Good evening. My name is Savannah, 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 Second Quarter 2022. [Operator Instructions]. Thank you. And I would now like to introduce you to your host for today's call, Ms. Gabrielle Rabinovitch, Senior Vice President, Corporate Finance and Investor Relations. Please go ahead.

Thank you, Savannah. Good afternoon, and thank you for joining us. Welcome to PayPal's earnings conference call for the second quarter of 2022. Joining 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. 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 third quarter and full year 2022 and comments related to anticipated cost savings, operating margin and share repurchase activity. 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 statement. All information in this presentation is as of today's date, August 2, 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. I'm pleased to share that in the second quarter, we met or exceeded our expectations announced in April, marking the second quarter in a row of hitting our non-GAAP guidance. We are well underway in a deep transformation of our business to regain our momentum. This transformation is supported by 3 major initiatives. The first is to seize the opportunity to grow our market share as many of our competitors retrench and reorient their business models. We are focusing our investments in the areas where we have tremendous advantage due to our scale and the inherent network effects driven by our 2-sided network. We are doubling down on Checkout, our PayPal and Venmo digital wallets and our Braintree platform. These efforts are having their anticipated effect as we, once again, took share in Q2. Secondly, we are meaningfully reducing our cost structure. I will discuss this in detail, but over the past 6 months, we have taken action to exit the year with operating margin leverage that will continue to grow in 2023. And third, we have reinvigorated our organizational operating model, and we are recruiting world-class talent to our product, engineering and technology functions. And later in my remarks, I'll expand on our progress in these areas. With that in mind, I'm very pleased to announce that Blake Jorgensen will be joining us as PayPal's new Chief Financial Officer starting this week. Blake joins us from Electronic Arts, where he was CFO and Chief Operating Officer, driving extensive operational excellence and shareholder value. He has also been CFO at Yahoo! and Levi's and was co-Founder and President of the Investment Bank, Thomas Weisel Partners. I am looking forward to working with Blake as we enter the next chapter in PayPal's journey.…

Thanks, Dan. I'd like to start by thanking the entire PayPal team for their continued commitment to serve our customers and execute on our priorities. PayPal delivered another solid quarter, meeting or surpassing the second quarter non-GAAP financial targets we shared with you in April. We delivered on our commitment of sequential acceleration in our revenue growth and slowed our nontransaction-related operating expense growth. Our results are indicative of the strength, diversification and breadth of our 2-sided global payments platform. Our team remains focused on what we can control. And more importantly, we're committed to accelerating our core strengths and building PayPal for the future. We are guided by our relentless focus on creating the best possible experiences for our customers and value for our stakeholders. Over the past 2 quarters, we have seen even stronger opportunities to advance our leadership position in payments and add to our momentum, with our digital wallet, checkout and unbranded processing strategies. Of course, unlike everyone, we're closely monitoring the impact of high inflation on economic growth, consumer demand and sentiment as well as broader global macroeconomic indicators. The backdrop continues to be complex, and we're taking an appropriately prudent approach to managing our business. PayPal's unique competitive advantages continue to drive us forward. Today, we believe we are better positioned to deliver sustainable long-term growth than we were before the pandemic. At the same time, we're increasing our rigor in managing our cost structure and prioritizing higher-return strategic initiatives. We are focused on improving our operating margin profile while investing in our key priorities. Over the years, PayPal has experienced serious business and macro challenges and has emerged stronger every time. As we look ahead, we're confident in our long-term strategy and our growth outlook. We believe we are operating in an environment…

Thanks, Gab. So before we start the Q&A section, I'd like to take the opportunity to provide some color on the discussions we've had with Elliott Investment Management. First of all, the discussions have been both constructive and collaborative, and we appreciate the partnership we've built with Jesse Cohn and his team. We are completely aligned in our mutual goal to maximize shareholder value, and we are substantially aligned on the areas of focus for achieving our objectives. Our discussions are focused on operational improvements, revenue-generating investments and capital allocation, and they are consistent with our short- and long-term objectives and plans. We've been working on a number of initiatives such as improved profitability and return of capital and we appreciate Jesse's collaboration and input on these important topics. And as we discussed, we're pleased to announce the following: approximately $900 million of cost savings in 2022 across our operating and transaction expenses, with savings potential of at least $1.3 billion through fiscal year '23, an invigorated capital return program including a new $15 billion share repurchase authorization, full evaluation of capital return alternatives and an upcoming Investor Day in early 2023 to share operational, capital allocation and strategic updates. We continue to engage with Jesse and his team at Elliott, and they have communicated that their investment is a vote of confidence in our strategy, in our management team and our ability to generate long-term value for shareholders. We have also entered into an information sharing agreement to maintain our collaboration across the previously mentioned initiatives, and we look forward to our continued partnership. That's the extent of our comments on Elliott's position in PayPal. And now I'd like to turn it over to the operator to hear your questions on other areas of our business. Thanks very much, and operator, let's open it up for questions.

[Operator Instructions]. And our first question will come from Tien-Tsin Huang with JPMorgan.

Lots to digest here, and Gabs, congrats on the elevated role of Treasurer. I think for Dan just to kick it off, the Q&A, I wanted to hear how you're prioritizing executing the strategy you mentioned with lots going on here, right, with filling some key roles, you've got Elliott. As you just mentioned, you've got cost-cutting plan, capital allocation consideration. So what part of the strategy, as we've heard it, do you think of as nonnegotiable, right, in the short and the long term. That was the key question I had, but also what moves down in priority? I didn't hear about things like in-store and others. So would you mind commenting on that?

Yes, it's a great question. So we're executing on the game plan that we started laying out at the beginning of the year. We knew we had a lot to get done. And we knew we had to, one, narrow our focus on growth opportunities in which we had high conviction of their ability to make an impact. Does it -- make no mistake, we are in the business of strengthening our value proposition, growing going forward and gaining share. That is our #1 priority. And we know the 3 things that we really need to invest in there, and there's no debate around that whatsoever. It is Checkout because that is the bread and butter of our business. We have a lot of advantages there. We continue to gain share, but there are a lot of places where we can make incremental improvements and, in some cases, some pretty radical improvements to improve our value proposition and competitive position. Number 2 is in our digital wallets. Both Venmo and PayPal, we are seeing very encouraging green shoots. We've talked about some of those. I'll probably talk about more of it in future questions, I'm sure. But that is the future. Digital wallets are the future, a combination of both payments and commerce and financial services coming together. And we are seeing some really -- some quite a bit of adoption, quite a bit of churn reduction for those who come in. So we'll continue to invest there. And finally, Braintree. My hat goes off to that Braintree team. They have done some Herculean tasks this year. We have tremendous momentum in our full stack processing in the marketplace. As I mentioned, there is a flight to quality in the market. We are clearly seeing that. And that platform, we're…

Our next question will come from the line of Darrin Peller with Wolfe Research.

Look, we had expected some cost saves, and it makes sense, just given the growth of expense lines over the last couple of years. But the magnitude you're talking about is definitely more than we anticipated. So if you can just touch on how we should think about the sources of the expense saves. Maybe, if any, will be reinvested into areas versus pass through to the bottom line, and really what we can expect in terms of investment levels into the wallet and Checkout and kind of operating leverage this would be to.

Yes, I'll start and then maybe Gabs will jump in. So first of all, we're a growth business. And for us to continue to improve our value proposition, we need to invest and we need to invest in those areas that I've just mentioned to the last question. It's in checkout and our digital wallets and our Braintree platform. And we are doing increased investments this year around that. But we're doing that while being quite aggressive and focused on where do we have costs and how can we start to take those out? One is focus, as I mentioned. We're like -- we're not -- we were doing 100 things. We're now doing 3 or 4 things extremely well. There are some things, obviously, but we are really focused. And all those other things are being applied to those key focus areas. Number two, we have a tremendous amount of scale coming out of the pandemic. We're going to do somewhere around $1.4 trillion of TPV this year. Our transactions are at $5.5 billion in the quarter, up 16%, up 20% ex eBay. And so the amount of volume we have in the business has and now has been leveraged across all of our suppliers. The more volume, the better your unit costs are. We've renegotiated our contracts across many of our suppliers, and that is giving us both OpEx savings and transaction unit cost savings in our transaction expenses as well. And then, of course, you can always drive more and more productivity. We put on quite a number of headcount. As Gabs mentioned a year ago, our OpEx grew by 27%. We have plenty of heads. We can be more productive. In fact, our headcount is lower than when we started the year, both in our contingent workforce and our full-time workforce. But we are doing that by reallocating resources, investing in some places, taking away from others. We are driving a better product experience so we have less calls coming into servicing. Therefore, we need less people. Those are the good ways of achieving productivity. And of course, we're looking at low-cost geos to do incremental hiring in and rationalizing things like our footprint, looking at our consulting spend. And we're cutting all of that back as we focus. And so we feel really comfortable with the investments that we're putting in. It's really important that we continue to invest in the business. But at the same time, be able to take out a tremendous amount of cost to be quite efficient.

Yes. Maybe I would just add, in terms of the $900 million of identified savings this year and the $1.3 billion next year, nearly 50% of that really comes from transaction-related expenses. And as Dan mentioned, really sort of benefiting from the scale we have and the ecosystem. So I wouldn't think about that as cuts to the way we do business, more really benefiting from the scale that we have and the large platform that we have. In addition, I'd say even with those savings, we would expect transaction expense to grow next year. And that's really just from the strong growth of Braintree that continues to impact our mix. And so we don't expect year-on-year for TD to come down. The other point I would mention is some of the savings are really not an insignificant amount, as Dan mentioned, really do relate to headcount. And we recalibrated our headcount plans to really be balanced with our growth plans on the year. So some of our expectations around the top line have come in. The way we thought about growing [indiscernible] has really adjusted. And so that's an important driver of the savings as well.

Yes. Well, I don't think we'd be seeing the incremental revenue growth. I mean, we've gone from 7% in April to north of 14% in July revenue growth. A piece of that has been the eBay lapping for sure. But a part of it is just taking share of the sales pipeline from our Braintree, implementing that live to site and slow-but-sure incremental improvements in checkout. That has to happen and needs to be a balance between cost cutting and investment.

Our next question will come from the line of Lisa Ellis with MoffettNathanson.

Terrific. A follow-up on Darrin's question related to the expense and margin side of things. Just maybe taking a longer-term view, how should investors think about the margin trajectory of PayPal, given that you've got Braintree growing so well, but the implication being it's mixing in as a lower gross margin business. So just looking out kind of beyond this immediate $900 million, $1.3 billion, but sort of more conceptually or structurally over the long term, how do you think about navigating that kind of mix-related gross margin pressure and then operating margin potential for the business?

Yes, absolutely. Thanks, Lisa. So I think as a starting point, I mentioned, sure, on the Braintree side, yes, mix is important. And certainly, there is a different profitability sort of dynamic to Braintree. At the same time, I would mention that, that really is limited to the LE side of Braintree. And to the extent that we continue to grow our Braintree franchise in the SMB space. And to the extent we continue to grow it in Europe, really, the profitability characteristics of it are quite attractive and will continue to support the business. But in addition to that, we do have a long track record of profitable growth. And so as both Dan and I have mentioned, we do expect to begin showing operating margin expansion in the fourth quarter. If we think about next year, a little early right now to provide full guidance on the year. But to start right now, we're targeting at least 50 basis points of operating margin expansion. And importantly, sort of initiatives that Dan has mentioned and the efficiencies that we're realizing the work that we're doing will allow us to grow profitably and sustainably improve the margin profile over time.

Our next question will come from Jason Kupferberg with Bank of America.

I wanted to ask a little bit about Venmo. I saw the overall volume there grew 6%. I think it slowed a bit against an easier comparison. So just curious how it came in versus your expectations. Maybe what we should expect for the second half there? It sounds like the Venmo revenue growth was robust again, so I'm assuming you're still on track for the 50% revenue growth in Venmo for this year. But just curious to get your take on what's happening with volume growth.

Jason, thanks for the question. So look, there's a lot to be excited about at Venmo right now. It's closing in on 90 million active accounts. It's going to do something like $0.25 trillion of TPV this year. And when you have that kind of scale, clearly, things begin to slow down a little bit. As you mentioned, revenue is up 54% in the first half. We had -- we're doing $100 million revenue months now. And a host of initiatives, I'll touch on in a second. But on the TPV side specifically, it's still tough comps. I mean, we grew 58% TPV in Q2 of last year. I mean, I wouldn't say that's easing comps. It's still pretty tough comps. So on top of, obviously, you're ending stimulus, you got reopening, macroeconomic conditions, et cetera. But there are a lot of things that we can do to improve the value proposition around P2P and around increasing TPV there. And the team is working on that, on a complete refresh of the app, which really will focus around like, search improvements, syncing up with contacts, persistent send and receive buttons no matter where you are in the app. So there are things we can do, I think, to help improve the accessibility and the ease of use of P2P in Venmo, but it's still going right now from strength to strength. It's commerce volumes, which really Pay with Venmo goods and services and business profiles, as I mentioned, are up 250% year-over-year. These guys are working on a debit card reboot, which will be kind of like metal form factor, full app integration, rewards integration, teen accounts, which opens up the addressable market anywhere between 20 million and 30 million TAM that opens up with that. You have charities start to come on to the -- their profiles, which will encourage giving before the holiday season there. So I'm pretty pleased with what they're doing. We're also looking at things like PayPal, Venmo, P2P interoperability, which I think is a very big opportunity. Networks, the bigger they are, the more valuable they are and the ability to start to link to PayPal and Venmo P2P interoperability, I think, is a big opportunity as well. So a lot to think about, a lot to look forward to, obviously, including Pay with Venmo on Amazon. So more to come but they're working on a ton of things right now.

Our next question will come from David Togut with Evercore ISI.

Congratulations, Gabrielle. Good to see the accelerating 12% growth in transaction per account in Q2, which is actually your highest in at least the last 6 quarters. So what do you see as the key proof points that this higher growth rate in customer engagement is sustainable? And are you on track to increase ARPA this year enough to support your new 2022 revenue guidance?

Yes. Well, first of all, I think on the revenue guide, as Gab talked about in her remarks, I mean, our guide for Q3 normalized is about 14% if you removed the sale of the PPP onetime thing we did last year. So just this quarter, we're going to -- and then the jump-off into fourth quarter is basically flat to hit the guidance that we put out there, and July came in north of 14%. So I think we're feeling as good as you can be in an environment that is unpredictable and anything can happen. But we're feeling really good about the revenue guidance that we gave. In terms of the engagement in TPA, I think you're going to continue to see TPA increase as the year unfolds. And you can hold me to that next quarter. But some of the proof points are, if you look at people who are in the digital wallet and we now have over 50% of our base in our digital wallet. They've got 2x higher the ARPA than those not in the digital wallet. They do 25% more checkout. Churn is now -- our best view of it now is churn is reduced by 33%. We thought that was about 25% last quarter so that's gotten slightly better. And they do 2x the transactions per active for those who aren't in the wallet. And so one, the more we can enhance and move people to the digital wallet, the more engagement and TPA growth we'll have. The other thing is we actually have a lot room to improve in terms of just usage of PayPal. If you look at the Fed came out with how many financial transactions does a typical consumer do in a year? And it's a little over 800. About 25% of those are online, so about 200 of those are online transactions. We only capture about 25% of those. And so there's a huge opportunity as more and more moves online, as we expand the digital wallet, as people see all they can do with that. We just launched our high-yield savings at 1.65% interest rate. That's about 16x the national average. We're putting on thousands of people a day on to that. There's a lot we can do as we look forward. And I think the more we can put on to the digital wallet and the more compelling those services can be, the more you'll see TPA and ARPA grow. And we'll see it as we go through the rest of the year.

Our next question will come from the line of Rayna Kumar with UBS.

Congratulations, Gabrielle. You have a very unique strategy in Buy Now, Pay Later, so I just want to dig into that. If you can discuss the progress of Pay in 4 and Pay in 3 and how it may evolve if we were to enter a global downturn. And secondly, have you been able to get better placement as a result of your BNPL strategy?

I guess maybe I'll start. Gabs, you can jump in. Obviously, we do have a unique approach to Buy Now, Pay Later, Rayna, as you mentioned. We don't charge any merchant fees. We have no late fees to consumers. We make our money not off of the Buy Now, Pay Later but the halo impact, which is about a 21% halo impact when somebody uses Buy Now, Pay Later. And so we aren't dependent on those revenue streams. And the profit pool for us in Buy Now, Pay Later is not inherent within Buy Now, Pay Later, but in Checkout and in our take rates. That gives us a tremendous advantage as we look at different credit cycles. We can tighten up quite easily where we need to on that. We also know, 90% of the people that apply for Buy Now, Pay Later. That is a tremendous advantage for us. We know their history. We know how they've paid. So we have amongst, if not, the highest approval rates in the Buy Now, Pay Later, and at the same time, amongst, if not, the lowest loss rates as well. And so -- and we also -- we've been in this business for 15 years or so in the credit business. We've gone through cycles. We have people who understand this inside and out. And so I think we have a huge amount of advantages. We continue to leverage it. And your last question is are we seeing incremental share gain when we have Buy Now, Pay Later? Clearly, we now have, with our 200,000 merchants, where we now are up on product pages. That is tremendous share gain for us and placement where, in many cases, it never even gets to the checkout page. It's just done right. The Checkout is done right off the product. page. And so as we continue to grow that and as again, there's a flight to quality in the market as well, and we have such a kind of robust value proposition, we continue to see more and more merchants place us upstream in their checkout.

I'd also just add, we're continuing to see better upstream presentment in part because of how we're continuing to grow the product characteristics. So introducing longer duration, more options with monthly payments gives merchants more ways to allow their consumers to spend. And so that also helps drive that upstream presentment. It's been a really great product for us. We continue to see very strong performance, very low loss rates as well.

And you saw that over 100 million times used by 22 million consumers. That shows the value that consumers see in it.

I'd also add as we think about potentially an environment where we can see some contraction in the economy, the new late fee dynamic to what we do is just exceptionally consumer-friendly. So we don't charge transaction fees for consumers on Pay in 4, Pay in 3, no interest fees, no late fees. And so overall, it's an incredibly attractive product for our customers.

Very helpful.

And we have time for one last question, and that will come from the line of Mike Ng with Goldman Sachs.

It was encouraging to hear about the share gains within Branded Checkout. I was wondering if you could just explore that a little bit more and talk about where you see e-commerce industry growth right now and how core PayPal is performing relative to that. And Dan, you teased some potential radical improvements at Checkout. I was just wondering if you could talk a little bit about that and initiatives that the core PayPal branded checkout is pursuing to improve or maintain share.

Yes, sure. First of all on e-commerce growth rates. It's tricky and people have different opinions on it. As best we can tell, in the second quarter, e-commerce growth was relatively flat. If you take out travel out of that, it might have actually been slightly down, probably negative if you remove travel from it. And if you look at our Branded Checkout, which is sort of ex eBay, P2P and Venmo, we had positive growth and we likely gained a bit of share, if not a little bit, more than a little bit of share on that. We obviously want to continue to do better on that. And as we come into this quarter in July, we're beginning to see that turn in Branded Checkout is actually growing again, which is obviously also really helpful as we look at margin dynamics and that kind of thing as well. For the full year, people were talking about 10% early on. That has kind of dropped into about the 8% for the full year. It's kind of where we're hearing as we look at a number of estimates out there. But BofA is down at 5% for the year. JPM is at 7% for the year. All of them accelerating in the back half, by the way. But it's still a little hazy, Mike, honestly, to understand what normalized e-commerce will look like. We clearly did not see the bump-up of 5 years that everybody had seen during the pandemic. But we are along the traditional historic e-commerce penetration rates and I'd expect that to continue but we'll see how that normalizes. But we'll continue to expect to grow significantly faster than the rate of e-commerce going forward, both on branded by the way and unbranded as well. And just really…

Great. That was very helpful.

Okay. I'm glad, Mike. Well, operator, that's going to be the end of the call. I do want to thank everybody for the great questions, for your time, and we obviously look forward to speaking to all of you again soon. Thanks again. Bye, bye.

And this concludes today's conference call. You may now disconnect.