Q2 2023 PayPal Holdings Inc Earnings Call
And I will be your conference operator today at this time I would like to welcome everyone to Paypal Holdings earnings Conference call for the second quarter 'twenty to '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 the number one on your telephone keypad. If you would like to withdraw your question. Please press star one again thank you.
I would 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 second quarter of 2023.
With 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 without limitation, our guidance for the third quarter and full year 2023, our planning assumptions for 2023.
Our comments related to anticipated foreign exchange rates operating margin impact from our sale of loans to KKR and share repurchase activity.
Our actual results may differ materially from these statements you.
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 todays date August two 2023.
We expressly disclaim any obligation to update this information.
With that let me turn the call over to Dan.
Thanks, Scott and thanks, everyone for joining us on today's call.
Proud of the Paypal team as we delivered another solid quarter for <unk>.
Revenues came in above the top end of our guidance.
non-GAAP EPS grew 24% to $1 16 in line with the midpoint of our guide.
And we are reiterating our guidance for non-GAAP EPS and operating margin expansion for the full year.
Encouragingly e-commerce growth appears to have stabilized in the mid single digits.
Essentially above our estimates when we enter 2023.
Our branded checkout volumes grew roughly in line with the industry in Q2 and accelerated to nearly six 5% growth in the month of June .
And in July our branded checkout volume growth accelerated again to over 8% our highest monthly growth rate since the end of the pandemic.
We expect branded checkout volumes will strengthen throughout the back half of the year supported by traction from our key strategic initiatives.
Of course, we still face a fluid global macroeconomic environment.
However, it is quite encouraging to see core inflation rates continue to come down.
As inflation cools, we would expect to see discretionary spending rise, which we will which we believe will support and possibly accelerate the overall growth of e-commerce spending.
And as a market leader in digital payments any uptick in e-commerce will accelerate our growth.
Revenues in Q2 grew by 8% on a currency neutral basis.
Approximately seven $3 billion.
It is instructive to note that we are lapping certain items that provided an outside an.
The outsized benefit to us in Q2, and Q3 last year.
Consequently, those items pressure, our revenue growth rate by approximately $1 two 5% in each of those quarters. This year.
Excluding these items our growth in Q2 would have been between nine and 10%.
As we mentioned last quarter, we expect our revenue growth in the second half of the year to be roughly the same as and given recent trends, maybe a bit better than the first half.
We expect Q3 revenues to grow approximately 8% on a currency neutral basis.
I would highlight that July was a very strong start to the quarter with currency neutral revenue growth of 9% and key PV growth accelerating into the low teens.
And for the year, we anticipate our revenue growth to be between nine and 10% on a currency neutral basis.
We continue to exercise good discipline in managing operating expenses.
For the quarter non-GAAP non transaction related expenses fell 11% year over year.
As a result, our non-GAAP operating margin was 21, 4% up approximately 230 basis points from a year ago.
We expect to increase our non-GAAP operating margin for the full year by at least 100 basis points.
As we look ahead to the rest of 2023 and into 2024, we expect to drive meaningful productivity improvements.
Our initial experiences with AI and continuing advances in our processes infrastructure and product quality.
Enable us to see a future, where we do things better faster and cheaper.
These overall cost savings come even as we significantly invest against our three strategic priorities.
We know exactly what we need to do as we look towards 2024 and as you can see in our results. We're beginning to see the fruits of our labor.
We understand that over the medium to long term, we need to deliver growth in our transaction margin dollars to ensure we sustainably grow our earnings and we are beginning to see clear signs that our initiatives will yield notable traction against that objective over the next several quarters.
As I mentioned, we expect our top line to accelerate to low double digit growth by Q4.
We expect transaction margin dollars to increase our operating expenses continued to create significant leverage.
That in connection with our share buybacks enables us to target low to mid teens EPS growth for the remainder of 2023, even as we begin to lap the increases we enjoyed on our interest income.
I'd like to now turn to our three strategic priorities and which we are investing our resources and energy.
R&D checkout, our PFC merchant solutions and our digital wallets.
As I've mentioned in the past all three of these are critical and in a related.
They are essential for us to increase our share of the e-commerce market as well as accelerate our margin dollar growth.
As we discussed in our June Investor meeting, we are meaningfully accelerating new product innovations into the market scaling our AB testing and significantly improving our time to market.
We are now consistently delivering against our roadmap on schedule. This.
This is the result of significant investments in our platform infrastructure and tools.
Enhanced set of measurements and performance indicators.
<unk>, new talent and early successes using AI and our software development process.
We continue to ramp our tests velocity with more than 300 experiments launched across our product experiences in the first half of the year.
Every successful tests leads to incremental customer benefits and the cumulative effect of those changes reached a noticeable improvements in our key metrics, including the gains we are seeing in branded checkout growth.
For instance, our buy now pay later traction has meaningfully accelerated with the introduction of preapproved amounts to our consumers.
Our work in Onboarding.
And Onboarding, new experiences has driven new monthly cohorts with higher engagement and lifetime value.
And this month, we are expanding the rollout of past keys in the U S and Europe , which will greatly simplify the branded checkout login experience and drive improved authorization rates that will further extend our lead over our competitors.
Our goal is to continually close the gap in our login and checkout experiences every quarter and to be equal to or better than any competitor within the next year.
We simultaneously aimed to drive differentiated wallet experiences across both Paypal and venmo.
We believe that only those companies with unique and scaled datasets will be able to fully utilize the power of AI to drive actionable insights and differentiated value propositions for their customers.
We are already experimenting internally with an AI driven Paypal assistant.
We envision that a version of this will be part of our consumer App and we plan to introduce it later this year.
We continue to see impressive traction in our PSP business with our growth rates nearly 30% on a currency neutral basis.
Many of the largest tech companies in the World are now either using our brand tree capabilities.
Were in deep strategic negotiations with us to do so.
We are in the process of rolling out high margin value added services, expanding internationally and making noticeable progress with in person payments.
And we continue to receive exceptional interest in our next generation checkout solution, which will leverage the scale of our network vault, our deep understanding of our two sided network and the development of proprietary AI models.
I couldnt be more pleased with the initial rollout of Paypal complete payments, our PSP merchant solution for channel partners in the SMB market.
We're seeing tremendous interest in the platform with a substantial pipeline of completed sales and our backlog of deals that continues to grow.
Importantly, our major channel partners are enthusiastic about its capabilities.
We have already implemented PPE CP with leading channel partners like Adobe.
Speed <unk> shift for Shopify stacks payments ultra cart Wix, and <unk> commerce with more than 25 additional channel partners schedule to be live by the end of the year.
This not only demonstrates the strength of our platform capabilities will also enable a meaningful number of SMB merchants to access our latest checkout experiences.
There is a remarkable sense of energy excitement and enthusiasm among our leadership teams as we see clear and distinct signs of re invigorated success in the market.
We are now able to take advantage of many of the investments we have made over the past years to do.
Deliver a best in class experience for our customers.
Leveraging a modern infrastructure and our scale and the age of AI.
We have successfully recruited a large number of external talent to complement our internal teams in both AI and machine learning as well as throughout our product engineering and technology groups in order to build upon our success and maximize our opportunity.
I'd like to end my remarks talking about our CEO succession plan.
We are in the very final stages of the process with several outstanding candidates all of whom are highly qualified and excited to lead Paypal as we go into our next chapter of growth.
Eager to welcome Paypal its next CEO .
Work with them on a seamless onboarding and to support them and the amazing Paypal team as I transition into my role on the board.
As you can hopefully tell we have a lot of energy and confidence that we are on the right path with good momentum.
Many of the headwinds we faced are now turning into a tailwind.
We are executing with a high degree of excellence, we have a firm handle on our business model and can point to numerous successes.
Already making a real difference in the market, which will only continue to compound over time.
Paypal is an increasingly strong position.
And we are poised to deliver for our customers and our shareholders.
Thank you and with that let me turn the call over to get thanks, Dan I'd like to start by thanking the entire Paypal team for their continued commitment to serving our customers and executing our priorities Paypal delivered another solid quarter and a dynamic environment. We're reporting revenue at the high end of our guidance range and <unk>.
Earnings per share consistent with our expectations.
Our results are tracking with the guidance, we gave for the full year and reflects steady progress against our long term growth aspirations.
We continue to invest in our key initiatives, while demonstrating discipline and delivering on our operating expense commitment.
In June we were delighted to share more about our long term strategic plan and product roadmap at our investment community meeting.
Importantly, the product launches we discussed are on track and we continue to gain conviction in our ability to accelerate our branded checkout volume and drive greater profitability across our PSP services.
During the quarter, we are pleased to announce a multiyear agreement to sell both our existing European buy now pay later receivables as well as future originations to KKR.
During my remarks, I will discuss the impact of this externalization on our financial results. We have also included additional details in our investor update presentation.
Before discussing our outlook for the remainder of the year I would like to highlight our second quarter performance.
As Dan mentioned revenue increased 8% on a currency neutral basis, and 7% at spot to seven $3 billion.
<unk> revenue grew 5% to $6 6 billion driven.
Driven primarily by Braintree, and Paypal branded checkout.
Headwinds to growth in the quarter included the lapping of $75 million in contractual compensation from merchants last year, which was de Minimis. This year.
$72 million less in hedge gains relative to Q2 last year and the impact from migrating and consolidating legacy Paypal payment services.
Other value added services revenue grew 37% to $731 million.
This performance was predominantly due to increased interest income on customer stored balances and to a lesser extent revenue growth from consumer credit products.
In the second quarter U S revenue grew 9% and international revenue increased 5%.
Currency neutral basis international revenue increased 7% accelerating sequentially and year over year.
Transaction take rate declined 11 basis points to 174% Approx.
Approximately two thirds of this decline was driven by a decline in foreign exchange fees in part driven by lower currency volatility declining gains from foreign currency hedges, which are recorded as international transaction revenue and the headwind from lapping elevated contractual assessments from merchants last year.
While merchant mix continued to pressure our branded checkout take rate the second quarter was an improvement from Q1.
Our total take rate declined six basis points to 194% affected by the same factors as transaction take rate.
Transaction expense as a rate of TPB came in at 94 basis points four basis points higher than Q2 last year.
This increase was primarily driven by growth in Braintree volumes, partially offset by rate benefits in core Paypal and venmo.
Overall transaction expense dollars grew 16%.
Transaction loss as a rate of TPB with eight basis points for the quarter of $3 six basis point improvement versus last year.
<unk> lost dollars declined 25%.
The decrease this year was primarily due to an atypical merchant solvency last year, which drove a sizable loss in the second quarter with no comparable exposure this year.
Our ongoing risk mitigation activities and mix of volumes also contributed to this performance.
Credit losses were $112 million or three basis points as a rate of TPB.
On a dollar basis credit losses increased 65% provisions.
Provisions in the quarter were driven by a build of $146 million.
Partially offset by a $33 million reserve release from the reclassification of our European buy now pay later portfolio to held for sale from held from held for investment.
The operating income benefit from this release of reserves was entirely offset by the fair value discount on the portfolio classified as held for sale.
The increased provisioning resulted from increased expected losses in our Paypal business loan portfolio as well as growth in our U S pay later portfolio.
Like the broader industry, we're seeing a normalization of our credit portfolio to pre COVID-19 delinquency levels across our consumer and Paypal working capital portfolio.
That said, we have seen some deterioration in our business model portfolio.
This portfolio represents less than 15% of our overall net credit receivable.
And as we discussed last quarter, we have taken remedial actions to address this performance.
We've tightened originations and have already seen improvement in new cohorts will be managing the book with similar rigor as we move through the remainder of the year.
As a result of designating one $9 billion and pay later receivables to assets held for sale. We ended Q2 with $5 5 billion in net credit receivables, a three 5% decline year over year, and a 26% decline sequentially.
The decline in receivables due to held for sale accounting also contributed to an increase in our reserve coverage ratio.
This ratio increased to 10% from seven 8% in Q1.
In the aggregate volume based expenses increased 13% in Q2 relative to an increase of 30% in the second quarter of 2022.
Transaction margin dollars grew 1% to $3 3 billion.
And transaction margin was 45, 9%.
While our transaction margin declined in the quarter the rate of decline slowed considerably from both Q1 and the second quarter of last year, and we're executing on our strategy to grow transaction margin dollars.
We're encouraged by the progress, we're making against our longer term initiatives that will support improved transaction margin performance overtime.
Q2 marked the third quarter in a row that we've delivered meaningful expansion in our operating margin on both a GAAP and non-GAAP basis.
Ongoing discipline in managing our cost structure allowed us to more than offset transaction margin compression with operating expense leverage.
On a non-GAAP basis non transaction related operating expenses declined 11% with reductions across each of our principal operating expense categories contributing significant leverage.
Strong expense performance resulted in 20% growth in non-GAAP operating income to $1 6 billion.
This is the highest growth in operating income that we've delivered and more than two years.
non-GAAP operating margin expanded 228 basis points to 21, 4%, which was slightly below the guidance we gave for the quarter.
This is principally attributable to our credit portfolio, where we are in less revenue than expected and increased loss provisions.
For the second quarter, non-GAAP , EPS increased 24% to $1 16.
Which was the midpoint of our guidance range.
We ended the quarter with cash cash equivalents and investments of $14 $4 billion.
The net cash outflows for originations of loans held for sale reduced cash flows from operations by $1 2 billion in the quarter, resulting in free cash flow for the quarter of negative $350 million.
Later this year when the sale of the European be NPL back book closes the proceeds will be recognized in cash flows from operations and offset this decline.
So while the timing of accounting treatment will affect the quarterly profile of our free cash flow. There is no change to our outlook for the year and we continue to expect to generate approximately $5 billion and free cash flow.
In the quarter, we completed $1 5 billion in share repurchases.
For the full year, we now expect to allocate approximately $5 billion to our buyback program.
Our recently announced credit externalization will help optimize our balance sheet and improve our capital efficiency.
Given our desire to return capital to shareholders and the confidence we have in our business, we've taken a more aggressive approach to share repurchases.
Since the end of 2021, our diluted share count has declined 6%.
I would now like to discuss our outlook for the remainder of 2023 at.
As Dan shared based on our results through the first half of the year, we're reaffirming our guidance for the year for non-GAAP operating margin expansion and earnings per share.
In the aggregate for the first and second quarters of 2023, we've delivered revenue growth of approximately 9% on a currency neutral basis.
We expect revenue growth in the back half of the year to be in line with this performance if not slightly ahead, given the momentum we're seeing in the business.
In addition, we are on track to meet our expense guidance for the year and are committed to delivering at least 100 basis points of non-GAAP operating margin improvement.
We also continue to expect to deliver non-GAAP earnings per share of approximately $4 95.
Representing 20% growth from 2022.
We're reiterating our full year guidance, while absorbing incremental pressure from our credit portfolio, given strengthening business performance driven by check out initiatives and our ongoing realization of productivity gains.
For the third quarter, we expect revenue to grow approximately 8% on both a spot and currency neutral basis to approximately $7 4 billion at current spot rates in.
In addition, we expect non-GAAP earnings per share to be in the range of $1 22 to $1 24.
Representing growth of approximately 13, 5% at the midpoint of the range.
In summary.
We're proud of our solid operating results this quarter.
Paypal unique competitive advantages, including our portfolio of differentiated assets and our global scale and ubiquity continue to drive US forward, we're committed to investing in our core strengths and building Paypal for the future.
And we're guided by our relentless focus on creating the best possible experiences for our customers, our revenue momentum and customer engagement trends position us well to achieve our growth objectives this year and beyond.
Given the uncertainties in the macroeconomic environment, we remain focused on managing the things, we can control and allocating capital with discipline to ensure we optimize for long term value creation and resiliency.
And with that Dan and I are happy to take your 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.
You limit yourself to one question and then return to the queue. If you have a follow up we'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Tien Tsin Huang of Jpmorgan. Your line is open.
Hey, Thanks, Thanks, a lot I wanted to ask a question on.
E Commerce shelf and Dan I know you talked about it upfront. We are just getting a lot of questions on e-commerce industry in general. So you mentioned inflation easing should help I'm curious about other trends like shift from services to goods like our economy. So we're talking about which I think would also be a.
A tailwind for you.
The headwind previously is there something you're seeing or maybe is that changing how you're thinking about the second half versus a quarter ago. It seems like there is some room for upside in your outlook here given the exit growth rate and what you talked about for July .
Yeah, Thanks, and it's great.
Good to hear your voice and thanks for the question.
I think the story.
Quarter Israeli.
Sort of the shape of the results inside the quarter and a strong exit as we.
Went into July and seen July results.
And our view right now.
Are beginning to see an inflection point.
Seeing our results on a slightly different trajectory for sure and as I mentioned in my remarks, we're clearly seeing a lot of headwinds.
Begin to shift towards <unk>.
E Commerce is definitely one of those.
We see e-commerce growth.
Accelerating we think it is at least in the mid single digits right now thats substantially above what we thought when we entered the year, we thought it might be might be flat year over year, and I would say a slight bias.
That will continue to accelerate.
Got a range out there from.
Low or zero to high of 10%, we think it's probably right in the middle of that and we think it is being driven by a shift from traveling in services into goods into fashion more coming into retail piece.
Pieces of that.
And clearly as inflation cools, we would expect to see more discretionary spend rebound and that will help drive E. Commerce. So one of the.
Headwinds, we face with e-commerce growth slowing now, it's accelerating again and that clearly will be.
Meaningful for us.
Also seeing improvements scare.
<unk> mentioned in cross border, that's beginning to accelerate again.
It's obviously, a very meaningful thing for us because one of our value proposition is perfect for cross border as consumers buying from merchants that they don't really know, but they trust Paypal to make sure that that that payment will be protected for them is.
Obviously extremely high margin business for us and that seems to be accelerating nicely right now.
PCP, which was.
A really important introduction for us for numerous reasons.
Could not.
A better reception.
In the market, we've got tremendous momentum there.
Braintree continues to.
To go from strength to strength that we're seeing a lot of our value added services.
Now start to take hold I can talk about some of that later in the call somebody wants to ask about that and obviously branded branded checkout.
Is accelerating that.
That 8%.
It's the highest we've seen since the end of the pandemic.
And.
We continue to expect to see that strengthen as we go through the year as many of our initiatives are really taking hold in the last quarter. We've got another 200, plus experiments that are going to happen in Q3.
So that's that.
That's all adding to the momentum and I guess at the end of the day, what that's adding up to when we look at our net promoter score. We're now at a seven year high and that and so there is clearly a lot of momentum.
The business right now and we just want to double down on that.
We do obviously feel a lot better today than we did 90 days ago, but I think that's just going to continue on your asset same question a quarter from now.
Your next question comes from the line of Darrin Peller with Wolfe Research. Your line is open.
Hey, Thanks, guys.
<unk>.
Revenue growth was obviously sound, but we still saw transaction profit dollars.
A little less pronounced versus revenue I think it actually may have decreased a bit year over year and so.
I know you talked about some one time grow overs and hedging differences and I am sure. The mix between branded unbranded continues to have an impact given the growth of free trade, but if you could just help us understand the moving parts in the quarter and the trends in the second half as far as gross profit per transaction.
Transaction profit growth Goose that'd be great. Thanks, you bet you bet Darren.
For the quarter transaction margin dollars grew 1%, which is essentially in line with Q1 that said when we look at the underlying performance of our business. We're very encouraged by the stronger results we're seeing.
In my prepared remarks, I called out several items that created headwinds to growth in the quarter due to lapping. In addition, we actually had some benefits that we saw in the quarter as well from the release of reserves from held for sale reclassification as well as from lapping that large merchant exposure last year and so when we adjust for all these items, both the benefits and the drag on.
On a more normalized basis, we actually see transaction margin dollars in the quarter growing several points faster than the reported 1%.
And what we're really encouraged by is the strengthening profile of the business, we're actually starting to see the benefits of our initiatives as we get through some of the noise from lapping we do expect to see improving transaction profit growth.
When we think about the back half in Q3, we will still see some pressure on transaction margin performance in Q4, we expect to see an improvement and then over the longer term our Tam profile in the future will certainly be benefited by the acceleration in branded checkout by E Commerce acceleration by the improved cross border trends that Dan referred to as <unk>.
Loss from the value added services that we're adding on the PSP side.
That's really helpful. So it sounds like some of these initiatives, our third and fourth quarter events, but they could move the needle starting them.
We expect to exit the year in a much stronger position from a GM trajectory other than where we are right now.
Okay very good thanks, guys.
You bet.
Your next question comes from the line of James Faucette with Morgan Stanley . Your line is open.
Thank you very much I wanted to follow up on Aaron's question I know that.
Unbranded seems to be a drag or dilutive to margins right now overall.
Which is a little bit surprising given just kind of how the margin structure tends to be throughout the industry I know you've talked a little bit in the past about adding incremental services to unbranded.
That could improve that that structural margin component and Brendan can you talk a little bit about what that may look like timing and if any of those initiatives are.
We will play a role in improving the transaction margin that youre looking at for the latter part of this year. Thanks.
Yes.
I'll take the.
James Thanks for the question.
Yes.
<unk> business does continue to go from strength to strength.
As we've talked about our overall TPG was nearly 30% in the quarter and that's despite as Gabriel mentioned deprecating some of our older piece.
PSP flows.
Things are coming off of <unk>.
Paypal Pro we actually migrated about $5 billion of TPB from our legacy stacks onto PPC Pete.
This past quarter and so.
It's a bit of a drag in the quarter, but we're going to be done with that.
By the end of the year.
And we continue to win marquee accounts in the business whether that be booking.
Dot Com meta Allstate insurance.
These are big accounts that we are winning.
Because winning PSP as a strategic imperative for us.
Allows us to have our latest checkout experiences.
With the largest most important merchants in the world across Paypal Venmo and buy now pay later.
We capture 100% of the data flows which really is.
Our AI engines, it's fueling what will be our next generation checkout and most importantly, it's fueling kind of our ability to have best in class off rates in the industry and the lowest loss rates.
And the industry.
In terms of the <unk>.
Margin services that we're going to be putting out there.
We are seeing a lot of traction on that right now.
For instance, we are.
We are moving into in store that's always been.
An area of opportunity for US we are now fully implemented with 20, Mark key merchants and.
Over 1000 store locations over 2500.
Yes.
Systems.
We will continue to do quite well, there and push significantly and we're making good progress in selling things like payouts risk as a service disputes automation, we're seeing our largest customers begin to adopt that right now whether it be sheehan, our meta or ticked up really is there some.
The bigger clients adopting our value added services and I will just give you. One example, we just.
Started doing orchestration and six additional Latam countries with much higher margins and where we're doing that orchestration for our largest customers. We're seeing like a 190 basis point off rate improvement. So you're seeing kind of this win win as we are doing this and then of course.
<unk> as it goes down market is a much higher margin product for US, yes, I talked about all of the.
Channel partners that have already implemented that.
The middle of implementing.
And we've got another 25 more partners by year end in the U S. Another 15 EU partners.
By year end, so we're seeing a tremendous amount of scaling on that we've also enabled here in the U S $1 2 million SMB merchants to basically do a one click migration into PCP, we've already done all of the risk assessment for them. They are on the right platforms.
For us to be able to seamlessly transition them onto that platform. So I think we're going to see a large amount.
Volume moving into <unk>, Thats, obviously higher margin value added services on Braintree will also help and those will develop overtime clearly every quarter they will add.
And some cumulative total will start to feel as we kind of exit the year and certainly as we go into 2024 with that.
I hope that helped a little bit no that's great. Thanks.
Yes.
Your next question comes from the line of Ramsey El <unk> with Barclays. Your line is open.
Hi, Thanks for taking my questions. This evening.
In terms of operating margin performance were there any factors besides credit that had a bigger impact than you expected in Q2, and then separately can you just talk about the overall health of the credit business give us more color on the steps youre, taking to maybe manage it a little bit differently. It sounded like that was the plan.
Absolutely so.
For the quarter, we expanded our operating margin by about 228 basis points to 21, 4%. This was a slight miss to our guidance of approximately 22% and it was predominantly driven by increased pressure from Paypal business loan.
There is no other item that really contributed to that myth.
Overall, Paypal business loans is about a 90 basis point drag to transaction margin at the operating margin and this is approximately two times, what we expected at the beginning of the quarter. So it really wasn't real impact is.
As it relates to our broader credit business, we're in a really good position.
Like the rest of the industry, we're seeing some reversion back to pre COVID-19 levels of performance, but across our diversified portfolio of consumer and merchant credit, we're seeing relatively stable delinquency and charge off trends.
The largest growth area for us continues to be our buy now pay later solutions, where our performance continues to be very strong of course going forward given our partnership with KKR. The majority of the originations are going to be funded off balance sheet for us and we'll be able to support the sustained growth of that business on the Paypal business loan side. This is really the part of our portfolio.
Where we have seen deterioration.
Portfolio represents less than 15% of our overall net receivable. We've historically seen consistently strong performance in this book and last year, we widened the credit box and the performance has not been within our expected risk appetite.
We've taken steps to improve performance, we significantly tightened originations today that book is down about 30% in total receivables and we expect this pressure to continue through the back half of the year, but then really to abate as we move into next year.
That said the overall strength of our business and the momentum we're seeing is allowing us to maintain our operating margin and EPS guidance for the year, while we are absorbing this credit pressure.
Thanks, So much very helpful. I appreciate it.
Okay.
Your next question comes from the line of Jason Kupferberg with Bank of America. Your line is open.
Thanks, guys I wanted to come back to branded TPG growth. So you had six 5% in the month of June you were over 8% in July Youre expecting further acceleration during the balance of the year. So can you just talk more specifically about the drivers of the visibility on that ongoing improvement like how much of it is better macro how much.
Traction with Paypal zone branded checkout initiatives.
Which among those branded checkout initiatives as moving the needle most materially here in 2023.
Yes.
I'll take a crack at that Jason Thanks for the question, it's an important one.
Okay.
We are really pleased obviously to see branded checkout.
Accelerate like it is.
And we have.
Good confidence.
The initiatives that we're putting into place are going to continue to drive that growth.
I think about what is driving that growth.
Hard to delineate exactly what is happening because of macro in terms of e-commerce, improving in general as I mentioned.
So Tien Tsin first question.
Around e-commerce, and what is due to our initiatives, but we are clearly putting a lot of time effort and resource into improving the checkout experience.
That's after the entire checkout team.
For all that they've done here.
Look first of all E. Commerce is growing we're going to grow with it because we are.
Clearly one of the market leaders, if not the market leader in digital payments around that.
We do have a scale advantage over anybody in terms of $30 million.
Plus merchants that we have out there 80% of the top 500 Internet retailers, we have a performance advantage in checkout.
Up to 600 basis points better.
Uh huh.
Author rates than the industry average and we are a trusted advantage.
<unk> businesses put Paypal on their site they see their online sales go up by almost 44%.
Those are things that we are building upon.
As you know.
We mentioned in our Investor day on June eight.
We've.
The amount of acceleration in the amount of innovation, we are putting into the market has improved dramatically. We did 108 tests in.
In the first quarter, we did.
200, <unk> tests, an incremental 200 in the second quarter, we're going to do another 200 coming here in the third quarter.
And in general about 30% or so of those tests that we run actually create positive benefit coming out of them.
What that means is we're going to have like a 150 or so improvements in checkout and our digital wallets running through our metrics as we go through in some of those are one or two basis points different some of those can increase tpa by 10 or 15.
<unk> points and when you put all of those together, it's extraordinarily powerful and we're definitely seeing that.
In our results. We also are beginning to see a lot of our merchants move to our latest integrations, we know that when we're native.
In App on the mobile that we hold or gain share.
Talk.
A quarter or two ago about 33 of our top 100 merchants had our latest checkout integrations and we had an aspiration to be at 50 by the end of the year I am pleased to report that now 43 of our top 100 merchants on our latest <unk>.
Check out integration, so, we're making really good progress around that.
We're not.
<unk>.
We're we're not above doing just like the basics, we are improving availability latency has now improved by 45% year over year every couple of milliseconds in.
Increases conversion rates on that and password list is really important.
For us in the rollout of past keys, some other authentication methodologies that were using.
Now ex the EU, which has FCA strong customer authentication, we're at about 70% of our checkouts that our past worthless, that's going to continue to go up as we push past Skus and we're now taking past keys into the EU, which will be <unk>.
Very beneficial because you can actually take out the friction of FCA in those conversions as well so we're going to push that really hard and then you see all of the other big initiatives that we're doing the pre introduction.
These amounts for <unk>, the NPL by the way in the U S. We've rolled that out to $60 million of our customers, we're seeing 25% to 30% increase in first time users of buy now pay later and those are using at 5% to 10% more.
In terms of the overall TPB and those that didn't have the preapproved amounts and we're going to roll out another 50 million preapproved into the EU.
Beginning this quarter.
We're taking our rewards.
Our rewards and cashback, we saw a 20% increase in the number of people using it from Q1 to Q2 are now up over 10 million people using our rewards when they use our rewards for Tpa goes up by 32%. So these are some of the things that we're doing that are making a big.
Difference, we've got a lot of things planned.
For Q3, and we're beginning to see it in the results and hope to be able to continue to point that out and continue to highlight what we hope to be increased growth in branded checkout.
Thanks for all the thoughts.
Yes.
Your next question comes from the line of Defense Toga with Evercore ISI. Your line is open.
Thank you could you provide an update on your cost takeout plan for 2023, the progress you've made and do you have any preliminary thoughts quantifying how opex reductions will carry into 2024.
Yes.
David I'll start and then probably against will jump in on this.
We're going to continue to do surgical discipline in our cost structure was down 11%.
In Q2 for the full year, we still expect that to decline consistent with what we talked about by 10%.
And therefore, when we think about our operating margin.
Expansion.
Coming up by at least 100 basis points and some of that incremental pressure that we're absorbing on the credit side than it is Gibbs mentioned will kind of move through our numbers by the end of the year Youre, obviously seeing.
Growing margin expansion driven by some of the top line enhancements, we're doing not just the cost.
Discipline that we've.
Demonstrated.
Just say that this is not just about efficiencies, but this is about doing things faster and accelerating the velocity of our innovation.
Not about tradeoffs.
It's about lower costs, but higher performance and youre seeing that because I can look at our MBS being at seven year highs look at the amount of innovation that we're now pumping through the system right now we're getting more done more efficiently.
No question.
AI.
Is going to impact every single company in every function just as it will.
Inside of Paypal.
And we've been experimenting with a couple of hundred of our.
Our developers using <unk>.
<unk>.
From.
Both.
Ooh will Microsoft as well as Amazon.
And we are seeing 20% to 40% increases in engineering productivity.
Imagine that in terms of how much more.
Product, we can get into the market and how efficiently. We can do that I think we've always known and anticipated that AI will.
Drive productivity improvements really for the foreseeable future I think the <unk>.
Exciting more unexpected result, as well.
It's going to transform our value proposition.
As well.
Things like <unk>.
Neighboring us to look into all of our transactions look at early fraud.
Metrics be able to feed that back to customers early fraud alerts that assure them that we are protecting them.
Enabling them to add more and more financial instruments to us.
As well that we can protect this paypal assistant.
That's going to that's really an AI chatbot, we've been using it internally inside our consumer app.
<unk>.
Pretty amazing what it can do obviously our advanced checkout.
Things like customized rewards. So AI is going to be a thing that not only drives productivity improvements for us, but really importantly value proposition improvements for us and so we're surgical and our cost thing we've been very disciplined in it we're quite pleased with it and I think we'll see productivity.
Improvements.
Over the years to come.
Yes, as Dan said.
We're on track for a 10% decline in our other opex for the year first half is down kind of low double digits call. It 11, 512%.
In the back half of the year of course, we begin to lap some of the cost savings that we get we began to take out last year and so the decline in other opex declines a bit and so it will be in sort of the high high single digits then.
Building on what Dan said, just around delivering better experiences to our customers and the productivity gains. It's also coming from the platform migration and consolidation work that we're doing and that two allows us to scale more efficiently over time, and so you should expect to see us continue to look for ways to deliver better experiences to our customers and scale them.
<unk> on our platform.
Thank you.
Your next question come from the line sorry, we have time for one last question and it comes from the line of Bryan Keane with Deutsche Bank. Your line is open.
Yes.
Hey, guys.
How are you doing Dan Thanks for letting me ask a question here I wanted to ask about the consumer value prop and a big piece of that is.
Is going to be the wallet and the enhancements of the wall.
Wallet, including offers can you just talk about some of the initiatives you're doing there that's going to improve the digital wallet going forward.
Yes sure. Thanks for the question.
Obviously, increasing the number of consumers who use our digital wallet.
It's one of our most important initiatives.
Because we feel it's going to drive both engagement ARPA monthly active users.
The app user today.
The typical app user as a 35% greater <unk>.
60%, greater TPB, and 25% less churn and so the more we can put on that the better and about 55% of our base today uses.
The App just to give you an idea of that and the App to your point yes.
Designed to.
It's designed to enable the full shopping experience from discovery, which is like the deals and offers that you just mentioned two flexible payments.
The widest array of funding choices.
Things like buy now pay later split tender that enables you to utilize two different funding sources to buy.
Your purchase.
<unk> purchase which includes package tracking and returns management.
Refunds directly into your Paypal.
Yes, I won't go in again too.
Experimentation, we're doing but you can see kind of the tremendous amount of velocity. There. The new features that are coming into the wall include. This early fraud alert we've scaled that now to 10% that's really designed to protect our customers we can see fraudulent.
<unk>.
Signals well before others, we can let the consumer know.
That their card has been compromised weekend simultaneous let DSI knows that card can be re issued instantaneously and so we're seeing.
Early but really positive response.
To consumers from this and it causes them to count these alerts that come it causes them to open the app before they open the app the more they do with us.
I think I mentioned on the rewards cashback that will be something that we'll be putting.
Some resource into because we're seeing a tremendous interest in it.
These users are up 20% quarter over quarter and the Tpa.
<unk> improvement as I mentioned about 32% improvement on that package tracking we are now a 100% ramped.
Across iOS and Android it scrapes basically your Gmail account to look for any of your E Commerce orders.
I don't even have to be through Paypal, we consolidate them all onto one place into our Paypal app.
Being a 20% app engagement uplift those who sign up for that a 10% improvement in tpa things like savings yes.
That's now at a four 3% interest rate.
When somebody does that their ARPA goes up $26 and their login to the App is up 16 times, those who don't have a savings account with US I mentioned buy now pay later preapproval that's.
$50 million more.
This quarter.
In the EU.
And we'll start things like our advanced AI checkout with our first clients later this year and our Paypal assistant using AI technology as well those are just some of the things to come there's a lot of innovation and as I mentioned my hats off to the team.
Because I think.
They're just doing a great job.
Hitting their schedule doing constant experimentation.
Really making her experiences.
Much improved and moving towards best in class.
So thanks, everyone for your great questions I really appreciate it I want to thank everybody for your time and we look forward to speaking to all of you later so take care. Thank you.
This concludes today's conference call. Thank you for joining you may now disconnect your lines.