Q3 2022 PayPal Holdings Inc Earnings Call
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I would now like to turn the call over and introduce your host Ms. Gabrielle Rabinovich Senior Vice President and acting CFO . Please go ahead.
Thank you Breanna good afternoon, and thank you for joining US welcome to Paypal is earnings conference call for the third quarter of 2022.
Joining me today on the call is Dan Schulman, our president and CEO .
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 the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the presentation accompanying this conference call.
We 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 2022, our preliminary framework for 2023, and our comments related to anticipated cost savings operating margin and share repurchase activity.
Our actual results may differ materially from these statements.
You can find more information about risks uncertainties and other factors that could affect our results and our most recent annual report on Form 10-K, and quarterly report on Form 10-Q filed with the SEC and available on our Investor Relations website, you should not place undue reliance on any forward looking statements all information in this.
Presentation is as of today's date November three 2022 weeks.
We expressly disclaim any obligation to update this information with that let me turn the call over to Dan.
Thanks, Kevin.
Thanks, everyone for joining us.
The share that our results in the third quarter exceeded the guidance that we announced in August marking the third consecutive quarter of delivering on our non-GAAP guidance.
Before reviewing our results and operational progress I want to share two exciting developments that we believe will enhance our long term strategic position.
First I am very pleased to announce that we are working with apple to enhance our offerings for Paypal and venmo merchants and consumers.
Leveraging apples tap to pay on iPhone functionality merchant customers in the U S will soon be able to accept contactless debit or credit cards, and mobile wallets, including Apple pay using an iPhone and the Paypal or venmo iOS.
Uh huh.
This will allow Paypal merchant base to easily user iPhone is a mobile point of sale without the need for a dongle or other payment terminals.
We believe that this along with our other in store initiatives, we will continue to accelerate our opportunity to seamlessly process payments in the physical world for our merchants.
We are also adding apple pay as a payment option in our unbranded checkout flows on our merchant platforms, including our Paypal Commerce platform.
We are already in beta with several ecommerce platforms and merchants and anticipate a broader rollout in the coming months.
And next year U S customers will be able to add their Paypal and venmo network branded credit and debit cards to their apple wallet and use them online and in store wherever Apple pay is accepted.
We anticipate this to be available in the first half of 2023, expanding the opportunity for our consumers to transact in store.
This is a significant step forward in our relationship with Apple and we're excited to work closely with them to bring these new capabilities to our mutual customers.
Second I am excited to share that we continue to ramp pay with venmo on Amazon and we plan to be fully ramped in time for peak holiday shopping.
This partnership is a reflection of venmo scale and ubiquity.
Particularly in younger demographics, and we look forward to working closely with Amazon on this new offering to drive results.
These relationships are aligned with our practice of working collaboratively with the major players across technology and financial services to provide more choice and superior experiences to our mutual customers.
We are regarded by many as a partner of choice due to our scale and ubiquity, enabling us to create unique value for our customers.
And while we continue to enhance our strategic position.
We remain focused on the operational initiatives that we shared last quarter.
Our efforts to reduce our cost structure and drive productivity gains are yielding strong results.
We remain on track to drive over $900 million in cost savings across our operating and transaction expenses this year and at least $1 $3 billion in cost savings next year.
This focus on efficiency, while continuing to invest in key growth areas is a high priority for us and we now expect to grow our year over year non-GAAP operating margin in Q4 two.
Approximately 22, 5%.
We further anticipate that in 2023, we will deliver at least 100 basis points of operating margin expansion.
Let me now turn to our results.
Our revenues in the third quarter were $6 $85 billion up.
12%, FX and an 11% spot exceeding our guidance.
I'm pleased to say that E. Bay's migration to managed payments is behind us and will be inconsequential to our results in the fourth quarter.
Normalizing for ebay's migration to managed payments our Q3 revenues grew approximately 13% on an FX neutral basis.
non-GAAP EPS was $1 eight <unk>, which exceeded the midpoint of our guidance by <unk> 13 cents.
The cost containment actions, we discussed on last quarter's call have slowed the growth of our year over year non transaction related expenses to 4%.
We now expect that non transaction related operating expenses for Q4 will be flat to slightly negative year over year, and we are planning similar levels in 2023.
We are pleased with this execution, particularly as we are driving reinvestment in key growth areas and continue to enhance our strategic position.
In the quarter, our free cash flow was one $8 billion.
Up 37% year over year, and an all time record for us on an organic basis.
We added $2 9 million and <unk> in Q3, and we expect to add another $3 million to $4 million in <unk> in Q4.
I'm also very pleased to report.
That our transactions per active account in the quarter grew by a record 13% to 51 times per year.
I'd like to spend a few moments discussing our progress on checkout.
With 35 million active merchant accounts and nearly 400 million active consumer accounts. Our scale is like few others in the world and represents a substantial competitive advantage in a business that is driven by network effects.
In addition, we have built a high level of trust with our customers.
<unk> significant preference to use our branded marks for online transactions.
We have continued to grow faster than overall E. Commerce in Q3, with our total TPB up 14% FX and demonstrating the competitive differentiation and diversification of our global platform.
Within our Paypal branded checkout business.
We believe we held or gained share in the United States with Paypal branded checkup volumes up 4% year over year.
Well there is not a standard proxy for e-commerce growth.
I would point to bank of America's credit and debit card volume data, which highlights 2% U S. e-commerce growth in Q3, a full 200 basis points below our 4% branded checkout growth rate.
We do expect we will continue to grow at or above the rate of e-commerce growth.
However, we know there are still substantial opportunities for us to pursue.
We have three major areas of focus for checkout.
<unk>.
Elevating and optimizing the consumer experience.
Providing merchants with a seamless integration experience and a one stop shop for payments and third innovating new checkout solutions.
As consumers move towards mobile shopping we are focused on creating the simplest mobile checkout experience possible.
Enhancements include allowing customers to checkout without leaving the original merchant point of interaction.
For example, our recently updated mobile SDK allows merchants to provide a seamless in app checkout experience.
We are also deploying the latest secure user authentication standard for our consumers, enabling past keys on all iOS devices to drive speed simplicity and conversion.
Our latest innovation is accelerated checkout, which will provide patients with a robust solution and enables one click checkout.
A simplified consumer experience is achieved by leveraging vaulted credentials within our network to authenticate and approve customer purchases without the need for a password.
This enables seamless guest or account checkout experiences by removing obstacles, which currently cause abandoned sessions.
We are currently piloting this with several key partner platforms.
Look forward to expanding this initiative as we move through 2023 and beyond.
For each segment of our merchant base, we are implementing detailed processes go to market plans and kpis to measure our migration from legacy integrations.
Moving more of our merchant base to our latest and most advanced integrations will take time.
This will clearly be a multi year initiative, but it represents a significant opportunity for us.
And we are putting resources.
<unk> and discipline in place to assure our execution.
We continue to see good momentum with our unbranded payment platforms. We believe we are well positioned to help merchants orchestrate payments leveraging our insights and machine learning to wrap traffic between multiple psp's, resulting in increased approval and retention rates.
Braintree is a key growth area for us.
We will continue to invest to further enhance the platform.
Braintree PPV grew 38% in the quarter.
Our Braintree momentum is driven largely by recent merchant wins and share of wallet expansions.
And we've recently signed an expanded agreement with live nation, which establishes Braintree as their primary card processor across the globe and includes an extended marketing partnership with Paypal and venmo at some of live nations largest festivals.
Buy now pay later continues to be a major asset to our checkout experience.
Paypal was just ranked as the best overall buy now pay later value proposition in the United States by the Wall Street Journal.
In the third quarter, we processed nearly $5 billion and volume.
Up 157% year over year.
With over 25 million consumers using our buy now pay later services approximately 150 million times since launch.
As a result of this robust growth. We believe we have become the largest buy now pay later providers in the world with a unique competitive advantage derived from our two sided network.
Our upstream presentment continues to grow with over 280000 merchants displaying our buy now pay later on their product pages.
The size of our active account base in the years of transaction data we have on our customers provides us with an additional competitive advantage from an underwriting perspective.
As of the end of Q3, our loss rates remain among the lowest in the industry with no observable deterioration to date.
Venmo continues to be a significant asset in our portfolio with much untapped potential we.
Almost 90 million venmo active accounts, including 57 million monthly active accounts.
Total payment volume on Venmo grew 6%, while venmo commerce volumes grew 150% in Q3.
We began to onboard charities to venmo this quarter, which we expect will encourage more giving as we enter the holiday season.
As I shared earlier, we are obviously enthusiastic about our partnership with Amazon and look forward to working with their team.
In October we are now.
<unk> launch of Paypal rewards, which unifies.
<unk>, our hunting and Paypal rewards programs and customers now can earn track save and redeem cashback rewards and merchant offers and their Paypal app.
In addition, our customers can also combine the benefits of their existing card rewards and offers allowing them to save even more.
Paypal rewards is ramping in time for peak holiday shopping and we have a robust roadmap to extend and enhance the program throughout 2023.
In closing I'd like to underscore that we are confident we have turned a corner in our transformation.
We will continue to drive cost savings and streamline our processes to improve productivity while.
While investing to differentiate our value proposition.
Drive market share and deliver on our commitments.
Given a challenging macro environment.
Slowing ecommerce trends and an unpredictable holiday shopping season.
We are being appropriately prudent in our Q4 revenue guide.
At the same time, we are raising both our full year <unk>.
Q4, EPS outlook and.
And expect EPS growth in Q4 to be positive 6% to 8%.
And given our commitment and focus on driving continued operational efficiency and earnings leverage we plan to deliver no less than 15% non-GAAP EPS growth next year.
While there are a number of unknowns regarding the macro environment.
Can largely control our spend and its implication on earnings growth.
Of course, we're also focused on investing for growth and we are balancing efficient spend with continued investment to drive future topline growth.
We are excited by the operational initiatives product enhancements and new strategic partnerships that position Paypal in a substantially stronger position from when we started the year.
I want to thank the Paypal team for the work they do every day to support our merchants and consumers.
With our values and drive our results.
And I'm also pleased that John Kim has recently joined us as Chief product Officer.
He has deep technical and operational expertise with extensive experience overseeing product and engineering teams and has driven customer focused innovation at scale.
We're fortunate to have the chance to work with him to drive this next chapter and Paypal story and with that I'll turn the call over to Gabrielle. Thanks, Dan I'd like to start off by thanking our customers partners and global team for helping us to deliver a great quarter. This strong results. We're reporting today demonstrate the continued execution of.
Our strategy to deliver long term sustainable growth.
Our teams are proving our ability to navigate a dynamic operating environment. While also staying focused on our key priorities. We once again demonstrated our resolve combining execution and focus with growth in our core business.
Our results reflect our operating discipline diversification and resilience the power Paypal is the scale of our global franchise, our investments in innovation are making us stronger and we're excited about what we see as we execute against our growth opportunity.
Share gains enthusiasm for our growing relationship with Apple and the rollout of pay with Venmo on Amazon. We believe we will continue to extend and reinforced our leadership in payments and we are confident that our competitive positioning with unparalleled scale across our two sided network will allow us to emerge from this period of economic uncertainty strong.
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We're proud of the quarter, we delivered we surpassed the third quarter financial targets. We shared with you in early August and delivered on our commitment of sequential acceleration in our revenue and earnings growth.
We're also on track to build upon our operating margin performance in Q3 to deliver non-GAAP operating margin expansion in the fourth quarter on both a year over year and sequential basis.
Our teams are energized by the progress we have made and by the increased operational rigor, we're bringing to running our business and investing in our priority.
At the same time, the macroeconomic backdrop continues to be complex and were focused on taking an appropriately prudent approach to managing our business for profitable growth at scale.
This year, we will process nearly one four trillion.
Payment volume.
An increase from $1 $25 billion last year, and a 25% compound annual growth rate from $288 billion in 2015.
At this massive scale, we are not immune to macro headwinds.
As we close out 2022 and prepare for the year ahead, we are intensely focused on doing everything within our control to anticipate and mitigate ongoing macro risks.
Drive robust earnings growth.
Given the breadth of our two sided platform and our strong balance sheet and free cash flow generation. We believe we are well positioned and have the levers available to successfully navigate an economic cycle. We remain committed to meaningful non-GAAP operating margin expansion in 2023, and a significantly stronger non-GAAP earnings growth profile.
Before discussing our outlook for the remainder of the year I'd like to highlight our third quarter performance.
As Dan mentioned revenue increased 12, 4% on a currency neutral basis, and 10, 7% at spot to $6 85 billion.
With each of these metrics exceeding our guidance <unk>.
The dramatically strengthening dollar has been an increasing headwind as we move through the year and we expect this condition to persist in the fourth quarter.
Transaction revenue grew 11, 2% to 623 billion driven.
Driven primarily by Braintree and venmo.
Other value added services revenue grew six 4% to $612 million.
This performance relative to last year resulted from higher interest income on customer stored balances offset by lower credit revenue as we lapped higher than normal loan servicing fees.
In the third quarter U S revenue grew 14, 4%, while international revenue increased 6% at spot.
On a currency neutral basis international revenue increased nine 4% and excluding ebay 11, 7%.
Additionally, ebay marketplaces revenue declined 38% to $145 million and represented 2% of our total revenue.
Our take rate performance was very strong with both transaction and total take rate improving approximately four basis points.
Transaction take rate was 185% and total take rate was two 3%.
Both transaction and total take rate benefited from gains from foreign currency hedges recorded as international transaction revenue as well as venmo monetization.
Interest income also benefit our benefited our total take rate.
Transaction expense came in at 89 basis points at the rate of GDP relative to 83 basis points as a rate last year.
This result was largely driven by the increase in the contribution of Braintree volume, which are predominantly card funded to our overall mix of payment volume too.
To a lesser extent funding mix also contributed to higher transaction expenses from more normalized debit card usage relative to 2021.
Transaction loss or the rate of <unk> was eight basis points versus nine basis points in Q3 last year.
In addition, credit losses were $113 million or.
Or three basis points as a rate of PPV.
As a reminder, in the third quarter of 2021, we released $63 million of credit reserves, which benefited transaction margin and operating margin performance in the prior period by 100 basis points.
We ended Q3 with $6 5 billion in gross receivables, reflecting sequential growth of 4%.
Growth in global pay later receivables was the largest driver of loan origination.
The mix of shorter duration originations from our pay later products and strong performance of our loan receivables portfolio resulted in a reserve coverage ratio of seven 4% compared to seven 3% last quarter and 11, 6% in third quarter last year.
Transaction margin dollars grew 4%.
A reversal from year over year declines in the first and second quarters of 2022.
Excluding the benefit from the reserve release last year transaction margin dollars increased 6%.
This quarter, we began seeing benefits to our transaction expense from leveraging our scale across the network ecosystem.
We expect this trend to continue in Q4 and into 2023.
In addition, we're making progress in rationalizing non transaction related expense growth.
In the third quarter on a non-GAAP basis. These expenses grew 4% year over year relative to 17% growth last year, driving a 180 basis points of operating leverage.
non-GAAP operating income also grew 4% year over year to 153 billion.
Importantly, this is the first quarter since Q2, 'twenty, one in which we delivered operating income growth.
Our operating margin was 22, 4%, which was approximately two points better than our outlook provided at Q2 earnings.
We're particularly pleased by this operating margin outperformance and look forward to building on this track record of cost prudent as we enter 2023 and beyond.
For the third quarter non-GAAP EPS was $1 eight.
Nearly 15% stronger than our outlook.
Pre tax benefit in Q3, 'twenty one of approximately <unk> <unk> per share created a headwind to EPS growth.
Our outperformance relative to our expectations was predominantly driven by the actions we took to increase efficiencies within non transaction related operating expenses and improved transaction loss performance.
We ended the quarter with cash cash equivalents and investments of $16 1 billion.
During the quarter, we generated $1 8 million and free cash flow, bringing year to date free cash flow to $4 1 billion.
Relative to last year Q3 free cash flow grew 37%.
We consider our balance sheet and cash flow to be competitive differentiators, which provide us with significant optionality for value creation.
In the third quarter, we completed an additional $939 million in share repurchases.
Year to date, we have now returned $3 2 billion to shareholders, representing 78% of the free cash flow we have generated.
Given our conviction in our business relative to its valuation today and as a long term competitive advantages and ability to deliver sustainable value creation, we have taken a more aggressive approach to our capital return program. This year.
We believe that share repurchase remains an optimal use of capital for our shareholders, while allowing us to retain the flexibility to continue investing opportunistically in our business.
We now expect to complete an additional $1 billion in share repurchases in the fourth quarter.
As I discussed during our earnings call last quarter, we've been assessing opportunities for additional credit externalization. We have made progress on this initiative and are committed to securing off balance sheet funding for a portion of our global pay later portfolio next year.
Before I cover our guidance I'd like to discuss the incremental disclosure that we are sharing this quarter to disaggregate our PV.
In our Investor update we're providing additional information related to our volume mix and how it has evolved over time, we believe sharing this detail is helpful for investors to better understand our business trends.
I would now like to discuss our outlook for the remainder of the year and our preliminary thoughts for 2023.
First some context on the trends, we're seeing and how these are shaping our outlook.
As Dan mentioned overall, we saw U S e-commerce growing in the low single digits in Q3 with deceleration into the close of the quarter.
This trend persisted in October .
On our platform as well as in third party data, we have not seen the early start to the U S online holiday season that we saw in 2021.
Our guidance contemplates holiday e-commerce ramping through November.
Overall, our expectations for holiday E. Commerce are consistent with the recent spending forecast from Adobe Mastercard and Salesforce with growth in the low single digits.
We are also closely monitoring channel mix between in store and online as well as the mix of services and goods spending.
From a market perspective, the U S continues to outperform international and we are seeing weaker performance in the U K, our second largest market.
These factors combined with the broader macro trends have been incorporated into our revised outlook.
We are lowering our full year currency neutral revenue expectations by one point and at the midpoint, raising our non-GAAP EPS expectations by <unk> <unk>.
Given the current uncertainty in the global macro environment. We believe this is an appropriately sensible and prudent approach to our revenue outlook.
That said our earnings guidance reflects the resilience and power of our franchise.
And raising our EPS outlook again, we are demonstrating our control over operating expenses the diversification of our business and the benefits from scale to our operating model, we believe that our ability to raise our earnings guidance in this environment, especially distinguishing relative to other public company guidance, we've seen for Q4.
For the full year, we now expect revenue to grow approximately 10% on a currency neutral basis and approximately eight 5% at spot.
For the fourth quarter, we expect revenue growth of approximately 9% on a currency neutral basis and approximately 7% at spot.
We believe our Q4 and full year revenue growth guidance is strong given our scale and the macro backdrop.
We also expect to deliver non-GAAP operating margin of at least 21% this year.
For the first three quarters of 2022, our operating margin has declined year over year importantly in the fourth quarter. We expect this trend to inflect and to deliver non-GAAP operating margin expansion.
Our guidance contemplates a Q4 operating margin of approximately 22.5%.
In addition, we are raising non-GAAP EPS to $4 seven to $4 nine for the year.
As we noted entering the year discrete tax benefit and reserve releases last year in the aggregate benefited 2021, non-GAAP EPS by approximately <unk> 54.
And are a headwind to our EPS growth profile this year.
Based on our expectations for revenue and operating margin in the fourth quarter, we expect non-GAAP EPS of approximately $1 18 to $1 20.
We expect to finish 2022, and a stronger position than we started it with greater operating discipline and focus.
Dan and I are pleased with our improving execution and we're confident there'll be room for continued improvement.
However, with our most important weeks in the holiday season ahead of us as well as ongoing macroeconomic uncertainty. We believe it is too early to provide a detailed outlook for 2023 on this call.
That said as we're planning for the year ahead. Our framework currently includes the following assumptions.
First that our overall volumes will continue to grow faster than e-commerce across our core markets and that we will continue to take market share.
At the same time, we expect expect inflationary pressures alongside slowing global growth to weigh on discretionary e-commerce spending which could continue to be pressured in 2023.
Second that we will deliver at least 100 basis points of non-GAAP operating margin expansion next year and.
An improvement from our 50 basis point commitment when we report our results last quarter.
And third our commitment to drive solid growth in earnings per share.
Taken together, we believe that our cost savings initiatives and benefits from higher interest rates will enable us to deliver non-GAAP earnings growth of at least 15% next year.
We believe this outlook for next year contemplate a sufficiently wide range of revenue outcome.
We are firmly committed to executing on the operational initiatives, we discussed last quarter and are highly confident that we will deliver on our 2023 framework.
Finally from a capital allocation standpoint, we plan to take a similarly aggressive approach to share repurchases in 2023 as we have this year.
In closing despite the many challenges of today's environment. We believe that we are well positioned navigate the road ahead, we cannot have more confidence in our people and in the priorities. We're executing against we are just beginning to scale several of our newer consumer and merchant experiences and worked with several important strategic partners in the ecosystem.
For our shareholders, we continue to achieve significant growth, while returning capital in the form of share repurchases and we're confident that our earnings power and strong free cash flow generation will allow us to continue to invest in our business and extend our leadership position.
We are completely focused on delivering for all of our stakeholders and look forward to updating you on our progress with that I'd like to turn the call back to the operator for questions. Rihanna. Please go ahead.
Okay.
At this time I would like to remind everyone in order to ask a question you must press star and the number one on your telephone keypad well pause for just a moment to compile the Q&A roster.
Okay.
Yeah.
Your first question comes from the line of James Faucette with Morgan Stanley . Your line is open.
Great. Thanks.
Exciting announcements for sure with Apple et cetera, just wondering on the margins, though can you talk a little bit about.
How youre approaching next year, obviously, there is a as you indicated Gabriel.
Big range of potential.
Scenarios, especially around revenue, but you're seeing.
I'm fairly confident in your ability to deliver that 100 basis points of margin expansion, which was a little more than we had modeled so you can talk about like what's going into that like what your the levers you can pull to make sure you can deliver that and how that translates into that 15% EPS growth. Thanks.
Hey, James.
It's Dan I'll start off and then maybe give skin.
So on around the edges here.
First of all we.
We do feel quite confident.
Our ability to.
Raise our EPS for the year.
And then all of that higher total generate at least 15% each.
Scott.
Which gets you to about the first steps for us $4 70.
Next year.
And this is really being driven.
By being taken a very prudent approach to what could happen next year from a macro economic perspective, there are a wide range of scenarios on that.
And everybody has an opinion.
But we think it's prudent to.
To plan.
Four.
Difficult economic cycle and have our cost structure be in line with that so that we can deliver robust EPS growth our.
Our cost and productivity initiatives are still well underway I'm really pleased.
With the execution that we've had over the last several quarters.
We have been anticipating.
A difficult economic environment. The team has taken a lot of action across non transaction related to opex.
As we said.
Our remarks, we expect in the fourth quarter, that's going to be flat and probably slightly negative.
As we look ahead and then as you look into 2023, we see no reason why it will come off of those levels of being flat to slightly negative. If you think about it our non transaction Opex has traditionally been in the mid single digits for a long time during the pandemic that jumped up to 17% in 2000.
20, and about 20% in 2021, so we have plenty of head count our head count are going to be down at the end of this year from where we started at the beginning.
We have a lot of efficiencies.
Our processes get better and better we are.
Clearly leveraging our scale with our suppliers as well.
Our network partners.
Or others on transaction related expenses, and we feel very good about delivering at least.
Basis points of operating margin improvement next year.
The way at the same time investing in our high growth.
Our high conviction areas checkout digital wallets and Braintree. We think this is a time where market share leaders get stronger we want to take advantage of this environment that we're in we're already seeing some of the investments we're making in those areas pay real dividends.
In our ability to satisfy our customers.
And we think this is an opportunity for us to take share going forward were in a rising interest rate environment. That's a tailwind for us for many of our competitors. It's a headwind on it and we just think there is opportunities for us to operate more efficiently and effectively.
And invest in and continue to take market share so really pleased with the.
With the focus and the commitment from the team making real progress.
On the cost side on the productivity front.
And we will continue to do so as we go into next year.
Yeah.
Next question operator.
Yes. Your next question comes from Jason <unk> with Bank of America.
Your line is now open.
Thank you guys wanted to talk about the top line outlook for Q4 currency neutral. We're looking at 9% revenue growth I know last quarter, we were thinking more like 14%, obviously linked to the softer TPB outlook can you just walk us through perhaps pieces of that bridge, what you thought last quarter versus what Youre thinking now for.
Q4 <unk>.
Given the context of the softer macro thank you.
You bet, Jason So you're right, we took down our full year revenue guidance by about a point and at the same time of course rate raised our EPS at the midpoint by <unk> 10.
We had a strong Q3 and obviously, we delivered on all of our commitments, but at the end of the quarter. We started to see some slides and that came right at the at the very end.
October in addition, we didn't see the early start to the holiday season that we've seen in 2021.
And so we brought down our internal forecast for U S ecommerce growth commensurately with that and so.
In the middle of the year, we were thinking about U S ecommerce growth for the fourth quarter in the mid single digits. That's now come down to low singles, that's pretty consistent with what we see from other third parties and not really is the predominant driver of the change in our guidance in conjunction with that similar to earlier this year. When we took down some of our <unk>.
Spectation around initiatives in conjunction with a lower growth environment. We have done this thing and so that's also contributing to the 9% FX neutral expectation on Q4.
But of course, we're raising EPS overall.
And in the quarter, we expect to deliver about 75 basis points of op margin expansion. So we continued to deliver on our efficiencies despite the slower growth environment.
Youre also seeing.
And they report that comes out on the macroeconomic environment.
Reaching all time side.
Inflation report and the Eurozone.
Great.
And you are seeing in countries like the Netherlands, which is so conservative or 17%.
Inflation rate UK, which is our second largest market.
Is really suffering and.
Our view is.
That we're still going into winter energy costs are going to go up.
And.
The low end.
Income levels and middle income levels are.
We are beginning to cut back on their discretionary spend they are spending so much more on food on energy on gas on rent.
And we're beginning to see that.
The impact those segments of the market the high end of the market by the way still spending quite freely.
And we're seeing that Austin our results. The other thing is we did expect.
Quite a number of live to site.
Implementations on Braintree, and the fourth quarter.
Almost a full point of growth.
Being pushed into.
Into next year.
So.
Capture that revenue, we just won't capture it this quarter. So I think as Gabe said there are certain things we can control.
Our expenses, where we're investing how we're doing in those investments and there I think the team is doing an excellent job and there are certain things like the macro environment that we can't control, but we need to be ready.
A wide range of scenarios and that's what.
And that's what we're laying out for you firm commitment around at least 15% EPS growth and operating margin expansion.
And continued investment in our.
High growth.
Conviction areas.
All makes sense thanks, guys.
Yes.
Okay.
Your next question comes from Colin Sebastian with Baird. Your line is open.
Okay.
Thanks very much.
Obviously, it's a fluid environment, but maybe following up the last question I think it would be helpful to know for context, how you think about the overall e-commerce environment into next year.
How that impacts the 2023 framework and including the underlying volume and revenue growth assumptions that you have to get to those targets. Thank you.
Okay.
So let me start off with <unk>.
Can come in so first of all.
It's a little bit too soon to have strong visibility.
Ability into what 2023 will look like.
Typically in a quarter when you're a third of the way through it you have pretty good visibility into what's going to happen in the quarter, but in the fourth quarter, that's not the case.
All about the holiday season.
And.
And what happens in five or six week period, that's still ahead of us.
But based on what we're seeing right now.
Based on external reports based on our conversations with other E. Commerce players you saw.
Another very large ecommerce player take.
Take down their revenues in the fourth quarter that we think that.
E Commerce is going to be pretty muted.
In the fourth quarter and right now we do.
We are not planning that that comes back.
For any for any reason.
We look into 2023.
I think baseline e-commerce growth.
We will be subdued, but I fully expect that we will pace. It we've got quite a number of Braintree live to site with very large merchants coming up our checkout and digital wallet improvements are.
Are quite strong right now and I'm really pleased with the.
Indications from those initiatives.
Amazon.
We'll see what happens with that but we have.
A lot of hope for that and our deal with Apple will certainly be meaningful over at least the medium term on that so still too early in the call we're going to be very conservative on our top line assumptions, but we're going to build a ton of resilience.
Into our model, we will adjust to potential lower growth environments. We can keep our opex very well controlled we've demonstrated that now and we will continue to enable operating margin expansion next year. So.
And if the macro picture gets better numbers can improve.
Dramatically, but we're anticipating a difficulty economic cycle and preparing for that so that we can invest and deliver robust EPS growth at the same time.
Thank you very much.
Yeah.
Your next question comes from Darrin Peller with Wolfe Research. Your line is now open.
Hey, Thanks, guys.
Look it's really helpful to have the volume breakdown by Paypal Braintree more I know you said I think you said, 4% core Paypal growth and Youre, saying youre expecting that it will be in line with the market.
Could just touch on the assumptions and drivers of Paypal core engagement growth and what you can do there. It obviously it looks like youre, making progress around initiatives like past key or the venmo Amazon partnership or obviously Apple.
All of that should help I assume on the checkout experience, but maybe we can have some more color on how much room, there is to improve that experience and what that could mean.
Sure.
So.
Really quickly into both checkout and a little bit on what we're seeing on digital wallet.
So.
As you know Dan we're already a leader in branded checkout I mean, we have eight.
Eight times the footprint over the next closest digital wallet.
Consumers are twice as likely to spend online when they see the Paypal button, 80%.
Of the 1500 largest online retailers across U S and Europe .
Except us and are off the rate right now is 600 basis points above the market average like for every 100 transactions Paypal is going to approved six more than traditional card networks.
But obviously as we've talked about many times, we can do a lot more here and one we've.
Proved customer perceived latency by 40%.
In the last 12 months, our uptime and availability.
<unk> has gone up by another nine we're approaching five nines.
Availability and when we're doing in App are early indications from in App mobile SDK is that conversion rates increase between three and 10% again, it's early days on that but.
Imagine has significant improvement is on the authentication side past keys.
A very big deal.
Past keys are going to be accepted not just with Apple we're integrating through iOS on <unk> initially, but Google and Microsoft are also enabling past keys and that basically.
Enables authentication through biometrics fully embedded.
Into the OS it eliminates the need for <unk>.
Weaker reuse.
Credentials.
It removes the frustration of having to remember password and like one of our recent surveys like 44% of consumers have abandoned and the online purchase due to a password issue so that <unk> could be a very meaningful.
Piece of conversion uplift for US and then of course, we're moving into consulting and accelerated checkout and I've mentioned this already on our digital wallet stats, but.
It's up 50% of our base now plus is using our digital wallets, that's up over 13% year over year, we're seeing much reduced churn.
On that 25% to 33%, 50% greater <unk>, 60% more checkout.
Transactions were seeing a lot of our new products in the wallet gain a lot of traction.
Savings is early it's got a 3% API, but we're seeing a 20% lift in ARPA for those coming to our savings program, 30% lift in and checkout and even things like just like our new three two card as cards are important part of our strategy as well.
After an incredibly strong start we've acquired more accounts in the first six months of that launch that we did in the previous 22 months with our 2% cash back offer so.
A lot of things to be excited about in terms of.
What we can do with our initiatives and that's why we're investing heavily in them as.
As well as.
Returning.
Operating margin performance and EPS performance to our investors.
Understood. Thanks, Dan.
You bet.
Yeah.
Your next question comes from Lisa Ellis with Moffett Nathanson. Your line is now open.
Hey, good afternoon, guys good to hear your voices.
Dan I just wanted to follow up on the Apple related announcements that you made are highlighted on the call Sidney.
Some good progress there can you talk a bit more about what you think this online where paypal in terms of better serving both your merchants and your consumers are there any aspects of this relationship that you could think could be more impactful, perhaps over time like where could it go and then also.
Talk a little bit about how that relationship dynamic is how collaborative relationship.
Our relationship is with that thank you.
Yes.
<unk>.
Well first of all I think the agreements quite important strategically.
Our two companies have been working on that together for quite some time.
I think there are.
Three areas.
This really helps unlock.
I mean first of all.
Enabling our merchants.
To use there.
Phone without any incremental <unk>.
For a point of sale terminal around that all they need to do it.
Our business profile and venmo or Paypal is give us three pieces of information in their mobile phone number.
To date and even in a social security number either tax that's it and then they are set up to receive.
Payments in the in the offline world.
<unk>.
Our payment rates there.
As to two 9% plus nine.
That is a really competitive rate versus.
Others in.
In the market and we think this can be really especially significant.
For the millions of customers that have the venmo business profiles and allow us to compete aggressively in an omnichannel world in there. So I think there is a big unlock on that.
Second, adding apple to our unbranded flows.
As you know.
Apples already on Braintree.
Brian the first but that's just going to make us well more competitive.
As we go out and sell Paypal Commerce platform further down into middle market.
And smaller businesses.
Enables us to sell Paypal commerce platform more completely it enables us to offer more choice.
Two our merchants, which is something we've been.
<unk> focused on for years and years now and it also enables the very best integration of our Paypal branded and <unk> branded checkout buttons and then finally.
The ability for our consumers to add their Paypal and venmo credit and debit card.
Into Apple pay in the U S for the year.
You said anywhere Apple pay is accepted as probably a bigger deal than most people realize we we've been doing this with Google pay.
For quite some time and we've seen for instance that Google pay.
Users in Germany when.
When they add their Paypal credentials there there is a 20% increase in their branded checkout transactions and so.
We also have the ability to create.
Temporary digital cards that can even allow us to bring our buy now pay later.
From.
Branded checkout online to everywhere consumer shops, and so I think theres a lot of really nice unlocks.
Apple and Paypal.
Yes, I've been working closely on this we're both excited to.
To put these into the market.
And dedicated resource to assuring that they are successful and just create a better value proposition for our mutual customers.
Terrific. Thank you yes.
Yes.
Yes.
Your next question comes from Jensen Huang with Jpmorgan. Your line is now open.
Yes.
Thanks, Dan and good just any more clarity on the at least part of the <unk> III and cost efficiency next year I'm. Just curious if that's more likely to come from cost cutting or maybe less investing how quickly can you pull the levers to deliver on the.
On the 15% thanks.
Yeah, you bet. So when we talked last quarter about driving at least $1 $3 billion in cost savings next year.
Nearly half of that was coming on the transaction expense side with the other half coming from non transaction related Opex I would say in addition to thinking we can do more I think the balance weighed more in favor of non transaction related opex than it does today at this point in time of that based on the fact that with a slightly lower growth environment some of the benefit.
That we derive on the he hadn't really from our really volume based in nature and doses volume expectations come in a bit we.
We would be driving more on the non transaction related opex side that said I think we see a lot of room to go in terms of our initiatives there and so just sort of taking a step back.
Last year, our non transactional hit Opex grew about 20% that was on top of about 17% growth in 2020 over 2019 and so this year.
Spending about $2 $5 billion more than our non transaction related opex buckets than we did in 2008.
And we see an opportunity to be a lot more productive and drive more savings there and so you'll see that the marketing dollars coming down they came down again in Q3 about 1% after comping down considerably more than that in Q2, and we will end up the year with low single digit non transaction rated opex growth and unexpected next year will do.
Better than that I would expect it to be closer to flat.
If not decline year on year. So we're looking for the opportunities. We can to continue to drive operating margin expansion, even in a lower growth environment, and we think that the savings we're finding a really sustainable and it's a lot more about productivity and using our scale to benefit us and so we think we emerged from the.
It much stronger as a result of the work that we're doing.
Understood that's all useful and thanks, Scott to say, thank you for slide six including the kind of stuff.
Great is that a one timer and I'll jump off thanks.
In terms of disclosure.
We will continue to provide updates I don't know that we're committed to doing it on a quarterly basis, but we will continue to update on the mix of our PVA, that's quite important to understanding the performance of the business.
Okay.
We'll take the next question.
We have time for one last question from David <unk> with Evercore ISI. Your line is now open.
Thanks, So much for squeezing me in you've announced a number of new omnichannel multichannel initiatives, whether it be the announcements with Apple today.
Rollout recently of Paypal Zettel terminal in the U S and of course continued expansion of <unk> products.
Can you help us think about what all the omnichannel initiatives might mean over time for revenue and then sort of broadly what are the costs associated with expanding omni channel you've talked about freeing up.
Investment dollars from your cost reduction initiatives. Thanks, so much.
Yes.
I'll start on that David.
So.
<unk> is a.
An integral part of our checkout strategy.
No.
If we go into upfront presentment with buy now pay later somebody puts us on their product pages as opposed to checkout.
Our share of checkout.
It goes up.
Quite dramatically and.
As you saw and as you heard from me.
It's growing by leaps and bounds.
Approaching 300000 upstream present remember one of the top players in any market two years after launch of $150 million different loans at over by the way $2 2 million unique merchants and what I didn't say in my script is.
It drives a halo spend of greater than 20%.
90% plus of that is incremental.
To us and and so.
Not only do we have.
Great value proposition, but we have a real competitive advantage in knowing.
Our customers, 90% of the people that use buy now pay later, we have history on and so our loss rates remained low and stable.
And and.
Today, we live in eight markets as I mentioned when a lease ask your question.
We think that.
<unk>.
The ability to take buy now pay later anywhere you want to shop, whether that be online or in store is a really exciting part.
Our solution a buy now pay later.
As part of being able to.
Put a branded.
Debit or credit card, Paypal or venmo branded debit card into Apple pay we can also provision.
Digital.
Buy now pay later.
For somebody going in store so they can pay in store using one of our buy now pay later solutions.
<unk> solutions and we are also now linking our card strategy, which is a very important part of our in store.
Moving away from going heavy into into QR and doing much more with cards.
But imagine paying for.
For something in store and then coming back into your Paypal App and deciding paid for that but now I want to.
To pay for that and for installments.
Or split that payment with rewards or Fiat currency and so we're really trying to imagine buy now pay later is being fully omni.
As a capability and we think that will unlock.
Wait a bit for us as we look forward.
Thank you I think.
David for that.
And.
I want to thank everybody for the time for your great questions.
We look forward to speaking with all of you soon and again, thanks for your time take care and bye bye.
This concludes today's conference call you may now disconnect.
Yes.
Yes.
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