Good afternoon. My name is Julianne and I will be your conference operator today. At this time, I would like to welcome everyone to PayPal Holdings' Earnings Conference Call for the Fourth Quarter 2022. 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]. I would now like to introduce your host for today's call. Ms. Gabrielle Rabinovitch, Senior Vice President and acting CFO. Please go ahead.

Thank you, Julianne. Good afternoon. And thank you for joining us. Welcome to PayPal's earnings conference call for the fourth quarter and full year 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, will refer to some non-GAAP measures. You could find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the presentation accompanying this conference call. We will make forward-looking statements that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include our guidance for the first quarter and full year 2023, our planning assumptions for 2023 and our comments related to anticipated foreign exchange rate, cost savings, operating margin and share repurchase activity. Our actual results may differ materially from these statements. You can find more information about our 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, February 9, 2023. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

Thanks, Gabs. Hi, everyone. Thanks for joining us on today's call. Well we obviously have a lot to cover in the next hour and I want to be sure we have plenty of time for your questions. So let me jump right into my remarks. In a difficult macroeconomic environment with the overall growth of e-commerce continuing to slow, we still managed to grow our 2022 revenues by 10% FXN to $27.5 billion. We grew our TPV by 13% FXN, with our branded checkout volumes growing in-line with global e-commerce growth. And we processed over $1.35 trillion of volume on our platform. Our non-transaction-related OpEx grew by 2.7% for the year, down from 20% growth last year as we operationalized the reduction of over $900 million in costs in both our transaction expense and non-transaction OpEx. And throughout the year, we drove 3,900 basis points of improvement in our non-GAAP EPS growth rate from negative 28% in Q1 to positive 11% in Q4. We returned $4.2 billion of capital to shareholders in the form of share repurchases, representing more than 80% of our free cash flow, which totaled $5.1 billion in 2022. In the quarter, we set several new milestones, and we returned to operating margin expansion and positive earnings growth. For the first time in our history, we exceeded $7 billion of revenue in the quarter, meeting our guidance of 9% FXN growth with the revenues of $7.4 billion. In addition, for the first time ever, we exceeded 6 billion transactions in a quarter, resulting in 51.4 transactions per active account growing 13% year-over-year. We delivered $1.24 in non-GAAP EPS, $0.05 above the midpoint of our guidance, as I mentioned, growing at 11%. The quarter was clearly a positive inflection point and is a direct result of our intense…

Thanks, Dan. I'd like to start off by thanking our customers, partners and global team for helping us to deliver a solid quarter. The results we're reporting today demonstrate the strength, resilience and diversification of our business. We accelerated earnings growth on both a year-over-year and sequential basis despite ongoing pressure on e-commerce throughout our core markets. We continue to navigate this dynamic operating environment with strong discipline and a renewed focus on our key priorities. While the macroeconomic backdrop remains challenging, we're energized by the significant opportunity we have to advance our leadership in payments and better serve our customers. We believe this is an environment where the strong will get stronger and where our scale, profitability and stability make us a partner of choice and a formidable competitor in the payments ecosystem. Our results reflect our efforts to manage our business with greater discipline and deliver operating margin expansion. Our ongoing savings efforts are resulting in sustainable efficiencies for our business. In addition, we're investing in our high-conviction growth initiatives to ensure that we emerge stronger from this period of economic uncertainty. We're proud of the quarter we delivered. Relative to the fourth quarter targets we shared with you in November, our non-GAAP EPS outperformed, and our revenue was in line. Importantly, the sequential improvement in our earnings growth continued. The fourth quarter was an inflection point as our non-GAAP operating margin expanded for the first time since the first quarter of 2021, marking a return to profitable growth. We have now established a solid foundation to build on these results. And in 2023, we plan to deliver meaningful non-GAAP operating margin expansion and a significantly stronger non-GAAP earnings profile. Before discussing our 2023 outlook, I'd like to highlight our fourth quarter performance. As Dan mentioned, revenue increased…

Thank you. [Operator Instructions] Our first question comes from Lisa Ellis from SVB MoffettNathanson. Please go ahead. Your line is open.

Thank you. Dan, wow, big news. I'm sad already, and you're not leaving for another year. It has been such a journey over the last eight years. Can you just talk a little bit more about your thought process, your decision around choosing to retire now versus, say, a year ago or a year from now? And then also perhaps comments on, in your view, what sort of profile would make the ideal next CEO of PayPal? Thank you.

Yeah. Thanks, Lisa, for that. I'm going to miss you, too. But as you said, we've got a year ahead of us here. So look, there's never a good time to retire because it's always a bittersweet moment. I love working here at PayPal. I love working with all the incredibly talented people here. I'm proud of all we've accomplished. But as I've gotten older, I also realize I have a lot of passions outside the workplace as well. These range from politics to non-profits to academia. I want to do a lot of travel. And frankly, I want to spend a lot more time with the people that I love. But I had two criteria for when that right timing was. I mean the first one was I wanted to be absolutely sure that PayPal was on solid footing with a bright future. And as we look at kind of the quarter we delivered in Q4, as we look at what's happening in Q1 right now, which is coming in much stronger than we anticipated across a wide variety of fronts, we feel that 2023 is shaping up to be a strong year. And we think we have a real nice glide path as we go into '24 as well. And so that kind of like leaving the company in a good place seemed to be a good time for that. And the other thing is that I wanted to be sure that the Board had enough time to do a thorough search and an orderly transition after we find the right CEO. As I mentioned, it's a complex business. We have massive scale on both the consumer side, on the B2B side. We're a financial services company, but we're also a tech company. We're heavily regulated across the world. There are a number of experience sets and leadership traits that the Board will be looking for. And they'll work with a search firm to look across the entire landscape to be sure that we find the best possible person to seize what I think is a very bright future for PayPal, and I really look forward to working with that person and doing an orderly transition. And of course, I'm going to be flexible in my time frame. If that happens sooner, great. If it takes longer, I've told the Board that I'm willing to stay on slightly longer as well, just to be sure we get the right person. And until then, you can be sure that every single day, I'm going to be fully focused on execution. Just ask my team that, they'll tell you the same thing, and making sure that we continue the momentum that we have. And so hopefully, that helps a little bit, Lisa.

Thank you.

Yeah.

Our next question comes from Darrin Peller from Wolfe Research. Please go ahead. Your line is open.

Thanks, guys. Dan, I also want to reiterate what Lisa said. Sorry to see you go, but I can only concur that you are very young mid-60s person that we all try to be like. Let me just ask more on the expectations, if you don't mind. I mean -- and to be sure that you or Gabrielle. You guys touched on, I guess, embedding mid-single digits in the guide, or maybe better than that with your expectation to achieve better. How should we think about the cadence just considering how much higher the growth rate should be starting off in Q1 per your guidance? And then if you can give us any color on expectations around transaction revenue or OVAS and Braintree or core branded, anything else that could be provided would be great. Thanks guys.

Yeah. So Darrin, I want to separate out two things that I was afraid might be conflated, which aren't linked. The first one is, when we were looking at our cost structure to deliver an 18% EPS growth and to make sure that we fully staffed our high conviction growth areas. We wanted to look at what we thought would be a worst-case revenue assumption, because we don't want to be chasing our cost structure for, we were like, okay, what's the worst case going to happen. We could do mid-single digits FXN growth. That would mean that you've got Europe going into recession, U.S. going into recession, inflation stays high, discretionary spend remains muted. And that's what we built our cost structure around to give us and to give you high confidence that the 18% that we're guiding to is something that we can deliver in pretty much any economic scenario that we could imagine. So that's kind of assumption set number one was around our cost structure and the revenue around it. Number two though, is our revenue expectations. And we clearly are expecting something very different than the worst-case scenario that we have in place for our cost structure. We're assuming, as we think about the year ahead that we hold or slightly grow our share globally. As Gabs said in her remarks, there's a lot of moving parts that could happen here, and we want to be responsible in our guidance for revenues. And we saw last year that revenue can move from quarter-to-quarter, but we're pretty darn accurate when we guide in the quarter ahead. And so we put out a 9% revenue guide in Q1. And frankly, Darrin, Q1 is off to a very strong start for us. We're seeing widespread acceleration both in January and February. We're seeing it in branded checkout, which has stepped up quite nicely from Q4. We're seeing it in our Braintree services as well. Buy Now Pay Later continues to accelerate for us. So much stronger than we expected. We wouldn't say 9% if we didn't feel confident in that number, as well as the 24% at the midpoint on our EPS guide. There's still a lot of the year ahead of us, right? We're five-six weeks into the first quarter, but it's clearly off to a very strong start, and we will have more as we report out Q1 earnings, as we look into Q2 that may inform how we're thinking about the full year. But we just didn't want to get ahead of ourselves. And also, we want to be really responsible in the guidance that we give. Anything you would to add to that, Gabs?

Yeah, maybe just to add a little more detail on kind of the trajectory of the year. I'd say just we're focused on delivering a great year, and we think we've set ourselves up to do that. At the same time, to Dan's point, we're definitely not going to get ahead of ourselves so early on. I would point out some dynamics though, that we're growing over in 2023 relative to 2022, which will make the first half of the year probably stronger from a revenue growth standpoint than the back half. That really relates to an expectation of Braintree deceleration. Braintree has had exceptional growth, and we have a great ramp of merchant volumes coming on this year with new merchants as well as additional volumes we expect to get from existing merchants. At the same time, just given the exceptional growth we had last year, we do expect a little bit of decel into the back half. I'd also say, given the interest rate environment and how we're currently positioned in our book, we'd expect the incremental benefit from the higher interest rate environment to benefit us more in the first half than the back half as we lap some of those benefits from last year. And so that would create a little bit of decel as well. And then finally, there were some pricing changes that we made in 2022 that were predominantly front-half loaded. And so we start to lap those as well. So just in terms of the shape of the year, I would expect a little bit of decel as we move into the back half.

That's very helpful. Thanks Dan and Gabrielle.

Yeah, you bet, Darrin. Thank you.

Our next question comes from James Faucette from Morgan Stanley. Please go ahead. Your line is open.

Great. Thank you very much. Dan, I'll add my thanks, and looking forward to a last final year, man, so it should be fun. I wanted to ask quickly on the branded checkout point. It sounds like you feel like you're kind of growing consistent with the market, if that's accurate and what you're seeing kind of early in the year? And perhaps more importantly, what are you thinking about in terms of when we can start to see some of the improvements impact, maybe share, but more importantly, engagement, et cetera, with the customer base. Thanks.

Yeah. I think that's an incredibly question. You saw probably in our investor deck, James, that our branded checkout volumes grew by 5% for the year, that's lapping 23% in 2021 and 38% in 2020. And that really is following the shape of the e-commerce. Part of the reason why there's questions around this and some mix commentary is that there's no perfect data source for market share. Share obviously, for us, it varies by country, by channel, whether it's mobile, mobile web, desktop and by merchant size, whether you look at large enterprise or small or midsize. And we look at everything that we possibly can and look at e-commerce growth around the world. And we look at 2022 -- 2022 e-commerce growth is probably mid-single digits, maybe lower than that across the world. By the way, that 5% was roughly the same in the U.S. as well. And so overall, we feel like we, at a minimum, held share to global trends. And I think there's some interesting commentary out there. But one of the things that is important to realize is digital wallets, in general, including PayPal, have been growing share overall. We grew share over 100 basis points during the pandemic. We've held it since there, but we continue to take share from manual card entry. Manual card entry say, like three years ago, it's 50% of the market. It's still about 30% of the market today. And there's a lot of share to be taken from that by digital wallets. In addition, a lot of the Buy Now, Pay Later wallets are -- their growth is starting to slow quite meaningfully as they move from growth as their number one objective to making money as their number one objective. And if you look at our…

That's great, Dan. Thank you.

Yeah, you bet.

Our next question comes from Tien-Tsin Huang from JPMorgan. Please go ahead. Your line is open.

Hey, thanks. I'm just curious if your investment in the R&D budget at PayPal has changed given some of the incremental cost savings, the bigger margin expansion. And I think, because we're really focused on the product road map and you got checkout, and it sounds like you're extending unbranded to the SME space, which makes some sense. So just love your latest thinking on balancing the cost savings with investments in product development.

Yeah. The first thing we do is ensure that we have all the investments we need to drive our road map. Again, we've honed our focus, sharpened our focus to make sure that we are investing and executing against our high conviction growth areas. And we're doing that since I mean, we are -- the team is making a ton of progress. I mean whether you look at what we've done in Braintree to harden the infrastructure, to create additional capabilities over the holiday season during the Cyber 5, we were five 9s [ph] and above in terms of availability. And you see that in terms of kind of the new sales, people moving more volume over to us. Braintree's auth rates, something like 390 basis points better than the competitive set. And so a ton of investment there and making a lot of progress. We've put a lot of investment against PPCP, which is our unbranded, small and midsized and channel partner play. And by the way, it's not just unbranded. It has our most advanced checkout flows in it, and we're going to probably take about 20% of our TPV through PPCP with integrations through Shopify, Adobe, TikTok, and move that to our most advanced checkout flows. And so that, we've invested in, and obviously, the rest of checkout. Like things like our SDK and APIs, two years ago, we were not really playing in that developer market. And today, if you go to Postman, which is like one of the largest sites that developers go to, to look at SDKs and APIs, we're now one of the top 10 requested SDKs and APIs based on both popularity and quality of that. We actually are number seven, number eight at Stripe. And so we have really gone from…

Got it. Thank you, Dan. And my compliments to you on the succession news as well.

Thank you.

Our next question comes from Jason Kupferberg from Bank of America. Please go ahead. Your line is open.

Thank you, Dan, congratulations. I wanted to do a follow-up on engagement. I know it's kind of been a recurring theme on the call. The growth in the payment transactions per active stayed elevated this quarter, 13%. Hoping you can delve into some of the specific drivers, the primary drivers of that and whether you feel it's sustainable in 2023? Thanks.

Yeah. So I think it's one of the things that we talked about, which is kind of a new piece of information for us is that nearly half of our base is a monthly active user and about 190 million or so. Those monthly active users, without Braintree in the number, because a lot of people are Braintree in that number, without Braintree in the number, use us 6 to 7 times a month. So they're transacting 72 to 90 times a year with us. That is up 40% from 2019. It's up 5% year-over-year. And that -- those characteristics of those MAUs is they have an extremely low churn rate. They are extremely engaged, highly satisfied with high and growing ARPU. Our biggest opportunity is to move our active accounts into our MAUs. We generate an enormous amount of organic active accounts. Enormous. Every single year, they come on to our platform. And they come on to our platform because we're so ubiquitous. We have coverage across 35 million merchant accounts, 80% of the top 1,500 accounts in the U.S. and Europe. And so they come. They make a transaction, or they get a P2P request, and they -- and they do kind of a one and done. And the way that I think about, probably the best analogy between MAUs, monthly active users, and the rest of our accounts is how the wireless industry thinks about postpaid and prepaid. Our MAUs are our postpaid accounts. Again, they're very satisfied. They have high ARPU, very, very low churn. And they're engaged in our mobile app. They're ready to try new services as we put them on. When we put on a new service, when they try on new service, their ARPU goes up by 25%. And so we are…

Understood. Thank you.

Yeah. You're welcome.

Our next question comes from Timothy Chiodo from Credit Suisse. Please go ahead. Your line is open.

Thanks a lot. I want to drill down a little bit on the core PayPal modern checkout migration progress. The numbers you gave were great to 20 going to one third, going to 50% for gold this year with the top 100. Two follow-ups on that. The first is, could you talk a little bit about the conversion uplift that you see when the new modern checkout experience is integrated there, and that would help us to kind of quantify what one third going to 50 in could mean? And the second one is, can you talk a little bit about and recap the actions that you're taking to help incentivize that? Clearly, it's a win-win for both you and the client. But what are some of the either financial or people resources that you could allocate to help speed things up?

It's a great set of questions. So when we put in the latest checkout experiences, it's anywhere from a low of a 3% lift in conversion up to a 10% of lift in conversion. So that's actually pretty meaningful in terms of what we see. We also see in our latest checkout integrations that we're growing our share there across mobile, across mobile web and desktop. And with the top 100, it's an account-by-account play. They're quite sophisticated payments teams. They have a lot of legacy integration. And clearly, the increases in conversion matter a lot and also the ability to seamlessly implement our Buy Now, Pay Later, which has the highest loss rates in the industry, lowest loss rates and a great value proposition is another reason for those top 100 plus to move forward on their integrations. And we're making good solid progress, as I mentioned, every single quarter there. Mobile SDK, same thing. Conversion rates up to 10%. We are now in developer portals. Our mobile SDK is a merchant requirement going forward, so no new merchant can come on without being in our most advanced checkout flows. In our mobile SDK, Buy Now, Pay Later will also be included in that in the second half, which is also something that our merchants are really asking for in terms of seamless integration of that. And then PPCP, we have Braintree, and that's -- when somebody signs up for Braintree, they immediately go on to our latest checkout experiences. I already talked about auth rates going up 390 basis points on average when that happens. But PPCP, that's a big opportunity for us. We're going into a $750 billion addressable market that we've never been able to go in before. We're going in both with our sales force direct into midsized customers and for that longer tail through channel partners. As I mentioned, we're already working with Shopify on PPCP. In France, we are beginning integrations with merchants like Adobe and TikTok. And we feel that those channel partners, when we upgrade them to PPCP, they almost instantaneously will upgrade that long tail. And that's, call it, 20% of our TPV out there. So we've got quite a bit of plans to address each part of the market with, I think, pretty significant detail around them and pretty significant movement as well.

Excellent. And thank you for giving the numbers on the conversion. I appreciate that.

Yeah, you bet, of course. Okay. I think we have time for one more question.

Our next question will come from David Togut from Evercore ISI. Please go ahead. Your line is open.

Thank you. Looking at your plans to reduce transaction margin pressure from Braintree over time by expanding it to more profitable segments, including downmarket to SMBs and PPCP, which you've talked about, unbranded full-stack processing with channel partners. Is there anything in your 2023 guidance that contemplates reduced transaction margin pressure from Braintree? And if not, when would you expect some of these initiatives to alleviate that margin pressure?

I'll start off and maybe Gab can follow on that. And thank you for the question. So there are a number of high-margin businesses that we add on to Braintree. Braintree itself is a lower-margin business. And by the way, we're serving the highest end of the customers that always have a lower margin structure for us. But a lot of the higher-margin businesses that we had into PayPal or things like risk-as-a-service, we'll be introducing FX-as-a-service, payouts is a higher margin. We're expanding Braintree into both Europe and South America, which are higher margin for us. So we expect to see unbranded, as a whole, that margin structure move up. And then as we go into the small and midsized merchant with unbranded, that obviously is a much higher margin. PPCP, is more of a call it sort of a mass customization platform. Braintree really is a customized platform because each one of those merchants have unique needs that we need to customize for. Gab, is there anything else that you'd add?

Yeah. I mean, to Dan's point, the geo mix, the merchant mix and the value-added services layer all are margin-enhancing to bring to overall. I'd also say we've talked about investing in the platform. And a lot of those investments that we're making are really to allow us scale that business more efficiently over time. So each incremental piece of volume will actually cost us less to profit as a process. We're also doing a lot on our own side in terms of how we think about processing as efficiently as possible and doing everything we can to make sure that, over time, we're going to scale those volumes as efficiently as we can. And so I would think about it as a multiyear dynamic in terms of how we think about the progression of Braintree again, sort of as we move more out of the U.S. down into a slightly smaller merchant set overall. In addition, as we layer on the value-added services and the margin profile really does come through.

Thanks for that. Congratulations, Dan.

Thank you so much. Okay. Well, I think we're a little over the top of the hour. I just want to thank everybody for your great questions. Thank you for all the e-mails that you're sending me already. Again, we're going to work quite closely. We're focused on executing against our plan, and look forward to speaking to all of you again soon. Thanks again for your time. Take care. Bye-bye.

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