Good afternoon. My name is Mel 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 Third Quarter 2021. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. [Operator Instructions] Thank you. I would now like to introduce your host for today's call, Ms. Gabrielle Rabinovitch, Senior Vice President, Corporate Finance and Investor Relations. Please go ahead.

Thank you, Mel. Good afternoon and thank you for joining us. Welcome to PayPal's earnings conference call for the third quarter of 2021. Joining me today on the call are Dan Schulman, our President and CEO; and John Rainey, our Chief Financial Officer and EVP, Global Customer Operations. We're providing a slide presentation to accompany our commentary. This conference call is also being webcast and both the presentation and call are available on our Investor Relations website. In discussing our Company's performance, we will refer to some non-GAAP measures. You can find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the presentation accompanying this conference call. Management will make forward-looking statements that are based on our current expectations, forecasts, and assumptions and involve risks and uncertainties. These statements include our guidance for the fourth quarter and full-year 2021 and our outlook for 2022. Our actual results may differ materially from these statements. You can find more information about risks, uncertainties, and other factors that could affect our results in our most recent annual report on Form 10-K and quarterly report on Form 10-Q, filed with the SEC and available on our Investor Relations website. You should not place undue reliance on any forward-looking statements. All information in this presentation is as of today's date, November 8, 2021. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

Thanks, Gabrielle, and thanks everyone for joining us. Well, the big news today is that for the first time, we're teaming up with Amazon to enable customers in the U.S. to pay with Venmo at checkout. Starting next year, customers will be able to make purchases on Amazon.com and the Amazon mobile shopping app using their Venmo accounts. This is, obviously, a very significant moment in our Venmo monetization efforts and marks the beginning of an exciting journey with Amazon, now that we're no longer constrained by the contractual obligations of the eBay operating agreement. The increasing scale and brand trust associated with our two-sided platform continues to set us apart from the rest of the market and enables us to expand our footprint with existing merchants and attract new partners. And now to our results. Our overall Q3 results were generally in line with our expectations. Our Total Payment Volume grew 26% on a spot basis to $310 billion. This comes even as eBay's TPV declined by 45% in the quarter and is now approximately 3% of our overall TPV. Excluding eBay, our volumes grew by 31% on a spot basis with an annualized run rate of $1.2 trillion. Our active accounts were up 15% year-over-year, reaching 416 million. We added 13.3 million Net New Active accounts in the quarter, including another 1.2 million merchant accounts, bringing our total merchant count to 33 million, and we remain on track to deliver more than 52 million NNAs for the year. Importantly, our diverse suite of products and services drove double-digit growth in our transactions for active accounts up 10% to 44.2 times. Revenues in the quarter grew to $6.182 billion, growing 13% on a spot basis. This was slightly below our expectations as back-to-school sales and travel were weaker than…

Thanks, Dan. I'd like to start by thanking our customers, partners, and employees for helping us deliver a solid quarter. We're now reporting our results for the 7th quarter since the pandemic began, and it's remarkable to take a step back and reflect on everything that we've accomplished during this dynamic and unprecedented time. There's been a profound and enduring shift in global commerce and consumer behavior, which has significantly expanded our addressable opportunity. The powerful and accelerating secular tailwinds of increasing e-commerce penetration and cash displacement have helped to advance our leadership position in payments. To give you a better sense of the scale of growth we've experienced, it took 20 years for PayPal to reach $600 [billion] (ph) in annual payment volume, which occurred in 2019. Only 2 years later, we crossed $1.2 trillion. Relative to 2019, we've seen significant growth across our key performance indicators, including active accounts, engagement, TPV, revenue, EPS, and free cash flow. At the same time, we're operating in a complex environment. The macroeconomic landscape is currently characterized by varying rates of reopening activity globally and influenced by short-term supply chain challenges, inflationary pressures, and concerns related to consumer sentiment. These factors contribute to a backdrop that continues to make forecasting more challenging. Our third quarter performance demonstrates the strength of our diversified platform, our global reach, and the scalability of our business. Notably, we delivered these results against tough year-over-year comparisons and in the quarter where we faced the most acute pressure from eBay's payments transition. For the quarter, we are reporting revenue of $6.2 billion representing growth of 13% on both a spot and currency neutral basis. eBay Marketplace's revenue declined 67% to $235 million and contributed less than 4% of total revenue, versus approximately 13% last year. Excluding eBay, revenue…

Thank you. [Operators Instructions] As a reminder, please limit yourself to ask one question only and you may return to the queue for a follow-up question. We'll pause for just a moment to compile the Q&A roster. First question comes from the line of Tien-Tsin Huang with JPMorgan. Your line is now open. You may ask your question.

Thanks so much. Real exciting to hear about the Amazon news. I noticed a lot to talk about here, but I wanted to ask on the market rumors on Pinterest if you don't mind and I know you are not pursuing a deal at this time, But just wanted to ask if your appetite to do a large deal is still there? If your longer-term outlook hinges on adding any assets like that with different revenue sources like advertising? I know, John, you said you're not counting on M&A for mid-term, just thinking a longer-term here. Thank you.

Yeah. I'll start off with that and then John can chime in on this. Let me just take one step back, and start a little bit with the big picture because that may help put everything into context. Look, we're obviously focused on becoming an essential everyday app for consumers, and that's on the consumer side, and on the merchant side, we want to provide a comprehensive platform for merchants to participate in the digital economy, and that includes everything from consumers engaging at the beginning of their shopping journey to purchase and post-purchase, and if you look at all of the acquisitions that we've done over the past 5 years, they kind of play into that overall strategy, whether it be what we've done internally with the PayPal App or QR codes, acquisitions like Honey, which have been essential to our shopping and deals tab fully integrated now into the PayPal App. Happy Returns, Chargehound that are part of our post-purchase process that we'll integrate into our app and put into our platform for merchants, iZettle Hyperwallet now is our payouts product going forward. So I’m very pleased with all the acquisitions we’ve done, they fit into our strategy, they're executing, many of them well above what we initially thought, some were delayed in terms of their integration for various reasons, but overall, really and pleased with the way our acquisition and acquisition strategy has gone and the integration into our strategy. The truth is we review hundreds of potential acquisitions every single year and we put every single one of them through a very strict set of strategic financial integration filters and we look at like are we going to buy, build or partner, and, you know, John and I have been here now for - well, I've…

I think you covered a lot of it, Dan. I just would add, Tien-Tsin, that we laid out what we believe to be a very compelling case at our Investor Day around value-creation over the next 5 years. That was entirely an organic plan and remain so. But that said, we don't want to sit here on our hands and think that that's good enough. If there are opportunities that are out there that create even more value creation, it's our responsibility to look at those, and so that's where deals of this size may come in sometimes, but we take capital allocation as a very serious activity for us, and then arguably one of the most important, and so as they have said we have a lot of rigor around that, and thus far nothing has matched those rigorous hurdles for us. But I think and the management team shares a belief that we have the same opportunity over the next 5 years to create value that we just realized over the last 5 years. But if we can do more than that, then we should do more than that, and so that's why we explore every opportunity, but the growth plans that we laid out in the early part of this year at our Investor Day are entirely organic.

Thank you. Next question comes from the line of Colin Sebastian with Baird. Your line is now open. You may ask the question.

Good afternoon everybody. So pretty big news here with Amazon on the Venmo integration, especially given how protective Amazon is over their checkout flow, so congrats there and it might be helpful to expand a bit on what you talked about Dan around the agreement such as are the economics with Amazon similar to other marketplace deals that you have in place, are there opportunities to expand the relationships to other PayPal brands and services and maybe when in 2022 we can expect that to show up on the site. Thanks very much.

You bet, thanks, Colin. Good question. First of all, I'd say one of the things we talked about early on is being free of the restrictions of the eBay operating agreement. We're going to have the possibility to open us up to working with a number of marketplaces that we were previously prohibited from doing so, and you're seeing some of that. You are seeing what we're doing with Ali and AliExpress, that continues to expand in terms of the volumes. There we are getting closer and closer with Walmart and Amazon is the latest example of us being able to team up with obviously an extremely significant player in the e-commerce space, and what I really like about this is like eBay results are like a pig to the Python right now. But these that we're talking about, right, are much more of a permanent nature. These are what will be with us going forward as eBay is a temporal phenomenon working through our results. We're still working through the launch timeframes. We are both eager to get this out into the marketplace, but we're still working those two, we obviously have large teams, each of us on this. It is the beginning of a journey of our two companies teaming together. I wouldn't venture at this moment as to where we'll go together; we're both very focused on the substantial opportunity that there is with Venmo at checkout, and we couldn't be more pleased to be able to team with Amazon on this. Obviously, if you think about the amount of market share that Amazon has in the U.S. this quite substantially increases the addressable market for Pay with Venmo. And Pay with Venmo is one of the key revenue drivers for Venmo going forward. Just as I think about the journey that Venmo has been on, this obviously is a punctuation point for sure. But even this year, Venmo will be transaction margin positive. That is a major milestone for that team, right on track to deliver the $900 million and obviously, exit the year at an accelerating growth rate and this partnership with Amazon will no doubt take that to next level.

Colin, I'll just add real quickly that Dan and I both appreciate that the investor community probably is getting tired of us talking about eBay and eBay results, but arguably not more so than we are, but this is the other side of that coin. It's as simple as that. I mean this would not be allowed had we not taken the steps that we had, and so we're quite excited about this and what it bodes for the future.

Thank you. Next question comes from the line of Lisa Ellis of MoffettNathanson. Your line is open.

Thanks. Good afternoon. I'm going to focus on the roll out of the new PayPal and Venmo apps. I know you made some comments in the prepared remarks, but can you elaborate a bit further, give a little more color on the early impact you're seeing maybe on user growth, engagement growth, etc., including maybe some aspects so far that have surprised you? Thank you.

Yes. Thanks, Lisa, good to hear your voice. So anytime you put something substantial out into the market, and this is really the first giant revamp that we've done of our PayPal consumer app and it's pretty massive, complete redesign. Typically on that, so what you find is you've got declines in engagement as people kind of like work their way through discovery of it, and then what you have is, over time, that really starts to accelerate, as we said you know. This has been completely the opposite which is the biggest delight, I'm not sure it's a surprise to me, but we are seeing, really, meaningful leaps in terms of our discoverability of the breadth of our products and service line right now. We talk about PayPal shopping, the full integration of Honey into the PayPal App, Honey now is completely mobile, and not just desktop, and that is empowering a whole tab of that. We've seen a 25 times lift in people exploring that tab and starting to put deals into their wallets and that kind of thing. It’s pretty amazing. On things like crypto, first-time user, once we did the app went up by 15%. Our strongest week ever for first-time users was like last week. We’ve had strong weeks for first time users of growth on that, but clearly the new app is driving both discoverability and conversion on the crypto side. And then I'm quite excited about what's happening with cash card. Because cash card is kind of like a debit card, right? In relation to the balance, and it can be used offline and obviously online, and this is a big part of our omni strategic thrust, and to see that go up, there's enrollment score up by 35%, and remember, this is…

Thank you. Next question comes from the line of David Togut of Evercore ISI

Thanks for taking my question. Looking at the third quarter KPIs, they’re certainly strong and broadly in line with your 5-year guide, and then you called out some short-term factors and tough comparisons for taking guidance down for the fourth quarter and guiding 2022, at least, your preliminary guide below the 5-year model. But when you look at 2022, at some of the shorter-term factors, you've called out like supply chain issues and return of consumers more to the physical POS, how confident are you that some of these issues are actually shorter term versus potentially longer lasting that might stretch into 2023?

Okay. David, let me talk very quickly about Q3 and then I'm going to have John talk about our Q4 guidance and our confidence in 2022. So you're right, actually, if you look at Q3, and let me just talk about revenue, TPV, and maybe engagement, as 3 metrics on that. The way that I think about our business right now is what's happening on our MS business. Because eBay is a temporal thing, it's just going through the system right now. It's less than 3% of our TPV, it’s less than 4% of our revenues, and dropped, and so really our business is our MS Business going forward. And if I look at revenue, revenue growth. I think this is really interesting because I examined this quite carefully. If I go back 5 years and look at our MS revenue growth, in Q3 of 2017, it was 24%. In 2018 in Q3, it was 17%; 2019 was 23% then it jumps up to 26% in the middle of the pandemic, Q3 2020 and Q3 2021, this quarter it is 25%, and so like people talk about reopening stuff, like that is enough. Our MS business is going from strength to strength. We have seen a leap forward in digital, and that is continuing, if you look at it in our MS and John will talk about it in Q4, and as we look next year. Same thing on TPV. TPV in Q3 of 2018. MS, I'm talking about MS, was 27%, it jumped up to 29%. Then in Q3, 2020 it jumped to 40% and over that 40%, we're growing this quarter at 31%, and so these are all really, really strong numbers, and if I look at even like transactions, which I think it's really interesting, we did 4.9 billion transactions in Q3 this last quarter. If you go back a year ago, we did about 4 billion, we're almost up a billion transactions in a year in the quarter, and our transactions ex-eBay are up 31% year-over-year. Our TPA transactions were active, double-digit growth for the second quarter in a row. Again, ex-eBay in the third quarter, our TPA was up 18%, and so these are, yes, of course, we get hit by some of these exogenous things that go on. But if I look at the strength of the core business every single metric is way above, even our forecast is way above our medium-term guidance, and that's kind of like what gives us just a ton of confidence, and we are obviously being, I think appropriately cautious and conservative as we look forward at this time, but I feel like if I look at the what the real part of our business is every metric is trending pretty strongly right now.

David, let me hit a couple of points here regarding some of the assumptions about our outlook. So first, with respect to the reopening of the economy, our basic assumption is that that's sort of a slow and steady pace similar to what we've seen here more recently. With respect to supply chain or labor shortages, I don't see a quick fix to that, so that could be with us for some period of time and I think the pressure there's probably more acute on some of the SMB segment versus large enterprises, and so that is baked into our assumptions as well. We’re also not going to have the benefit of stimulus next year or likely not based upon what we see today, and then the last point I'd make is around eBay. eBay, if you think about the high teens or 18%-mark that we put out there for revenue growth, the impact to eBay year-over-year in terms of a headwind is about 200 basis points. If you just take what eBay represents in our business in 2021 compared to 2022. Said differently though, if we were to exclude eBay in both years, the revenue growth is 22%, and so that's exceedingly strong, and I think the best proxy for how to think about our business going forward, and so wrapping all of that together and sort of tying it to where we stand right now with the guidance that we just gave today. If you go back to the beginning of the year, and the guidance that we provided, 50 million Net New Actives, roughly $25.5 billion of revenue, we're effectively right there, and I think very, very importantly, that was the basis for the 5-year plan, the medium-term guidance that we laid out just a few weeks after that, and so that's a way of saying that we are right on track with what we have laid out at the beginning of the year with our medium term guidance.

Thank you. Next question comes from the line of Darrin Peller with Wolfe Research. Your line is open.

Hey. Thanks, guys. I just wanted to touch on the organic trends of the business, mainly the KPI Net New Actives and just maybe if you can give a little more color on the organic dynamics you are seeing now, a year and a half into COVID, in terms of gross adds versus mature levels, and we're also getting more questions on '22 guidance and some of the inputs there that you just touched on that, John, so thanks, but thinking about the underlying, sort of user growth potential there, engagement potential, and then really just reminding us of your conviction in the drivers getting to 750 million of NNA long-term? Thanks, guys.

Sure, so let me talk a little bit about NNAs. So $13.3 million in the quarter up about $2 million from last quarter, growing 15% year-over-year unlike a lot of companies that experienced growth during the COVID time, and then unwinding our growth remains incredibly strong on the NNA side. I mean, think about it, in the minute that we have been talking, so far Derrin, we put on about 100 consumers and 9 new merchants. We're putting on 1.5 consumers every second of the quarter, every 6 seconds we've put on another merchant, so really unbelievable. And if I look 5 years ago, you remember this, 5 years ago we put on 13 million Net New Actives for the year we just had this quarter alone we've put on a 110 million Net New Active since January of 2020, and as we said, I think in our press release we expect to end the year in north of 430 million actives on the platform. So you know obviously continued strong growth, but as you look forward to that 750 million, there are 2 places that our Net New Actives come from. One is top of the funnel, and top of the funnel is actually pretty strong right now and remain so. It's just kind of a must have platform for merchants and consumers and scale begets scale in this business. But as you get bigger and bigger, the bottom of the funnel becomes equally, if not even more, important, and so reduction in churn becomes a really important element of our ability to get to the $750 million. That's why we're so excited about what we're seeing in terms of our TPA numbers again normalize it, ex-eBay up 18%. Last quarter, I think it was up 17% double-digit growth even with eBay and 2 quarters in a row, some of the things I was talking to Lisa about in terms of the engagement on the app, those are things that the more people engage, the more people get cash cards and start utilizing that service offline, we see halo effects inside the business, Buy Now, Pay Later all of that that actually effects churn rate, and if we can keep a consistent top of the funnel, maybe even improve that a little bit, but reduce our churn rate, you'll start to see Net New Actives actually accelerate going forward and so we remain so quite confident in the 750, but that's what the drivers are of that Derrin.

Thank you. Next question comes from the line of James Faucette of Morgan Stanley. Your line is open.

Thank you very much and thanks for all the color and detail of things that you're going through. John, I know you kind of touched around this in your commentary, but if we think about all the irons and initiatives that you have in the fire right now, how should we think about kind of the medium-term progression of your operating margins? I know you also highlighted that you want to make investments, but just trying to make sure that we try to align our own expectations with how you're thinking about your planning purposes going forward. Thanks.

So I'll start by saying that, I would hope that people appreciate and agree with this, but I don't think there's ever been a more important time to invest in our business than right now. This is a precious opportunity that we have with some of the secular tailwinds. We're fortunate in that the margins on our business want to go up. We've demonstrated that we can scale at a very low marginal cost, we've got tremendous opportunities some of which we've talked about today, that give us confidence that over our planning horizon, our margins will go up. That's not something that I think we lose a ton of sleep about. Quite frankly, I think the more challenging dynamic is where to invest, where we can get that return that's expected, and if you think about the last couple of years being 2020 and this year 2021, our operating expenses have grown about 20% each of those years, and I would discourage you from thinking about that as a sort of one-time spend related to customer acquisition or something like that. There's a lot of like engineering costs around people that are punching the keyboard to write code, and that's still with us today. So even as we talked about the high single-digit growth next year, that's on top of 2 years of 20% growth. But for us it’s also important not to spread ourselves too thin and to make sure that we are prioritizing appropriately and some prioritizing involves, say notice our things as well. And so I think we've laid out a pretty clear plan over the next few years with our focus on things like the digital wallet, building out commerce capabilities, continue to monetize Venmo that give us ample opportunity to invest. But as I noted in my remarks, we don't manage the business to have margin expansion for the next quarter, or frankly even for the next year. We're looking at how we create a Company over the next 5 years, that can have the same type of market value appreciation that we've experienced over the last 5 and the decisions that we make really just lineup with that much more so that trying to maximize for any particular time period. And so maybe not directly answering your question, but our margins are going to go up over the long term and we're not going to be handcuffed to doing that from one period to the next at the expense of like creating shareholder value.

Thank you. We have time for one last question, comes from Jason Kupferberg of Bank of America. Your line is open.

Thank you, guys. Hey, how are you? I guess, they're now tracking to more of the lower end of the 52 to 55 million target for the year previously thought to be closer to the higher end. So I'm just wondering, is this some incremental softness in gross adds, is it higher churn, a decline in new activations? It seems like we may be down a little bit quarter-over-quarter in Q4 but normally there is some positive seasonality. So just wanted to get your take on what’s going with the NNA? Thanks.

Yeah, great question Jason. Thank you for that. If you remember we started the year at 50 million then we raised it 52 to 55 and then we thought we'd be towards the higher end of the 52 to 55. At this point, we're just being consistent with our revenue guide as well. We're going into the heart of the holiday, you're exactly right. If holiday season shapes up like it did last year, then we'll have more than 52 million organic because there would be a lot more of shopping, and if it doesn't, then we'll have a little bit less. So it's very consistent with us just being, I think prudent and cautious given some of the trends that we're seeing and others are talking about. Again, supply chain shortages, people can’t shop if consumer confidence is down, people do more in store, we’ll get less M&As than we typically might, . If the holiday season goes as it did last year, we'll get more than we are talking about right now. So I just think it's just very consistent with the guide that we gave, and again, as John mentioned, we had a good start to the quarter, we’ve had a pretty strong last week report too, but we're early on right now and so we don't like it when we are at the mid-point of our guidance or any of that kind of thing. We are used to being a Company that puts out things and then beach what it puts out, and we want to assure that what we say is appropriate and an appropriately conservative on it. So that's how I think I would answer that question, Jason.

Thank you.

All right. Operator, thank you, Jason for that last question, really look forward to talking to all of you over the course of the next couple of days and weeks and at a number of different conferences, and thank you for all your support and your time today.

Thank you. This concludes today's conference call. You may now disconnect.