebay and at two quarters in a row. Some of the things I was talking to lease about in terms of the.
Engagement on the App those are things that the more people engaged more people get cash cards at sharp.
Utilizing that service offline, we see halo effects inside the business buy now pay later all of that.
That actually affects churn rate and if we can keep a consistent top of the funnel, maybe even improve that a little bit, but reduce our churn rate youll start to see net new actives actually accelerate.
Going forward and.
So we remain still.
Quite confident in the 750, but that's what the drivers are of that.
Darren.
Thank you. Your next question comes from the line of James Faucette of Morgan Stanley. Your line is open.
Thank you very much and thanks for all the color and detail are the things that are going through John I know you kind of touched around this in your commentary, but if we think about all the irons and initiatives that you have in the fire right now.
Should we think about kind of the medium term progression of of your operating margins. I know you also highlighted that you want to make investments, but just trying to make sure that we try to try to align our own expectations with with how youre thinking about your planning purposes kind of going forward sure James It's good to speak with you.
Well I'll start by saying that.
I would hope that people appreciate and agree with this but I don't think there's ever been a more important time to invest in our business than right. Now. This is a precious opportunity that we have with some of the secular tailwind.
And that.
The margins in our business when I go up we've demonstrated that we can scale at a very low marginal costs, we've got tremendous opportunities some of which we've talked about today.
At <unk>.
Give us confidence that.
Over our planning horizon, our margins will go up that's not something that I think we.
Lose a ton of sleep about quite frankly, I think it's.
The more challenging dynamic is.
Where to invest where we can get that return that is expected.
You think about the last couple of years being 2020, and this year 2021, our operating expenses have grown about 20% each of those years.
And that's not.
I would discourage you from thinking about that.
As.
Sort of like one time spend related to customer acquisition or something like that there's a lot of.
Like engineering costs around.
People that are.
Punching a keyboard to write code and Thats still with US today, so even as we talk about.
The high single digit growth next year, that's on top of two years of 20% growth, but for US. It's also important not to spread ourselves too thin and to make sure that we are prioritizing appropriately and and some are prioritizing involves say no to certain things as well and so I think we've laid out a pretty clear plan over the next few years with.
Our focus on things like the the digital wallet building out commerce capabilities continue to monetize venmo that give us.
Ample opportunity to to invest but.
As I noted in my remarks, so we don't manage the business to have margin expansion for the next quarter or frankly, even for the next year. We're looking at how we create a company over the next five years that could have the same type of market value appreciation that we've experienced over the last five and the decisions that we make really just lineup with that much more so than.
Then trying to maximize for any particular time period. So.
Yes.
It maybe not directly answering your question but.
Our margins are going to go up over the long term and we're not going to be handcuffed to doing that from one period to the next.
At the expense of like creating shareholder value.
Thank you we have time for one last question comes from Jason Kupferberg of Bank of America. Your line is open.
Hey, guys.
How are you.
Okay.
I guess, they're now tracking to more of the lower end of the $52 million to $55 million.
$5 million a.
Target for the year previously thought to be closer to the higher end. So I'm. Just wondering is this the microrna and felt softness in gross adds is it higher churn of decline in new Activations and it seems like we may be down a little bit quarter over quarter in Q4, but normally there is some positive seasonality. So just wanted to get your take on.
On what's going on with the Internet of things.
Yes, Great question, Jason Thank you for that.
If you remember we started the year at $50 million then.
And then we raised it 52 to 55.
And then we thought we'd be towards the higher end of the 52 to 55.
At this point.
Just being consistent with kind of our revenue guide as well.
We're going into the heart of the holiday you're exactly right. If holiday season shapes up like it did last year, then we'll have more than $52 million organic because there'll be a lot more shopping and if it doesn't then we'll have a little bit less so it's very consistent with kind of us just being.
I think prudent and cautious given some of the trends.
That we're seeing and others are talking about.
Again supply chain shortages.
If people can't shopping at if consumer confidence down people do more in store will get less in <unk> than we typically might if holiday season.
Goes as it did last year, we'll get more.
Then then we're talking about right now so I just think it's just very consistent with the guide that we gave and again as John mentioned that.
I had a good start to the quarter.
We had a pretty strong last week or two.
And but we're early on right now and so you know well.
We don't like it when.
When we are at the midpoint of our guidance is there any of that kind of thing we are used to being a company that puts out things and then beach, what it puts out and we want to assure that.
What we say is is appropriate.
And.
And appropriately conservative on it so that's how I think I would answer that question Jason.
Alright.
Operator, thank you very much Jason Thank you for that last question.
Really look forward to talking to all of you over the course of the next couple of days and weeks and had a number of different conferences and.
Thank you for all your support and your time today.
Thank you. This concludes today's conference call you may now disconnect.
Yeah.
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