Q1 2023 PayPal Holdings Inc Earnings Call
Good afternoon. My name is Sarah and I will be your conference operator for today at this time I would like to welcome everyone to Paypal Holdings earnings Conference call for the first quarter 'twenty twenty-three all lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by one on your telephone keypad. If you would like to withdraw withdraw your question. Please press star one again thank you.
I'd now like to introduce your host for today's call Ms. Gabrielle Rabinovich.
Senior Vice President and acting CFO . Please go ahead.
Thank you Sarah good afternoon, and thank you for joining US welcome to Paypal earnings Conference call for the first quarter of 2023.
Joining me today on the call are 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 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 second quarter and full year 2023, our planning assumptions for 2023, and our comments related to anticipated foreign exchange rates operating margin and share repurchase activity.
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 may eight 2023.
<unk> expressly disclaim any obligation to update this information.
With that let me turn the call over to Dan.
Thanks Scott.
Thanks, everyone for joining us today.
And a good start to the year with stronger than expected growth across our key financial metrics.
Particularly pleased to see the TPG from our branded checkout meaningfully accelerate to six 5% growth FX.
200 basis points from Q4.
Well, our unbranded TPG growth also accelerated from Q4 to post year over year growth of 30% FX.
Even with this strong start there remain many challenging issues to navigate as we look forward.
Both the macroeconomic and geopolitical environments are complex and difficult to predict.
In these times the strong message I'm, giving the Paypal team is to focus on the things we can control.
We know that job number one is to invest and innovate to improve our value proposition to our merchants and consumers.
Since we owned our strategic priorities last year, we have consistently executed and delivered against our road map and this work is beginning to reflect in our results.
Of course, we still have room to improve in multiple areas, but we are making large strides in upgrading our merchant and consumer experiences, which are both significantly strengthen from a year ago.
We are focused on executing in the most cost effective and efficient way possible.
As you can tell from our non transaction related Opex performance, we are more than delivering against our plan.
As encouraging as these early results are.
I'd point out that we are just at the beginning.
Multi year efficiency journey.
For several years, we've been at the forefront of advanced forms of machine learning and AI to come back fraud.
Our sophisticated risk management programs.
With the new advances of generative AI, we will also be able to accelerate our productivity initiatives.
We expect to AI will enable us to meaningfully lower our cost for years to come.
Furthermore, we believe that AI.
Combined with our unique scale and.
<unk> of data will drive not only efficiencies.
To drive a differentiated and unique set of value propositions for our merchants and consumers.
So despite the fact that today's macro environment, it's difficult to forecast. We believe we are well positioned to deliver a strong year.
Enter next year are poised to reap additional revenue streams from the investments we are making in our products.
<unk> to drive efficiencies and reduce our overall cost structure.
Let me now turn to our Q1 results.
As I said, we were quite pleased with the quarter our.
Our revenues grew by 10, 4% FX.
Seven point over $4 billion in Q1.
One and a half points better than our guidance.
Consequently, we anticipate our full year revenues to be stronger than we expected.
Back half of the year being roughly similar in growth to the front half.
We processed $355 billion of PPV.
An acceleration of nearly 300 basis points sequentially from Q4 to 12% FX, then driven by five 8 billion transactions in the quarter.
With our branded checkout growing by six 5%.
We believe we improved our global share of checkout and gained share in unbranded processing.
We saw monthly active base slightly increase in line with our expectations.
Tpa grew by 13% year over year.
Importantly, our core Paypal consumer transactions per user improved throughout the quarter and then March was 400 basis points higher than in March of last year.
In addition, we saw consistent improvement in the quality of new cohorts in Q1 versus last year.
For instance, our March cohort of new accounts.
24% higher tpa and 40% higher ARPA.
Of last year.
These results strongly reinforced our decision to focus our resources on engagement and driving high value accounts.
Driven by continued discipline and execution.
non-GAAP EPS for Q1 grew by 33% to $1 17 exceeding the high end of our guidance by <unk> <unk>.
As a result, we are increasing our non-GAAP EPS guidance for the year to $4.95 up 20%.
Our three strategic priorities remain consistent.
Improve our core checkout proposition grow our unbranded processing.
And drive adoption of our digital wallets.
We're making good and steady progress on each of these inter related goals.
Okay.
I'd like to highlight our unbranded suite of services.
Including brain tree, and our newest platform for Smbs and channel partners Paypal complete payments.
Within the highly fragmented processing ecosystem.
Our PSP offering across unbranded and other merchant services.
Growing faster than the market and we are taking share.
We believe that in an apples to apples comparison.
Volumes in these areas are now roughly equal to that of IGN and strikes.
There are four points I want to make regarding our unbranded momentum.
First unbranded processing is a strategic imperative for us.
Enabling our merchants with our unbranded service helps ensure that we have a deep relationship with our most important merchants.
It enables us to bring our latest and most technologically sophisticated checkout integration.
<unk>, Paypal and Venmo and our buy now pay later service to our merchant base.
Going forward, we will primarily focus on enabling unbranded processing and our latest branded checkout experiences through Braintree and Paypal complete payments.
Based on our early observations our share of branded checkout stabilizes or grows when our latest checkout integrations are in place.
Second we will continue to invest to help ensure our unbranded platforms are best in class.
Enabling our merchants to reduce fraud and increase their sales conversion rates.
We will do this while providing a comprehensive orchestration layer that enables our merchants to have a single point of contact and integration and a multi PSP environment.
Our platform reliability is now amongst the best in class and our integrated servicing capabilities are increasingly differentiate it.
Third.
We are focused on substantially improving the margin structure of our unbranded business.
Paypal complete payments platform opens a new $750 billion Tam in the small and mid size business market.
As a significantly enhanced margin structure compared with our largest enterprise customers.
Our Braintree and Paypal complete payments platforms are also expanding overseas, where we can drive higher margins.
And we are adding value added services to our platform.
Risk as a service.
Omnichannel capabilities.
Yes.
That's a service.
So both enhanced functionality.
Incremental margins.
And finally, enabling merchants with our unbranded services will provide a constant stream of incremental data to feed our AI engine and fuel our next generation checkout platform.
We believe no other company will be able to replicate the unique nature and scale of our data set and.
And in the future our AI engines will use that data to drive differentiated capabilities to improve the entire checkout experience for our merchants.
We anticipate that this combination of initiatives will enable our unbranded services become a clear market leader.
Drive additional growth in our branded checkout.
Enable our next generation of checkout and provide new sources of margin growth.
And I would add that we continue to win and expand services with new marquee customers like live nation.
Booking dot com and Adobe.
Our focused efforts in improving our branded checkout, clearly, making a difference in the market and in our results.
Our product and engineering teams have driven substantial improvements in availability.
Agency and password list login.
We also expect that our in App native checkout solution.
Our API as an SDK is along with the deployment of our Paypal complete payments platform to our largest channel partners.
Should begin to bear significant fruit and bringing our legacy base to our latest integrations.
Buy now pay later continues to provide meaningful value to both our consumers and merchants.
Over 32 million consumers have used our buy now pay later service since inception at nearly 3 million merchants.
We are now one of the most popular buy now pay later services in the world with $6 billion of TPG in Q1 growing at 70% on a currency neutral basis.
Consumer spend 30% more on our branded checkout when you buy now pay later and we believe we have amongst the highest authorization rates and lowest loss rates in the industry.
Venmo continues to grow its revenues by double digits, and we were pleased to see it PPV accelerate 550 basis points from Q4 to $63 billion.
We're continually working to improve the venmo PDP experience.
This quarter, we launched an easier more intuitive way to split PDP payments across multiple people.
We also increased the AD funds limit for venmo to $10000.
We recently added the ability for venmo customers to transfer crypto to other users and external wallets, bringing it on par with the experience on Paypal.
Later this year, we will add the ability for a venmo user to pay a paypal user and vice versa, bringing more utility to both customer bases.
We are currently piloting the upcoming launch of Venmo team at teen accounts.
Which had been requested by both parents and teens for some time.
Our Amazon and Starbucks experiences continue to grow nicely.
And we recently launched Paypal and Venmo with Mcdonalds and just signed a deal with Microsoft to launch both pay with Venmo and buy now pay later for Microsoft Xbox store.
Oh.
Finally, I'd like to briefly touch on the search for my successor.
The board has formed a subcommittee and we're working with a leading search firm.
We have detailed set of criteria and skill sets to assess both internal and external candidates.
Still plan to announce my replacement before year end and the process is well underway.
One of the most important criteria influencing my decision to retire.
So that Paypal is on the right path to emerge from this economic climate and not only strong financial health, but also as a clear market leader in payments.
Our results this quarter are another solid proof point that we're on that path.
I'd like to thank all of our employees for their hard work and excellent execution.
Still a lot to accomplish and prove what our customers are responding to our efforts and that is and will always be our north star.
With that I'll turn the call over to gas. Thanks, Dan I'd like to start off by thanking our customers partners and global team for helping us to deliver a great quarter. Our results demonstrate the relevance diversification and strength of our payments platform, we are reporting healthy volume and revenue growth.
This solid topline performance in conjunction with strong expense management and efficiency gains resulted in outstanding earnings growth.
Notably, we accelerated our revenue and earnings growth on both a year over year and sequential basis.
Relative to the first quarter targets, we shared with you in February both our revenue and EPS outperformance.
Jason we established last year for cost discipline and to realize productivity gains allowed us to expand operating margin and deliver profitable growth.
Before discussing our outlook for the second quarter I'd like to review our first quarter results.
As Dan mentioned revenue increased 10% on a currency neutral basis, and 9% at spot to $7 4 million.
This represents a three year revenue CAGR of 15% and 20% excluding ebay.
Transaction revenue grew 6% to $6 4 billion.
Driven primarily by our unbranded processing volume.
Our value added services revenue grew 39% to $676 million predominantly due to higher interest income on customer stored balances and to a lesser extent solid performance from consumer and merchant credit.
In the first quarter U S revenue grew 13%.
International revenue grew 3% spot and 7% on a currency neutral basis accelerating both year over year and sequentially.
Transaction expense as a rate of TPB came in at 93 basis point.
Five.
Basis points higher than Q1 last year.
This increase was primarily driven by 30% growth in our unbranded processing volume <unk>.
These volumes grew approximately three times faster than our overall PPD growth.
As a result transaction expense dollars grew 17%.
Transaction loss is it right at TPB with eight basis points for the quarter, a two basis point improvement versus last year.
Transaction loss dollars declined 7%.
Our ongoing risk mitigation activities and our mix and volume drove this improved performance.
Credit losses were $142 million or four basis points as a rate of PPV.
We ended Q1 with $7 $5 billion in net receivable flat sequentially.
Originations were primarily driven by the strength of our buy now pay later franchise.
As we have discussed later this year, we plan to externalize, a significant portion of this portfolio, reducing our balance sheet exposure and securing a long term partner to support sustainable and healthy growth.
Our reserve coverage ratio increased sequentially to seven 8% in Q1 from seven 4%.
<unk> grew up in the consumer receivables portfolio and some deterioration in our Paypal business loan portfolio.
Relative to Q1 2022, our reserve coverage ratio improved 50 basis points.
Similar to the broader industry overall, we're seeing a normalization of our credit portfolio to pre COVID-19 delinquency level.
We continue to be pleased with the quality and diversification of our credit portfolio and are closely monitoring the macroeconomic environment, while making appropriate adjustments to ensure we continue to perform with our within our internal risk appetite.
Continuing the trend from 2022 growth of unbranded processing volumes outpaced growth in branded volume, resulting in slower transaction margin dollar growth.
Volume based expenses and in the aggregate increased 17% and transaction margin dollars grew 1% to $3 3 billion.
Transaction margin declined 47, 1% from 59% in Q1 last year.
While we do anticipate ongoing mix shift we believe that this performance will improve as we execute against the strategies that Dan outlined to drive increased profitability across our unbranded processing volume and accelerate growth of our branded franchise.
Strong discipline across non transaction related operating expenses more than offset the contraction in transaction margin.
On a non-GAAP basis non transaction related operating expenses declined more than 12%.
With reductions in sales and marketing technology and development.
And customer support and operations expenses contributing significant leverage.
This expense performance resulted in 19% growth in non-GAAP operating income to $1 6 billion.
This is the highest growth in operating income that we had experienced in eight quarters.
non-GAAP operating margin reached 22, 7%.
Expanding 201 basis points from the first quarter of 2022.
In addition, we're pleased to be reported $1 17.
And non-GAAP earnings per share for Q1, representing 33% growth year over year.
We continue to be in a very strong position from a balance sheet and liquidity perspective, ending the quarter with cash cash equivalents and investments of $15 3 billion.
During the quarter, we generated $1 billion in free cash flow.
Cash taxes related to the intergroup transfer of intellectual property reduced operating cash flow by approximately $430 million.
And in Q1, we allocated $1 4 billion to share repurchases.
For the full year, we continue to expect to generate approximately $5 billion in free cash flow and to repurchase roughly $4 billion of our shares.
I would now like to discuss our guidance for the second quarter and update our outlook for the full year.
For the second quarter, we expect revenue to grow approximately seven 5% to 8% on a currency neutral basis, and six 5% to 7% at spot.
In addition, we expect non-GAAP earnings per share to be in the range of $1 15.
The $1 17, representing growth of approximately 25% at the midpoint of the range.
For the full year, given our earnings outperformance in the first quarter, we are raising our outlook.
We now expect non-GAAP earnings per share to grow 20% to approximately $4 95.
An increase of two points of growth from the guidance we shared in February .
At the start of the year, we indicated that our framework for 18% non-GAAP EPS growth in 2023 contemplated revenue growth coming in at low at mid single digits.
We also shared that our objective was to deliver revenue performance that exceeded this baseline.
Our first quarter performance and the guidance for the second quarter are meaningful steps towards achieving this objective.
As Dan indicated assuming that current macro conditions continue we now expect our back half revenue growth to be.
In line with our performance in the first half of the year.
Additionally, based on the expected contribution of unbranded processing volumes to our growth. We now expect at least 100 basis points of operating margin expansion in 2023.
We are encouraged by our start to the year and at the same time mindful that the environment remains dynamic.
Focus on execution, and we will be agile and responsive to how the macroeconomic environment is playing out.
And we plan to continue to guide revenue one quarter at a time.
To wrap up we entered the year as a more focused business with strong fundamentals, we're off to a great start in 2023, and believe we're well positioned to deliver revenue and earnings growth expand margins and generate strong free cash flow.
We're continuing to invest to accelerate our growth and capture the meaningful opportunity ahead of us.
In addition, our expansive scale enables us to realize additional efficiencies and productivity gains.
We believe our digital payments platform is unrivaled and breadth and depth, which creates a powerful competitive advantage for us.
And we have conviction that our strategy to accelerate our branded checkout franchise improve the margin profile of our unbranded processing platform and strengthen our digital wallet will result in significant and enduring value creation for our shareholders.
We look forward to continuing to share our progress with you.
With that I'll turn it over I'll turn it over to the operator for questions. Sarah. 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, we request that you limit yourself to one question. Please and if needed return to the queue, we'll pause for just a moment to compile the Q&A roster.
Okay.
Your first question comes from the line of Tien Tsin Huang of Jpmorgan. Please go ahead.
Hey, Thanks, a lot nice performance here on revenue. So I'll ask my one question there. It looks like Q1 clearly ahead like you talked about the second quarter revenue growth is in line with what we have in the model three points lower.
Reported here and then you are calling for.
Second half to be in line with the first half, which is better than what we modeled and better than what you guys talked about before so my question is how much of this change is macro related versus maybe some momentum with.
With some of the new products and integrations that Dan you were talking about as well as curious on share gains. If your thinking is different there and we've been curious if you've seen any sort of benefit from from flight to quality with all the stresses in the banking system.
Survey work suggests that so love to hear your thoughts on all of that if you don't mind. Thanks.
Sure that was one question.
No it's a lot.
Alright.
Yes.
So let.
Let me, let me start with that and then get skin.
Come in.
First of all obviously, we had a real strong start to the year was stronger than our expectations, but we just missed around 11% FX.
Revenue growth at 10, 4%.
It's still a 150 basis points better than our expectations on that I think what really pleased us on that is all parts of the business accelerating.
You had PPV going up 300 basis points sequentially from Q4 to 12%.
R&D grew by 200 basis points to six 5%.
Growth Unbranded just continues to fire on all cylinders at 30%.
And even venmo was up almost 600 basis points.
And so.
Yes, it's a good strong start.
And the other thing that we didn't mention is our net promoter score, which is kind of how do our customers feel about us is that a five year high this.
This quarter so.
Obviously, a lot of things are.
Our.
Growing the way that we hoped they would be.
I think if you look at second quarter coming down third quarter, and then fourth quarter. We're lapping some one time events in Q2, and Q3 that could pressure of about a point to a point and a half R&R growth normalized you'd have Q2 after those one time things.
Growing.
Five 9% or so so that's kind of a normalized growth in the <unk>.
Quarter as.
As we look out to the.
To the rest of the year on the back half whats change in our outlook.
First of all we're a third of the way through the year as opposed to just coming into the year and yes. There are two things that.
We think are happening right now first of all.
Our initiatives are taking hold in the market.
No silver bullet.
On any one thing that comes in these are a number of small things whether it be improving and latency.
40%.
Year, our goal is to improve it.
50% by the end of this year, our availability being at an all time high.
We are pretty much at five times almost all the time.
We're fixing bugs all over we're reducing friction.
Less calls coming into service.
Unbranded.
<unk>.
Yes.
We put a lot of investment in that.
It is taking off and we have very high expectations for what <unk> can do.
The small and mid size market and with our channel partners as well and we're seeing things like new cohorts strength as I mentioned in my remarks that are significantly higher and cohorts we've seen.
In quite some time.
So we know we still have a lot to do there, but when you have scale like ours engine.
You start making small incremental improvements.
And as a flywheel effect.
So we're pretty pleased with what we're seeing there. The other thing is look we came into the year.
Really muted expectations around E Commerce Global E Commerce growth.
We thought it could be anywhere from a negative 2% to maybe positive 2% call it flat in general.
We saw that pick up.
In first quarter.
And we think it could be low single digits, maybe mid <unk> as high as mid single digits.
Clearly.
Consumers are turning more of their spend.
<unk> E Commerce, and I think many of us expected.
And as long as we continue to see those trends.
We think now which is very different than what we thought coming in the back half growth is going to be equal to our first half growth. So it's.
Our much improved.
Outlook than we had before.
Okay.
No.
Thanks, so much.
Yes, you bet you.
Your next question comes from the line of Lisa Ellis with Moffett Nathanson. Please go ahead.
Terrific. Thanks for taking my question and thanks for all the detail on the unbranded strategy just a couple of follow up questions. There Dan for you. One can you elaborate a little bit on what's driving the 30% growth in unbranded TPP and how sustainable that is meaning like is it a couple of large clients that will eventually lap.
Or is this more broad based growth.
And then <unk>.
Can you just talk a little bit more about Paypal complete payments competitive positioning downmarket, where exactly you think that's going to win.
How how quickly that will ramp thank you.
Yes.
So.
Brian team continues to do extraordinarily well and it's.
Not just winning.
Incremental clients, but they are growing.
Sure.
Overall.
PSP volume and our largest.
<unk> as well.
Okay.
We did expect Brian tree, and we do expect frankly to moderate its growth lapping some big deals last year.
But honestly, we're working on some big deals this year too.
And.
And we've done a lot of momentum in <unk> and I think its success.
It's differentiated it's driven by an open architecture.
We are perfectly willing to orchestrate transactions third party services and other psp's.
And yes, we've.
We've got our integrated servicing Scott our availability I think now is amongst the best in class.
We've got the lowest loss rates fraud in the industry. Some of the highest soft rates, maybe up to 390 basis points better than others.
And we've got a number of great value add services that others have but we're expanding to whether they be apm's vaulting or real time update on payouts.
Adding more and more that.
A really valuable to clients and also our very high margin like FX service, if you look at it.
<unk> results and you see how much comes from their profits come from FX is service.
You can see why we're eager.
Had that.
The PCP side of it there are.
Obviously.
Some benefits as you move into the small and mid size market first of all you obviously have a higher margin structure than you do with your large enterprises.
And we clearly see that even in the Paypal button.
Dynamics that we have.
Yes.
A really flexible.
A simple integration is fully featured as well, it's got all the apm's, including Apple pay and Scott vaulting, IC plus class Wheeler real time account update or it's got all of our latest innovations.
It's integrated with the settle for omni.
The channel.
Capabilities.
And it also is targeted at channel partners.
That's a really important thing and we're making some really good progress in our initial conversations with lots of our major channel partners.
Those channel partners are hosted.
They run their services as a hosted.
Service once we upgrade them to <unk>, our latest checkout integrations.
Very quickly move into that merchant base, that's part of those channel partners in some way.
Moving our long tail of merchants onto our latest checkout.
Integrations.
We're now fully live with People's CP here in the U S.
And the EU.
And Australia next quarter.
And the other really important thing about.
Our unbranded services. Besides the fact that we've got a deep relationship with our most important clients.
Drive a ton of data into our machine learning and AI engines. It's why we have amongst the lowest loss rates in the industry.
The lowest instances of fraud, the highest conversion rates. So when I look at all of that together, it's why I really spent time calling out.
Why unbranded is a strategic imperative for us.
People <unk>.
Asked us about our transaction margin, what's happening with that looking at our growth of unbranded.
That is a high class problem for us that we are winning in that market faster than we anticipated we have a very well thought through strategy and set of actions to drive margin in that business and we're very focused on making that.
It happened and we're seeing the beginnings of that already happening. So I. Appreciate the question because I think some really important one.
Thank you.
You bet. Your next question comes from the line of Darrin Peller with Wolfe Research. Please go ahead.
Hey, guys. Thanks.
Braintree growth in mix, obviously were a factor on the take rate and margins but.
If you could just help us understand the dynamics of margins in the second half I know you are lowering your lower margin guidance by 25 bps to 100 basis points. Despite with obviously very strong expense management results.
Maybe you could just help us understand how much of that is related to either the braintree mix versus any other variables in the second half we have to keep in mind and just just as a quick add on to that.
When would we expect the strength of the Braintree volume, we're seeing to actually translate to some higher margin offerings at a faster pace.
Thanks again guys.
Yeah, you bet I'll start.
You are right. So we have some margin dynamics that are worth calling out as it relates to first half versus second half performance, specifically as it relates to operating margin.
Our Q1 operating margin performance is very very strong with about 200 basis points of operating margin expansion.
In Q2, our expectation is actually that it would be ahead of that from a fashion standpoint, and so we're really delivering the vast majority of the margin expansion on the year from an operating margin standpoint in the first half of the year the back half, we actually have some lapping dynamics.
And some nuances that will result in much more modest operating margin expansion for <unk> overall.
I'd say, it's worth highlighting that Q3, I would expect to see some pressure on operating market, maybe some slight pressure and then in Q4, we'll see expansion again, but more modest expansion that youre seeing in the first half of the year and really sort of what the drivers are of that R&D again, highlighting a few of them.
We do have some lapping dynamics in the back half of the year.
Q3, specifically there were some benefits on the GE side. We're also beginning to really lap the benefits from increased interest rates and the increased.
Revenue that we earn on customer stored balances that really starts in Q3 continued in Q4 that would be.
<unk> that don't expect to see as much operating margin expansion in the back half.
In addition, we began to really lap a lot of the cost savings work that started in the back half of last year and so while we do expect to see meaningful decline in non transaction related operating expenses in both Q3 and Q.
From a percentage decline standpoint, it will not be as great as what we're seeing in Q1 and Q2.
Okay. All of that taken together will result in that differential between the first half in the back half op margin expansion for the full year again, we do expect to see at least 100 basis points of op margin expansion that change that you called out between the $1 25, and at least 100 that is predominantly driven by the fact that when we're talking about our revenue being slightly ahead.
A lot of the benefit that we're seeing is coming from the Braintree business and having a lot more visibility in that pipeline and that contributing to our top line, but also having some margin impact annualized talk a little bit about the.
This strategy Brandon.
Yes.
Maybe I'll just take a step back for a second I mean I think.
Look our our strategy.
On average and over time is to deliver.
Double digit EPS growth year after year after year.
A good track record in.
In general of doing that we have.
Got a well thought through strategy and a set of actions.
Kind of deliver increased transaction margin dollars, along with Opex reductions to make sure that we do that.
We've talked a lot about the initiatives that we're focused on.
And we've been.
Focus on the same thing for over a year now its drive branded checkout. That's our number one priority. So all of our initiatives linked to that is our highest margin.
Service and some are bread and butter and we're absolutely determined to have that be best in class.
We want to drive unbranded.
Because of all the things I've talked about in my remarks, it helps us on branded share of checkout. It helps us in our data collection and all of the things. We can do with those unique sets of data and unbranded will be a new source of margin generation for us without question we are.
Beginning is.
Already into place many of them will go into place by the fourth quarter.
To see the majority of those things start to take effect in 2024.
And then clearly we're managing our opex.
England, well I can talk in more detail on that if anyone has a question on it but we said we thought it would be negative high single digits. This year, it's likely to be 10% negative 10% plus and.
If anybody thought costs, we're going to be going up they'll go down again next year as well I can talk more about that but we've got a real set of <unk>.
Initiatives and strategies focused on this we are executing against it.
<unk> that we'll be able to deliver on what we set out to do.
That's really helpful guys. Thank you both.
You bet.
Your next question comes from the line of Jason Kupferberg with Bank of America. Please go ahead.
Thanks, guys that could see the improved revenue outlook here I actually wanted to switch over to the branded side of TPB growth. As you mentioned you had a couple of points of acceleration there wanted to understand which countries or verticals or other drivers what was behind that would you attribute any material amount of the improvement through the rollout of advance check.
And then just any directional comments on how branded checkout.
Phebe growth may trend during the balance of the year and supported.
Revenue outlook, you talked about thanks.
Okay.
Thanks, Jason and I think maybe I'll grab that one.
If I just take a step back for a second what are the market leader in online checkout right. We've got 35 million merchants, who accept US 80% of the top 1500 online retailers in the U S except us.
No other digital wallet that comes close to that acceptance. Yes. In general are off rates are about 600 basis points better than the industry average.
It's every time.
<unk> things that consumer does to buy from a merchant we approved six more of them and we.
Scott.
Consumer Trust.
And brand trust in that when a smaller mid sized merchant puts paypal on their website.
They see a 44% conversion lift by doing that so these are really strong advantages that we're going to leverage going forward, but obviously there is a ton of stuff we can still do.
We are optimizing presentment, we're making sure that our best in class integrations are out there with that come through our branded checkout whether that comes through.
The new SDK is an API that we have with that comes through PPP going into channel partners. So because we know when we have our best in class integrations.
We either have stable share or growing share of checkout.
Our ability as I mentioned is closing in on five nines are latency improved it by 40% will improve at up to 50% better makes a giant difference in conversion rates are password and login.
And proved by 10 four.
Last year, we intend to grow that again.
This year, whether that be through the past keys or tethered IP or forms of biometrics.
Now pay later.
We're taking share there and we are intending to continue to take share there.
The rates are higher we think than anyone else's, because we know the customers coming in over 90% of the customers coming in to buy now pay later are already Paypal customers. It's why we think we also have the lowest loss rates and we know.
Somebody mentioned flight to quality that people are coming to Paypal and our buy now pay later surfaces and we are targeting.
All of the largest merchants, we know what our competitors contracts are up and we're going after that business, because we see a clear shift in market share as well as spend when we have buy now pay later.
<unk>.
And our checkout excellence.
And obviously, we're now full GA on our mobile checkout with our SDK is an API.
We are now beginning to experiment with first generation of <unk>.
What we call AI powered checkout, which looks at the full checkout experience not just the Paypal checkout experience with a full checkout experience for our merchants. So we have a lot of things underway.
Our branded checkout.
But I will just say this.
The team.
Is executing extremely well here when they say theyre going to get something done they do they have a roadmap that they are consistently executing what they think will happen is happening in the market and so I've got a lot of confidence.
That will continue to see.
Branded share of checkout.
And we saw by the way in U S U K.
Germany, France, Italy, Spain, most of the markets, Australia and improvement in our share position of course, there is an odd one uniform.
Measure.
Market share but.
Any way you look at it when your branded share or you are.
Growth was up sequentially by 200 basis points.
A lot of momentum.
Thanks, Dan.
You bet.
Your next question comes from the line of David <unk> with Evercore ISI. Please go ahead.
Hello, Thank you good afternoon.
How are you thinking about the opportunities for cost savings in Opex.
Reduction beyond 2023, and in particular, if you could.
Maybe weigh that against potential.
Transaction margin dynamics as well to the extent those will continue next year based on the trend we saw in Q1.
Yeah.
Yeah.
I'll start off and then gas can attack the last part of your question.
First of all obviously, we had good solid progress against what we.
Secondly, we're going to do.
<unk> is 12% in Q1.
I think our opex for the full year it could decline as much as negative, 10%, which is a bit higher than we expected.
And as I said in my remarks.
Just beginning on this efficiency journey.
If you can share costs continue to come down year over year over year.
This is not just about efficiencies, but it's not about cost reduction this is about doing things better.
There's no question that AI is going to impact almost every function inside of Paypal, whether it be our front office back office.
Marketing legal engineering you name it.
Have an impact and allow us to.
Not just lower costs, but have higher performance and do things better is not about trade offs. It's about doing both in there. The other thing that the teams are doing and doing extremely well is there improving processes right now they are removing friction.
That much.
Simpler onboarding process.
First transaction resolution.
Better engagement as a result fewer calls as I've mentioned.
Higher NPS.
Youre seeing that in our newest cohorts coming in with significantly high.
Tpa.
And so I think.
This is going to be a cost journey that will be on for a long time to come.
At the same time, we'll just be doing things better than we've ever been delivered before as well.
Yeah understood Yeah.
Okay go ahead David.
Yes.
Just a second piece of that as well, Dan which is there an inflection point you see coming in terms of transaction margin dollar growth accelerating at some point later this year or in early 2024.
Okay, Yeah, so I really think about it as a multiyear journey that we're on to continue to transition the business and really drive more profitable volumes to the unbranded processing side, while at the same time accelerating the growth in branded we're off to a really good start Q1, we saw acceleration in the branded business. It was very broad based.
In terms of what we were seeing and we continue to see very strong growth on the unbranded side of the platform sequential acceleration in unbranded given its size and scale is very impressive given the base of business that we Brian It will take some time to see what I would deem an inflection point and the overall sort of key and dynamic.
I would say Q1.
Have some nuances to it which included about 130 basis points of impact just from normalizing our credit provision. So that is not specifically related to unbranded branded mix. It really what sort of credit loss provisioning that impacted the TM rate as well, but to your point as we move through the year and we do continue to expect to see a continuation of that.
M dynamic that played out in Q1 there are some.
Any trends that we're seeing in the business. However, I would say what we saw in cross border in Q1 and the growth in that business is quite encouraging or is the strongest quarter. We had for cross border I'm really since Q4 of 2021 that of course has a higher yield to it overall so as we start to see some of those pieces of the business pick up that will also help.
And then just from a TM standpoint, we did see some pressure as well in Q1 specifically.
On the unbranded side for Paypal and it does not Braintree business that hit the <unk>.
Transitioning of our unbranded processing on the Paypal side to PPP has created some pressure on the quarter, which we don't expect to be sort of ongoing as we think about how we exit the year given what our expectations are for PPP. So we're continuing to be disciplined about the breadth of isn't it.
Do you expect all these strategy to start to play out and start to help turn the overall <unk> profile, but I would expect it's going to take a number of quarters before we see what we would call inflection point.
Thank you.
Sure.
Next question comes from the line of James Faucette with Morgan Stanley . Please go ahead.
Yeah.
Hey, good afternoon, Dan Gabriel Thanks, a lot for time. This afternoon I wanted to follow up on one of the comments for topics you've mentioned quite a bit in this call Dan and that's around engagement.
I'm wondering if you can give some update you mentioned that there has been some improvement in engagement, but im wondering if you could give us some update on those initiatives more specifically.
How thats, helping engagement and conversion, especially things like advanced checkout et cetera, and what kind of lift you're getting from that and maybe give a little more detail of how we should think about the tie in to some of the unbranded initiatives and if we think there can be further.
Improvement in those engagement levels or uptake by merchants et cetera. Thanks.
Sure.
Hum.
So first of all as I mentioned, we've got these three initiatives. They all tie together and they all lead to driving more share and volume of branded checkout.
So.
As we do more and more on our unbranded, we put out our latest integrations into the market and when we.
We put out our latest integrations in the market, we take away friction we.
We takeaway latency and we see more engagement.
And.
A lot more checkout go through our latest.
Integrations.
But.
One of the initiatives that we haven't really spent time talking about.
Okay. This is what we're doing on our digital wallets.
Right right drive engagement and monthly active users and ARPA through our digital wallets drive our checkout driver on Brent and they are all linked together and then keep tight.
Antelope on our cost structure.
Four things that we're focused on.
In the wallet.
We're making good solid progress with that beyond our venmo wallet on the Paypal side of it with the Paypal App.
Is already one of the largest commerce and payments apps in the world. It's used by about 55% of our base right now thats up about 600 basis points year over year and our App users are predominantly our monthly active users and there are power users they've got.
35%.
<unk>.
Got 58% greater transactions for active on it.
Churn is at least 25% less.
And then the rest of the base and the.
The thing that I'm really pleased to see.
What John Kim and his team are doing is that the velocity of experimentation.
Our wallets now is like nothing that we've seen in quite some time, we have constant champion challenger hypotheses going out.
Replacing <unk>.
<unk> that have been overcome by the champion and that just starts to lead to more and more.
Engagement going through as I mentioned on the consumer side, we saw consumer transactions for user increased every single month.
In the quarter in March there was 400 basis points better than March a year ago, and the whole idea of the apps right now.
Three specific areas one.
Upfront pre purchase call that shopping where it's really about discovery saving and rewards we introduced rewards.
Recently, we have over 6 million monthly active users in our rewards right now those that are using it have an increase in those 6 million a 45% in their transactions per active I mean these are huge numbers, you, obviously need to get us from $6 million to $10 billion to 20.
$5 million, but that will happen.
Over time.
Then we have to purchase which is all about being the most flexible easy way to purchase buy now pay later really plays into that and there were clearly taking share.
We intend to.
To drive that and then we have post purchase which is like things like how do I check my packages, how do I get refunds easily how do I put that right into my wallet and their I've talked about this the last earnings call.
Package tracking we're now 100% ramped in iOS.
We do all of the package scraping now off of GE May also in one place you can see all of your Paypal purchases and non Paypal purchases. So you can track all of that in one place and again for those users that have started to do that their app.
Engagement is up 32% and there are transactions are up 20% and so all of these things James when you think about what we're doing on just being better in checkout.
Rising unbranded, so that we can drive better integrations going forward.
And what we're doing in the wallet they all linked together to really drive.
May use which are our most valuable customers by far and away and they went up.
Slightly in Q1.
There are 2030 times more valuable.
Just an active user out there and to drive.
Transactions and in ARPA. So this is a flywheel as Scott said it takes time to drive it but a lot of the things we're seeing right now. The reason we are taking up our expectations for what we think our revenue growth will be.
Taking up kind of R. R.
Our EPS as well as because were seeing distinct improvements take place in the market.
That's awesome, thanks for that Dan.
Yeah, you bet my pleasure.
We have time for one last question from the line of Bryan Keane of Deutsche Bank. Please go ahead.
Yes.
Hi, Thanks for taking the question I wanted to ask about credit or are you managing the book any different on credit given the macro and exposure to be NPL and merchants and just thinking about maybe the impact of provisions for credit losses for the rest of fiscal year 'twenty three maybe as a result of managing the book any different.
Okay.
Yeah, you bet. Thanks, Brian .
So you'll see in the Q, which will be filed tomorrow.
Did increase the provisions.
On the PPL portfolio, which is the Paypal business loan portfolio overall that portfolio is about 17% of our overall receivables, there's sort of a flavor of our overall book and we get a widening our credit box in the middle of last year.
<unk> seen some requirements that.
Less strong than we would have liked and that is working its way through our system and so we increased the provisions we've already started to see an improvement overall, we've had in a box.
And that will just work its way through our systems, we would expect delinquencies to worsening through Q2 peak in this quarter and then improve throughout the remainder of the year based upon the origination strategy, but really that piece of the buffet there very small component of the overall portfolio and I'd say more importantly, the area that we're really grow it where we're really growing where the origination.
<unk> are quite strong continues to be the buy now pay later portfolio and they are routine very broad based strength and so that's a really important part of our strategy to support improved checkout performance in our business on the branded side and we're excited about the continued growth of that business. Overall, we did mentioned in the prepared remarks that our expectation is to externally.
Part of that portfolio during this year and work with a partner to really provide sort of longer term sustained support for growth in that portfolio and I'd say overall, we continue to be very pleased with our credit portfolio. We've seen very good performance.
Across the book, we are seeing some normalization, which we expected to see as it relates to just sort of pulp.
Normalization post COVID-19 and really getting back to what we've historically seen in terms of performance, but in terms of reserve coverage. When we take a look at reserve coverage today versus when.
When <unk> started which was the first quarter of 2020, we're actually a few hundred points a few hundred basis points better overall, and so that the book itself continues to be quite healthy.
Got it thanks, so much.
You bet.
Alright, well I think we are at the top of the hour. So I just wanted to thank everybody for your great questions. Thank you for your time and we look forward to speaking with all of you again soon thanks, everybody take care Bye bye.
This concludes today's conference call you may now disconnect your lines.
Okay.
[music].
Yes.