Good afternoon. My name is Donna 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 Fourth Quarter 2021. [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, Donna. Good afternoon and thank you for joining us. Welcome to PayPal’s earnings conference call for the fourth 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 are 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 first quarter and full year 2022 and our medium-term outlook. 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 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, February 1, 2022. 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. Today, I am going to highlight our 2021 results, but I also want to spend time discussing the opportunities and challenges we face this year. 2021 was one of the strongest years in PayPal’s history. Our revenues grew by 18% to $25.4 billion and our non-GAAP EPS grew 19% to $4.60. We surpassed $1 trillion in annual TPV for the first time in our history, ending the year with $1.25 trillion of total payment volume. We had a record 5.3 billion transactions in Q4 alone, up 21%. We added 49 million net new active accounts to exit the year with 426 million active accounts, including 34 million merchants. In the last 2 years, we added 122 million net new active accounts. And despite that spike in new users, our transactions per active account grew to 45 this past year, an 11% increase. And last but not least, we generated $5.4 billion in annual free cash flow. With all that said, 2021 was also a difficult year. It was a particularly hard year to forecast. eBay’s migration to managed payments happened faster than we anticipated. Overall, eBay put $1.4 billion of pressure on our top line, reducing our revenue growth by 700 basis points. Ex-eBay, our revenue growth was very strong, growing 29% on a spot basis for the full year and 22% in Q4. Exogenous factors also did impact our results. Supply chain issues disproportionately impacted our cross-border volumes and our small business merchants. Inflationary pressures impacted spending within certain segments of our user base. Rising threats from COVID variants cut travel and event bookings and the elimination of government stimulus had an impact as well. E-commerce growth rates during the holiday season were lower than industry expectations despite a strong 2-year…

Thanks, Dan. I’d like to start off by thanking our customers, partners and employees for helping us deliver an outstanding year following our record-breaking performance in 2020. There are several important points that I want to discuss today. I am going to discuss a pivot in our strategy to focus more on engagement and what that means for our net new actives going forward. I also want to discuss why we are taking a more conservative outlook for 2022 for both revenue and earnings. And lastly, that we don’t believe either of these items will prevent us from achieving the revenue and earnings growth rates, along with our free cash flow objectives in the out years of the period contemplated in our medium-term guidance. But first, I want to spend a moment discussing our Q4 performance. 2021 certainly had its ups and downs, but when one steps back and looks at our overall performance, it was really an amazing year. TPV grew 33%. Revenue grew 18%. And we generated $5.4 billion in free cash flow. We also added 49 million customer accounts, ending the year with 426 million. And our engagement metric, transactions per active account, grew 11%, an acceleration of approximately 10 percentage points from 2020. Remarkably, in 2021, growth on our platform, excluding eBay, accelerated meaningfully on top of extraordinary performance in 2020. TPV growth accelerated more than 500 basis points to 38% and revenue growth accelerated more than 600 basis points to 29%. Since 2019, our volumes ex-eBay, have nearly doubled. And overall, we have consistently grown volumes well ahead of industry growth rates. We also advanced our leadership position in checkout. Since the start of the pandemic, on average, our share of checkout among the largest publicly traded merchants has increased by nearly 200 basis points.…

[Operator Instructions] Your first question comes from the line of Tien-Tsin Huang from JPMorgan. Your line is now open.

Hi, thanks so much. I wanted to drill in on the NNAs again, if you don’t mind. Just what drove the decision here to focus on engagement focusing on quality instead of growth in NNAs? Just trying to gauge your confidence and expanding ARPU as implied in the guidance both this year and I suppose in the mid-term now that the $750 million is off the table? Thanks so much.

Sure, Tien-Tsin. I’ll start and Dan might want to jump in. Look, I’ll start with some context. We’re a data-driven business. And if you just look at the last year, we did almost 20 billion transactions on our platform. And each of those transactions has hundreds of signals about that transaction. What was the size of the transaction? What was the price point? Was it on a mobile device? It was at a repeat customer? Did it happen after a P2P transaction, and that informs our strategy. And we analyze that – and informs the strategy. We measure the results, and it creates this feedback that we then refine and pivot our strategies as well. And what we’ve been able see is that when we asses the strategy around trying to retain these very low engaged users versus of tempting to move people up maybe from the medium engaged user to the high engaged user group. The ladder is much more effective for us to focus on engagement. And I think it’s important to note, we are not a subscription model business, where there is a direct relationship between our net new actives and the amount of revenue. As I noted in my prepared remarks, there is a Pareto dynamic in our business where the vast majority of our volume comes from about third of our customers. And so we think that we need to pivot to evolve with the feedback that we’ve received and go achieve our medium-term guidance a different way than what we initially have laid out. But importantly, there is very encouraging signs that we see around engagement. And we’ve talked about some of those. But when we, for instance, add a – provide a separate product or service for a customer, and they are engaging with us in a different way. The ARPU for that customer increases appreciably. And so this is a pivot in our strategy. We think it’s appropriate for our business, but it does not mean that we don’t have confidence in our medium-term outlook as it relates to both revenue and earnings and free cash flow.

Maybe I’ll just add a couple of things onto John’s response. First of all, we did put on 122 million NNAs over the last 2 years, which is obviously substantially more than what our pre pandemic levels were. And within that, there are always a number that are low engaged or have done one transaction and nothing else. And we drove some programs, incentive-based programs to see if they would reengage and then engage back with the base. And what we found is that they were due one transaction and then fall dormant again. And so our view is spending money on lower-value NNAs that are not engaged in the base becomes an increasingly expensive proposition over time and does nothing for our revenue growth. In fact, this year, when we’re saying that we’re going to do $15 million to $20 million, it’s probably going to be about $20 million incremental one-and-done customers that roll off. That does nothing to our revenue that is actually just people coming out of the base that were never engaged. Over time, we feel like our NNAs are that revert more back to pre pandemic, which was in the $30 million to $40 million a year range. And could that change slightly? Could that be more as we go into more international penetration we’re seeing some very encouraging signs, as John said, with a digital wallet, where if somebody adds one more service to the digital wallet, their average revenue per active goes up by 25%. The average revenue per active of the digital wallet user is 2x that of a checkout only. And so we really feel like we are going to invest our dollars in the best way to drive our revenues and our earnings and in the most efficient way. So we have great confidence in the medium-term outlook. And this shift is one that doesn’t mean that we won’t bring on tens of millions of NNAs every quarter. It just means that we’re not going to throw marketing dollars at low-value subscribers coming in. And that, as John mentioned in his remarks, is a conscientious choice that we’re making.

Very clear. Appreciate your thoughts.

Yes.

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

Hi, thanks, guys. Can you just – can you touch on the assumptions for your revenue guidance? I know your 15% to 17% is obviously lower than the prior 18% as of expected as of a few months ago. So maybe John or Dan, if you could just touch on the magnitude of ARPU expansion or consider and perhaps any color on the take rate or other factors? And just maybe any assumptions that might be conservative here and also, John, just the cadence and trajectory, I know you talked about exiting the year at 20% plus growth rates. Obviously, it’s great to hear just we need a good ramp as the year progresses. So anyway, thanks guys. Any color that will be all.

Sure, Darrin. You packed a lot into that one question. I’ll try to get most of it. So look, as I noted, we are adopting a more conservative stance on the year, and that’s informed allowed by what we’ve seen over the last 8 to 10 weeks in our business. And I think underlying the outlook that we have for 2022 is e-commerce growth. The consensus estimates that we see are in the kind of the 10% range. And so that’s sort of a fundamental assumption to start with. As I noted in my prepared remarks, we’ve seen weakness around spending in our lower income cohorts. And imagine for us, it’s – the percentage of our user base is pretty similar to what you see just like in the U.S. overall. So it is a large percentage of our user base. And this was a cohort that certainly benefited from stimulus in prior periods earlier this year. And we’re seeing the effects of inflationary pricing around that where there is a more elastic demand curve around that. Certainly, with higher income cohorts, you’ve got a more inelastic demand curve, and that’s a lower percentage of our base. But generally speaking, I don’t think people are going out and buying boats with Venmo. And maybe they are, but this has had an impact on our business. And so when we provide that range of revenue guidance for the year, if this persists and doesn’t improve, then it’s going to be at the lower end of that range. If it improves appreciably, then it’s the upper end of that range. And so if you take the midpoint, we do have some expectation that some of the supply chain issues and inflationary pressures that we’ve seen right now, improved in the back half of the year. With respect to cadence, the first half of the year, clearly is the most difficult from a year-over-year comp perspective and most notably because of the impact that eBay has in our business, Dan talked about, in his prepared remarks, sort of the impact that it has $600 million in the first quarter as we get that – I am sorry, first half, I am sorry, first half. As we get passed that and also at the same time begin to see some of the benefits from some of our new product initiatives rollout through the year. The second half will be much better and look, we want as much as anyone to demonstrate to all of you the power of our business and so we are very much looking forward to that back half of the year and an exit rate there is much more in line with our medium-term guidance.

Darrin, I think also if you uncouple the headline revenue numbers from our revenue numbers ex-eBay and look at it whether it would be in the fourth quarter 22% revenue growth ex-eBay, growing over 27% revenue growth ex-eBay from a year ago. And you look at that 2-year CAGR, it’s about 25% CAGR. You look in the first quarter, which is our low quarter of the year. And ex-eBay, we are growing revenues 13% on top of 38% revenue growth ex-eBay a year ago. Add the two up, you have got a 2-year CAGR of about 25% again. So, what I was saying in my remarks is that our business ex-eBay is remarkably consistent and our 2-year CAGRs are also remarkably consistent. And so we are lapping eBay, which goes away by the end of June as we go into the back half of the year, and we are also lapping our two strongest quarters of growth in the first and second quarter. And just as we look at the math of that and then on top of that, obviously, all the initiatives that we are doing, we see growth rates exceeding 20% plus as we exit the year. And I think if you look behind the headline numbers, you can see those numbers have maintained their strength quarter-over-quarter.

Great. Understood. Thanks guys.

Thank you. Your next question comes from the line of Bryan Keane from Deutsche Bank. Your line is now open.

Hi guys. Thanks for taking my question. I wanted to ask about the take rate. It did stop, I think, a 2-year decline. And just thinking about it going forward with the Venmo monetization, especially Pay with Venmo being a factor, thinking about pricing, if there is any other benefits domestically or internationally there, and then mix P2P versus branded and Braintree. It looks like from the guide that take rate, the moderation of take rate going down also alleviates there. So, just thinking about those factors, John, maybe you could help us with that.

Sure. Well, we were pleased to see the sequential increase in take rate in the quarter versus the third quarter. And I do think it sort of underscores some of the strength in our business, particularly around pricing and also, as Dan noted, Venmo, quite excited to see that Venmo having achieved it’s roughly $900 million in revenue last year that’s starting to be a contributor to take rate. And we have been saying this for some time. We are glad to actually show the results. I don’t think it’s fair to assume, though, that Brian, that every quarter, we are going to see a sequential increase going forward. But it’s a step in the right direction. I think maybe a better way to think about take rate for this year is really looking at the factors that drove the year-over-year change. And of course, year-over-year take rate declined. But if you look at that decline of 17 basis points, roughly half of that was related to eBay. And certainly, that goes away as we get into the back half of the year. The other next largest contributor, which was about 4 basis points or 5 basis points related to that decline was a decrease in foreign exchange fees that we monetize on cross-border transactions. And so that sometimes goes up. So, if you look at like the core business, there is actually a very small change in what’s happening with take rate and so quite pleased about that. And I think it really – like when you also overlay on that, the pricing change that we made that contributed to that I think it underscores the value proposition and how that resonates with our customer base. We are seeing users becoming more loyal to brand ecosystems like ours. And look, when side-by-side given the choice to choose PayPal or other wallets, more than 50% of the time, people are choosing PayPal. And so this shows the strength of our business, the ubiquity, the network effect of it, and that’s translating into the effect on our take rate. And frankly, we are just pleased to see that we don’t have some of the noise that’s been persisting in that comparison over the last couple of years, and we will get into much cleaner compares in the back half of next year.

Yes. And I think I will just expand on one part of John’s remarks. I mean if you look at Venmo exiting the year with $250 million of revenues growing at 80% plus. I mean as we think about Venmo revenues this year, we can see that our revenue is growing another 50% plus as their average revenue per active continues to grow. And so I think when we look at a bunch of things that before, we are putting pressure on take rate. And now we are seeing the opposite of curve. I think that obviously bodes well at least on the pressure on take rate, if not the stabilization of it.

Great. Thank you very much.

You bet.

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

Good afternoon guys. Thanks for taking my question. Alright. Well, it has been a couple of tough quarters here coming out of the pandemic. You have highlighted, of course, in detail the shift from NNA growth to ARPU growth. But beyond that shift, just taking a step back, what are some of the other strategic and operational adjustments you have been making now over you are making in order to adjust to this new world and reaccelerate growth as you look out later into 2022?

Lisa, there is sort of a little bit of inflation between end of pandemic and us entering into the eye of the eBay transition, which happened concurrently. So, coming out of that, you are lapping very strong growth quarters for us, and we are going into eBay and the pandemic is beginning to end. If people are conflating a lot of that, which is why I was trying to point out that the core business ex-eBay, has been pretty consistent as we have looked over the last several quarters. And clearly, the lapping is going to have an impact, although a lessening impact in the first half of this year until we move into the back half. I would say though the other big thing, Lisa, that we have talked about quite a number of times is sort of the ascendancy of digital wallets, of financial super apps in the – in checkout. There have been numerous studies. JPM just put out one payments, just put one out, where you are seeing digital wallets take increasing share at checkout. And clearly, there is no other digital wallet close to us in terms of scale, and there is overwhelming consumer preference for PayPal in those wallets. And our super app is showing extraordinarily promising early results. Now, we only rolled that out fully in the middle of October across all of iOS and Android, so we are three months or four months into it. But what are we seeing, we are seeing double the average revenue per active account when somebody uses our app versus just checkout. When somebody uses the app their propensity to churn is 25% less. The discoverability and first-time users of people coming into the app, crypto is up 40%, in-app donations are up 300%, people coming…

Very helpful. Thank you.

You bet.

Thank you. Your next question comes from the line of Jason Kupferberg from Bank of America. Your line is now open.

Thank you, guys. Appreciate it. So, I know you have said that you are positioned to achieve the medium-term revenue and EPS targets over the last 3 years of the 5-year guidance period. So, are we to assume that you expect to be below those levels when we look at the 5-year CAGR basis in its entirety? And I guess, if not, if you still think you can achieve these targets on the 5-year basis, what would really drive the necessary increase in engagement? Thank you.

Sure, Jason. It’s good to speak with you. I appreciate the clarifying question. So look, any time you put out a longer-range plan over multiple years, it’s rarer than anyone ever assumes a business cycle in there and not that we are exactly going through the business cycle, but we are certainly seeing some macroeconomic pressures on our business that were not contemplated at the time that we did our guidance. So, you are correct in that we have confidence that we can achieve those growth rates of 20% revenue and 22% earnings growth in the out years beyond 2022. But because we have not done that in the first 2 years of that, you are correct, mathematically, that CAGR is much more – that compounded annual growth rate is much more challenging. But when you step back and you think about the core earnings power of the business, the core growth opportunities that we have, look, e-commerce is still going to grow. We are still seeing a pull forward around that. We are still seeing the increase in digital payments, the primacy of the digital wallet, all of these things benefit us. And I would say even benefit us even more because of the scale and brand that we have. And so we shouldn’t conflate like changes in real disposable income of people with digitization trends, which benefit our business. I would argue that our competitive positioning has never been stronger. And so we are very focused in 2023, ‘24 and ‘25 and demonstrating that we can achieve those growth rates.

Okay. Appreciate the clarification.

Thank you. Your next question comes from the line of David Togut from Evercore ISI. Your line is now open.

Thanks so much. This was touched on a bit earlier, but given the 2022 headwinds you have discussed, what are some of the structural changes you see sustaining as we enter 2023, for example, you have called out 20% plus expected revenue growth as you exit 2022. And then related to that, with the pivot to increase focus on growing engagement? What’s the timeline of new applications we should watch for in the expansion of the PayPal super apps?

Where to start? Well, maybe I will start with the first part of your question, David, on some of the structural changes and we covered this a little bit in a couple of questions, but we continue to see a movement, particularly in checkout or gravitation towards digital wallets versus other ways to pay. And in fact, in some studies, it would suggest that PayPal is second only to debit in front of credit in terms of preference from consumers. And as I noted earlier, like you are beginning to see more and more preference for brand ecosystems. And we think that’s only going to become more relevant as we go forward, which is part and parcel to why we are emphasizing our digital wallet strategy so much because when someone is using our app is using our digital wallet. They are much more likely to be engaged with us in other parts of our ecosystem, including offline transactions. And so all of these things, I think are structural changes related to the pandemic that getting the timing precisely correct on when we reach that, that pivot or that step function change is sometimes difficult. But I don’t think anyone would argue that we are continuing down that trend and it’s only been accelerated during the pandemic.

Just add to it a couple of things. One, obviously, we feel like supply chain issues will work their way through. This actually is impacting quite profitable revenue streams for us like cross-border. When we look at export out of China, that’s double-digit negative, and it’s typically double-digit positive for us, and that will turn its way around going forward. So, we know some of these things are temporal and will change over time. But we wanted to be measured in the guidance that we put out for this year. And on the digital wallet, we put out a ton of new functionality out there. We are just started to ramp the high-yield savings product that we are introducing with Synchrony. That started at the end of January. We are aiming to be 100% ramped with that by the end of Q1, early Q2. We are – have quite a number of people on the waiting list for that. And we want to really spend a lot of our efforts this year, enhancing each of those various products and services to create best-in-class value propositions around every single one of them. I think we have a really comprehensive, good first step of our digital wallet. I think each of these areas can be linked better to each other. The value propositions can improve, we will add incremental features over time, but really our opportunity this year is expand our app penetration because we see what happens when that occurs. And then when people are in the app, introducing to more and more services because that has a tremendous amount of leverage in the business model.

Thank you very much.

You bet.

And we have time for one last question from Timothy Chiodo from Credit Suisse. Your line is now open.

Great. Thank you for taking the question. When we think about your revenue growth, we like to think about what Venmo could contribute? And then we like to think about what the onus is on sort of the rest of the business, if you will. I know you mentioned that Venmo did roughly $250 million in Q4, and I think it was around that $900 million for the full year. Dan, you alluded to this earlier in terms of growth for next year, what could you tell us in terms of what is implied for next year’s or for fiscal 2022 in terms of Venmo growth and revenue monetization? And how that might look into 2023 and beyond as well?

Yes. I think this year, we are contemplating 50% plus revenue growth for Venmo on top of what it did this year. Obviously, they are continuing to add incremental services. Eventually, you are going to see Venmo have a lot of the capabilities that the PayPal super app has because that consumer base loves Venmo, or wants to live more and more of their financial life on the app. We have over 83 million people using Venmo right now in the United States. Think about that as a percentage of the population. Yes, it’s one like out of every 3.5 people in the U.S. is using Venmo right now. We obviously have plans to take that overseas. We are going to be rolling out Venmo with Amazon, with Starbucks, with DoorDash, I mean there are quite a number of very high-profile merchants that are going to be implementing pay with Venmo on top of all of the things that they did last year. And so we have got a lot of promise yet to go, as I mentioned. I feel like we are in the beginning stages of the monetization progress, team is executing extremely well against both their objectives, but really importantly, against the roadmap as well. And so I think you just continue to see Venmo grow. And by the way, when it grows, obviously, its ARPU grows and as I mentioned in my remarks, it starts to add to our ability to grow take rates certainly that adds to an upward pressure on take rate as opposed to a downward one. I think that was our final question. I do want to thank everybody for all of your great questions. We really appreciate it. Realize there is a lot of information that we put out today. We want to thank you for your time as well. And we look forward to speaking with all of you soon, and meeting with you in person. And again, thank you for your time. Take care, and bye-bye.

This concludes today’s conference call. You may now disconnect.