Good day, ladies and gentlemen, and welcome to PayPal’s Fourth Quarter and Full Year 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. [Operator Instructions]. I would now like to introduce your host for today’s call, Ms. Gabrielle Rabinovitch, Head of Investor Relations. Please go ahead.

Thank you, Andrew. Good afternoon and thank you for joining us. Welcome to PayPal Holdings earnings conference call for the fourth quarter and full year 2019. Joining me today on the call are Dan Schulman, our President and CEO; and John Rainey, our Chief Financial Officer and EVP Global Customer Operations. We're providing a slide presentation to accompany our commentary. This conference call is also being webcast and both the presentation and call are available through the Investor Relations section of our website. We will discuss some non-GAAP measures in talking about our company's performance. You can find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the presentation accompanying this conference call. In addition, management will make forward-looking statements that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include our guidance for the first quarter and full year 2020, our medium-term guidance and the impact of our acquisitions. Our actual results may differ materially from these statements. You can find more information about risks, uncertainties and other factors that could affect our results in our most recent annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC and available on the Investor Relations section of our website. You should not rely on any forward-looking statement. All information in this presentation is as of today’s date, January 29, 2020. We expressly disclaim any obligation to update the information. With that, let me turn the call over to Dan.

Thank you, Gabrielle, and thanks everyone for taking the time to join us on today’s call. I’m pleased to report that PayPal had a strong quarter ending 2019 with record results across key customer and financial metrics. Over the past year, we meaningfully improved and expanded the PayPal platform. We strengthened our value proposition for consumers and merchants, expanded our international scope and scale, and announced transformative, strategic acquisitions, investments, and commercial agreements. For the year, we delivered $17.8 billion in revenue, that's up 19% on an FX-neutral basis, adjusted for our receivable sale to Synchrony. In the fourth quarter, we generated $4.96 billion of revenue, growing 18% on an FX-neutral basis. Our strong revenue growth combined with disciplined expense management enabled a 28% year-over-year increase in our non-GAAP earnings per share to $3.10. Excluding net unrealized gains on our strategic investments, we delivered $2.96 of non-GAAP EPS, up 25% on a year-over-year basis. On that same basis, in Q4 we delivered $0.84 of non-GAAP EPS, growing 28%. For 2019, our overall payment volume grew 25% on an FX-neutral basis to $712 billion. Excluding eBay, TPV grew 29% on an FX-neutral basis to $649 billion, as we continue to grow market share. In Q4 alone, we processed just shy of $200 billion of TPV, a new record for us. We've processed more than 12 billion transactions in the year, including nearly 3.5 billion transactions in Q4 alone. eBay's TPV continues to decline shrinking by 4% on an FX-neutral basis. Consequently, we anticipate that eBay will be approximately 6% of our total TPV by midyear. We added 9.3 million net new actives in the quarter, ending the year with 305 million active accounts on our platform, up 14% year-over-year, including 24 million merchants. In 2020, we expect to add approximately 35…

Thanks, Dan. I want to start off by thanking our customers, partners, and employees for helping us deliver an outstanding year. 2019 was another great year for PayPal and I'm pleased with our team's accomplishments. The results we're reporting today demonstrate the consistent execution of our strategy to realize long-term sustainable value creation. We're entering 2020 ready to build on our momentum, focused on our key initiatives and excited about the year ahead. Now to our fourth quarter results, revenue in the fourth quarter increased 17% on a spot basis and 18% on a currency neutral basis to $4.96 billion. The translation effect from the stronger dollar negatively impacted revenue by $35 million. This impact was more than offset by $58 million in hedge gains. Relative to the fourth quarter of 2018 U.S. revenue grew 19% and international revenue grew 17% on a currency neutral basis. Transaction revenue grew 18% and revenue from other value added services grew 14%. Strength across core PayPal, Braintree, and Venmo all contributed to transaction revenue growth. Other value added services revenue growth reflected solid performance of our credit business offset by the lapping of interim servicing revenue from Synchrony. As a reminder, this headwind will continue through the second quarter of this year. In the fourth quarter, transaction take rate was 2.27% and total take rate was 2.49%. Compared to Q4 2018, this was a decline of 8 basis points and 9 basis points respectively, which is the lowest level of decline we've reported. Strong P2P growth continues to be the largest driver of the year-over-year decline for both transaction and total take rate. In addition, on a sequential basis, both transaction and total take rate improved. The diversification of our business and our pricing initiatives allowed us to deliver these results. Volume-based expenses…

Thank you. [Operator Instructions]. Our first question comes from the line of Tien-Tsin Huang with JPMorgan.

Thanks. Good afternoon. A lot of good information here. So, I'll ask on the outlook if you don't mind, just your guidance this year versus last year. Aside from Honey, how would you characterize overall visibility this year versus this time a year ago? It seems like you have more in your control but still lots of moving pieces, so would love your thoughts on visibility.

Yes. Thanks, Tien-Tsin. This is Dan. I'll start on that and then may be John will fill in on it. First of all, we had a strong Q4, and actually an even stronger back half of Q4. The holiday season was strong for us. December was strong. And frankly, we're seeing a strong January as well. And that comes from a couple of things that we actually really didn't have the year before. First of all, I think we are executing a lot better than we have for quite some time. Second and really important, because we have the visibility in this, we have seen the pricing that we talked about start to get implemented. It's implemented in a number of countries. We still have more countries to even roll that out into, but that's going exactly according to plan. We signed a number of very large deals at the end of the year. We implemented many of those in December, and we are seeing that those growth rates begin to kick in. Those are deals like Paymentus that we’ve talked about, but other very large multi-billion dollar deals as well. And so, we’re entering this year in really a fundamentally different place than we entered the year before, a lot of momentum. For instance, we feel very comfortable with our forecast around TPV. We're talking about TPV being in the mid-20s. That was 22% in Q4, but of that 22% actually 200 basis points I guess was because of the lapping of iZettle. So, if you normalize for that, you're at 24, a little weakness in eBay; and then we've got these big deals that are already implemented and accelerating, others like Uber to come. And we feel very comfortable with our TPV accelerating into the mid-20s. So, I'd say overall we're pretty excited about where we're starting off the year, things that we already have in place, and we have a ton of initiatives that we're excited about as well. So, I don’t know John, if you add to that?

Yes. I’d maybe underscore a couple points that Dan mentioned. I think what's notable Tien-Tsin about this year versus last year is, in particular how we are starting off the year. There's always a certain amount of trepidation that exists about the macro economy, but I think the macro economy was maybe a little wobblier last year. And as we certainly enjoyed, I think a better holiday season this period as we look the month of December, even going into January. And so, we're starting off on the right start but also I'd underscore the point he mentioned around execution. We recognize that we have a pretty precious opportunity here at PayPal when you combine the secular tailwinds of our business with the incredible assets that we have when you look at our portfolio of products, and it’s incumbent upon us to execute. And I think the team is executing as well now as they ever have. So, again I think that gives us more confidence than on a relative basis versus last year.

Thank you. And our next question comes from the line of James Faucette with Morgan Stanley.

Great. Thank you very much. I wanted to touch on a lot of different incremental market opportunities, but I want to touch on Venmo and the efforts to continue to develop that as a separate brand. Can you talk a little bit about kind of what the objectives are for growing Venmo monetization during 2020 and beyond, and how we should be measuring those? And I guess, kind of dovetailed with that, now that, Visa owns Plaid, it seems like -- just wondering how that may impact the ability to grow Venmo and some of these other ancillary services whether it be internationally, et cetera? Thanks a lot.

Yes, James. Thanks for the question. We continued to be pleased every quarter with the performance of Venmo. Even as it’s gotten larger, we've seen strong net new actives, and we’ve got 52 million now at year end. We’ve always said we thought Venmo would wind up with over 100 billion of TPV and it wound up at 102 billion, and it’s up about 60% for the year exited, I think at about 56% of growth rate. Its revenue run rate right now is over $450 million. And as we're getting that scale on the revenue side, we're beginning to see losses reduce as well each year. So, we kind of have a line of sight to when breakeven is and when this starts to actually turn profitable as well. We don't want to slow down its growth at all. We want to keep enabling Venmo to grow as rapidly as possible, but we’re really pleased with this trajectory and I expect to see good revenue growth, continued strong, strong revenue growth on the Venmo side. We're adding new capabilities all the time. Debit is continuing to expand. We're going to put a big emphasis on Pay with Venmo. There's a lot of work going on around that right now because we think that's a very big opportunity that we did not take as much advantage of last year as we probably could have. As I mentioned, we are going to be developing a credit card. That was a very competitive process with a number of issuers looking to work with us on that. It’s very competitive on the network side too. So, we're really pleased with the economics around that. You will see us add things like just like goods and services. Goods and services is one of the…

No.

Thank you. And our next question comes from the line of Bryan Keane with Deutsche Bank.

Hey, guys. Good afternoon. John, I was just hoping to get clarification on the TPV. The FX-neutral growth dropped from 27% in 3Q to 22% in 4Q. So, I just want to understand that delta, but probably the more importantly is the walk or reacceleration to the mid-20% going into this year. So, I know I'm not sure how much Honey is a factor there or the Uber, UnionPay, MELI deals. Maybe you can give us a walk on how to get back to that mid-20s TPV? Thanks.

Sure, Bryan. It’s good to speak with you. So, if you look at our TPV whether you will get overall or international, the biggest single driver of the decline is related to the lapping of the iZettle acquisition. In fact, if you just look at international TPV, the entirety of that 4 point decline is attributable to iZettle. But looking at TPV in total, there are some other factors but one is obviously eBay. We saw about 1 point decline related to eBay. And if you sort of decompose that a little bit even look at our transactions, and you look at the various parts of our business, the transactions related to eBay declined 6% for us in the quarter. And so, this has been something that we’ve talked about. The next year we will begin that period where we will transition away from that but we are still seeing the rest of our business grow quite well. So as we look into 2020, there are a number of things that will bridge that back to the mid-20s. A part of it is just the acceleration we are seeing in the business right now as Dan alluded to in the December, January timeframe. But we've got international expansion going on next year. We have got some work being done with large merchants. You know that we're are ramping up with Paymentus and other parts of our business that we are emphasizing more like recurring payments, subscriptions, bill pay that give us confidence that we will be able to achieve that mid-20s TPV number even in a period where we are transitioning away from the eBay. And I think it's worth mentioning, in doing it, while expanding operating margins in 2019 and given us the latitude to make the investments that we need in 2020 to continue this trend of mid 20s TPV growth into the future.

Yes. I’ll just add a little bit onto what John said, what probably pleased me the most about Q4 is to see coming out of it the reacceleration of a lot of our core trends. Our core business started to accelerate. Braintree, even though it's gotten larger and larger, I’ll bet its growth rate will be larger than it was this year going forward. We know what deals we have in place and we know we've got, I would say, quite good visibility into what our TPV looks like. So we're very comfortable with that projection on that and we're seeing it in our trend lines.

Next question comes from the line of Lisa Ellis with MoffettNathanson.

Good afternoon guys. A question on China. Now that you've successfully acquired the majority stake of GoPay and then signed the more recent expanded agreement with CUP, could you just provide a bit of color on your overall market entry strategy to the domestic market there? Meaning, are you more focused on say building out the presence of the PayPal wallet as a competitor to some of the local digital wallets? Or are you more focused on Braintree and building out broader payment processing? Could you give us a little bit of color there? Thank you.

Yes, sure. I'll take that. And then John can do that. I’d say Lisa the first idea that we had working with the PBoC is people now need to have a legal basis to have a payments license inside China to provide both cross-border and domestic payments capability. We worked over the last several years closely with the PBoC and we invested a lot of dollars and resources into our compliance and risk management efforts across the business. So not only do we have a close relationship with PBoC, but now with regulators around the world. That legal basis allows us to look at cross-border and work very closely with multinational that have established shop in China, one of the few platforms where that international payments traffic go over. We also now have the ability to work inside of China with either folks like CUP, other tech platforms, financial institutions inside China to link their cards into our wallet so Chinese consumers can use our platform to do purchases at our 24 million merchants outside of China. One of the most exciting things that we have though going on, because it has agreement that we have with UnionPay International and China UnionPay is really a landmark arrangement. I mean inside China, China UnionPay is the network, it's equivalent of deals that we might've struck with Visa, MasterCard, Discover and AmEx all in one. That's significant in terms of a player. Obviously, we have very close relationships with the banks and we believe that we can start linking their payment instruments into our wallet and China UnionPay and PayPal will be looking to expand acceptance of the PayPal wallet with Chinese merchants. And that will enable also travelers coming into China to be able to use PayPal wallet to purchase and…

Lisa, I'd add to that I think a couple of points. It is a significant investment that we are managing in 2020, and that we will carry into 2021. But it's also a significant opportunity. Just the estimates that I see is, by next year, China will be 40% of worldwide cross-border TPV. And this is a market where we have roughly 1% penetration into their 0.5 billion digital users. And you compare that to our core markets where we're significantly penetrated, if we can turn that 1% into 2%, 3%, 4%, 5%, that's a big opportunity for us. But I think one thing I want to emphasize around this investment is, the things that we're doing in China and the way that we're investing there, it’s a scalable solution for other markets. So, we're approaching it as if there will be other opportunities where we can have a much more prominent presence in those markets versus kind of dabbling in some of these markets like we do today without our full product. And so, we're taking a very long-term perspective and investing appropriately given the significance of the opportunity.

Thank you. Our next question comes from the line of Darrin Peller with Wolfe Research.

Hey. Thanks guys. Look, it’s good to see your confidence in TPV growth being mid-20s again for the year. I assume a part of that is engagement. Engagement obviously did well this quarter, it was up 10%, it accelerated. Just I'd love to hear more about the drivers of that. How sustainable that is, do you expect that 10% growth rate to either stay the same or get better? And then when we think about Honey, a big part of our thesis on Honey is that the flywheel effect could help that even more. Can you just touch on the opportunity there as well? Thanks guys.

Yes. Darrin, it’s Dan. Thanks for that question. I think you know from talking to us that engagement is one of the most important drivers for us and we are very focused on it. When I started some almost six years ago now, we were at 17 times a year. We're at 41 right now. But our goal and we realize that this is aspirational, it's for somebody to use PayPal or Venmo every single day. That is our goal is to have daily engagement with that and we have a long ways to go before we get there. Honey, we think significantly increases our engagement with consumers. It allows us to be more towards the beginning of the shopping journey more towards the intent piece of this. The great thing is that one-third of all commerce transactions start with some sort of trigger based event whether that be a promotion or some kind of deal and Honey enables us to take a full advantage of this trigger based type of capabilities. And Honey is not just coupons, it's far from it, it's a mobile shopping assistance. It's an offers platform, it provides rewards. It has price tracking tools and alerts that are droplist and wishlist, that kind of thing. And so we think -- and by the way, Honey team had already saved, last year alone, its customers, a $1 billion of opportunity on products and services. And so we think there's a lot of opportunity for engagement and scaling of that Honey app is we integrate it into the PayPal and Venmo apps. But that's only one part of what we're thinking about in terms of engagement. We talked about Paymentus and a lot of what we -- people think about Paymentus as the full-stack integration that we're…

Thank you. And we have time for one last question from David Togut with Evercore.

Thank you. Good afternoon. Bridging to Darrin's question, if you could perhaps expand upon integration plans and priorities for Honey Science? And then just as a quick follow-up, now that own Honey for a few weeks, any updated thoughts on capital allocation priorities between share repurchase and further acquisitions?

David, I'll start with the last part of your question and let Dan talk a little bit about some of the integration plans. We don't anticipate changing our capital allocation priorities going forward. And as a reminder, that's spending about 40% to 50% of our free cash flow towards returning -- buying back stock, returning cash to shareholders and then $1 billion to $3 billion per year in acquisitions. Again, I'd point you to the cash generation of our business and I think that gives us in some ways a competitive advantage versus the other players in the landscape that we compete with because we have the opportunity to go out and acquire companies and acquire capabilities as well as invest internally, as well as return cash to shareholders. And many times things that we want to go after inorganically allow us to be faster to market or to provide capabilities that we maybe think are better than others. And so, we will continue to be acquisitive. We will continue to return cash to shareholders and we will continue to invest in our shelves.

And David, let me drill in. But before I answer that, operator, I think we have time for one more question after this. So, maybe we will just keep the line open for one more additional question. So, a quick update on Honey. First of all, I said this in my opening remarks, I want to emphasize it, the caliber of that Honey team is extraordinary. They have great product and engineers. They react extraordinarily quickly. When we acquired Xoom, admittedly that was a number of years ago and our tech stack did not have a whole of the service-oriented architecture that we have today but we were able to -- with Xoom, it took us something like six to nine months to integrate log in with PayPal on to the Xoom app. With Honey, day number one, PayPal customers could log-in with their credentials right on to the Honey app. Day number one, they are doing cross-marketing together. We have a full plan over the course of the year by quarter on exactly functionality that we are integrating together. The big thing for us is to integrate Honey into our mobile apps. We have significant scale on those mobile apps and it’s relatively heavy engineering lift. But we're looking at that in the back half of this year. But there are host of payment capabilities that we will integrate into the Honey app going forward that are our payment capabilities, credit type of capabilities. And so we've got a full integration plan in place. I'm pretty pleased with the execution against that. As John mentioned, our execution capabilities are humming along pretty well right now, and I do think the combination of Honey and PayPal is a very, very strong one. I think we can enhance the ways we serve both consumers and merchants. Merchants who are looking to us for full solutions right now are looking to our products to basically increase their sales in a world of digital commerce and Honey is a big tool set for that. And we're excited about working with not just 30,000 merchants they have today but pretty dramatically accelerating that. And obviously it drives engagement and savings for consumers. It enables us to move beyond checkout. We can enable personalized time and relevant offers for consumers and become a highly value-added partner to our merchants. So, we're quite excited about it, pleased with the integration so far, a lot to do, but we are very focused on it. One more question, operator.

Thank you. And our last question comes from the line of Heath Terry with Goldman Sachs.

Great. Thank you. I know you’ve talked a lot about China and some of the other bigger initiatives in 2020 already. But can we step back and just talk about -- and maybe even prioritize sort of where those investment priorities in 2020 fall and the incremental costs that you see associated with them, where those fall in the guidance? And then, as we look out over time sort of the ability that you see to sustain operating margin expansion over time as you take on those incremental costs?

Sure, Heath. This is John. I'll tackle that. Well it's not a comprehensive list. I would say a couple of things that stand out in terms of our investment priorities for 2020. One would be the consumer value proposition, and a sub-bullet or sub-bullets underneath that are Honey as well as what we're doing with expanding offline point-of-sale offerings. So that's a big investment priority. Also Venmo is a big investment priority and I'd also throw in there international expansion, all of those -- and international expansion includes China. So all of those things are of significant cost and really are of a significant magnitude that absent that we'd be expanding operating margins again next year. But I'll point you to a number that I think maybe can help direct you to how think about our long-term capability to expand operating margin. So in the quarter, if you looked at our incremental operating margin, so the incremental growth in operating income divided by the incremental revenue was roughly 35%. And I think that's a fantastic number and one that's really been pretty consistent throughout the year, but at a much higher level than what it's been in previous years. And this is the point that I continue to go back to about our ability to grow our platform at a low incremental cost. And if we can continue to generate the type of revenue growth that we have and do it at a low marginal cost that results in incremental operating margins north of 30%, then I'm confident we're going to create a lot of shareholder value here. And I think that's a good way to think about our business long-term.

Yes. I’d just add to that. I mean I think about our guidance for 2020, this is the beginning of the eBay transition. We're ending the year closing in on $18 billion and we are talking about FX-neutral revenue growth of 18% to 19%. We're looking at, excluding acquisitions, something like 19% to 21% EPS growth especially absorbing the CECL impact on that. If you look over the last three years, our EPS CAGR has grown at 27%. And so we have really strong conviction in our ability to execute against our medium term guidance. And I think John is right, we want to invest, we want to seize growth opportunities that are ahead of us and do that in a way that's consistent with the medium term guidance that we've put out as well as execute year-over-year. So I think we're feeling like we're entering into 2020 in a strong position and it gives us more confidence than we had when we entered into last year and a lot of conviction around our medium term guidance.

So I want to thank you, Heath, for that question and thank all of you for joining us today. We really appreciate your time and we look forward to speaking with all of you soon. Thanks a lot.

This concludes today's Q&A session. Ladies and gentlemen, thank you for participating in today's conference call. This concludes the program. And you may now disconnect. Everyone, have a great afternoon.