Good afternoon. My name is Sarah, 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 2023. [Operator Instructions]. I would now like to introduce your host for today's call, Ryan Wallace, Head of Investor Relations. Please go ahead.

Good afternoon, and thank you for joining PayPal's Fourth Quarter 2023 Earnings Conference Call. Joining me today is Alex Chriss, our President and CEO; and Jamie Miller, CFO. We're providing a slide presentation to accompany our commentary. This conference call is also being webcast. 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. Our remarks today will include forward-looking statements that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. 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. All information in this presentation is as of today's date, we expressly disclaim any obligation to update this information. And with that, let me turn the call over to Alex.

Thank you, Ryan, and thank you to everyone for joining us this afternoon. It's been a productive first 4 months. I'm pleased with what we've been able to accomplish in such a short period of time while delivering the solid financial results we will discuss today. More importantly, I'm excited about the foundation we're setting and the velocity at which we're executing as we enter 2024. Today, I'd like to walk you through the changes we've made to the structure of our company, including several key additions to our leadership team, give a clear road map for how we will be executing going forward and share our strategic priorities for 2024. Jamie will take you through the fourth quarter and full year results in greater detail, but the headline is that we delivered a solid quarter during the most important shopping season for our customers. In Q4, we delivered 9% revenue growth on $410 billion in total payment volume. Transaction margin dollar performance was better than expected in the fourth quarter, and we continued strong expense discipline, reducing non-transaction-related expenses by 9% year-over-year. Taken together with $600 million in share repurchases in the quarter, our non-GAAP earnings per share increased 19% year-over-year. While these are solid results, we know there is still much room for improvement, and we're committed to making the necessary changes to our business and how we invest and operate to get it right. One of the key changes I talked about in our last earnings call was ensuring we have an outstanding leadership team in place. It's important to me that we have a leadership team with a broad diversity of experience, deep operational rigor and leaders with track records of success. I'm thrilled with the talent that we've assembled in the last few months. With…

Thanks, Alex. Good afternoon. First, let me say that I'm very excited to have joined PayPal. Our new leadership team is laser-focused on our customers, and I am incredibly energized to see our team come together to deliver PayPal's full potential. Before I discuss our financial results, you'll notice several things different in our materials today. First, we've redesigned our press release in a more standardized tabular format designed to allow ease of use and better consumption of information. We have also included additional supplemental metrics in our investor presentation intended to provide greater transparency into our business. We will continue to evaluate these and other changes over time. I'll start with a summary of our financial performance. In the fourth quarter, we reported 9% revenue growth on a spot and currency-neutral basis. For the full year, revenue grew 8% at spot and 9% on a currency-neutral basis. Transaction margin dollars were flat year-over-year in the fourth quarter and declined 1% for the full year. Non-GAAP earnings per share were $1.48 in the quarter, representing 19% year-over-year growth. Higher earnings per share in the quarter were driven by ongoing expense discipline and better-than-expected transaction margin dollars, which benefited from branded checkout, Braintree and interest on customer balances. We ended the full year with $5.10 of non-GAAP earnings per share, up 24%. Our full year results benefited from lower operating expenses, the higher interest rate environment and the impact of share buybacks. Now I'll walk you through some key operating metrics that support these results. We ended the year with 426 million active accounts and 224 million monthly active accounts. Throughout last year, we indicated that we expected ongoing churn of unengaged accounts in less developed markets, predominantly in Latin America and the Asia Pacific region. This was the primary driver…

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

Appreciate all the details here. I wanted to dig in on the outlook for transaction margin dollars to be flat. Can you just give us a little bit more, maybe high-level thoughts on the key drivers there, and maybe some of the levers that are available to you to get the transaction margin dollar growth to accelerate beyond that in 2024. I get a lot of questions about it, obviously. So I'd love to hear the puts and takes that you would underline for us.

First, let me start just with recognizing how much change there is that we've gone through. You heard it in my prepared remarks, but we essentially have a brand-new executive leadership team. We've accelerated the pace of innovation. The first-look experience you saw a couple of weeks ago, really was innovation that could have taken months or years that I'm very proud of the team, accelerating and getting done in 60 days. And we are at a point now where even our mindset shift, this focus on profitable growth is something that's new for the organization, and we are grinding away every day. And so with that said, let me unpack the components of transaction margin growth. The way I think about it is there's 3 levers there. The first is really around the branded experience. This is a proven experience for us. It's one that we -- in some of the innovations that we put out, both for merchants that improve their experience as well as consumers with a new app that allows them to get through the experience better. That is a significant lever for us. And one that, to be honest, we've under-invested in. And if I take just specifically the mobile experience for our consumers, has been underwhelming. And it's something that with the new innovations we just rolled out, I expect for us to be able to continue to see improvement there. The second is around the unbranded processing. This is an area that we have invested significantly in. With Fastlane now, we have really, I believe, one of the best products in the market for our merchants. We're seeing the highest conversion rates out there, and it's something that our merchants are looking for and looking to adopt. We also are looking to move into new areas for growth that have higher margin opportunities such as international and small business. And it allows us to actually have different conversations with our customers and really price to value the product. And the third is really what I'd consider a bucket of value-added services. This is a combination of improving our flows with our consumers to ensure that we're attaching the products that we need to whether it's Buy Now, Pay Later or our Cashback Mastercard, these are flows that we've not optimized and were underperforming when it comes to really attach. And then some of the new offerings that we rolled out, you saw our advanced offerings platform as well as smart receipts. These are all ways that we can monetize and improve the connection between our merchants and consumers. So that's different ways that I think about the components.

Yes. And Tien-Tsin, I'll jump in on the '24 specific puts and takes on transaction margin dollars. And first, you heard us both say earlier that on the initiatives that Alex has been talking about, we have included limited impact on that in our guidance. But if I pull back, really, we're viewing largely steady trends to what you saw last year, maybe in slightly different proportions. So Branded Checkout being a healthy contributor to growth, improvement in our PSP margin profile. We expect some benefit in our interest income on customer balances, but really, that should be much smaller than what we saw last year. And we do expect some headwinds to our credit revenue, which as I think, as I mentioned in the script on the call, with loss rate normalization happening to pre-pandemic levels and that trend is starting to work. We'll just see lower rev share from our partnerships in that space. And then offsetting that, we really see also that some of our smaller product lines in the aggregate will be a drag on TM. This will be to a much lower extent than last year. But in areas where we do platform consolidation, there are times we deprecate products to really push customers to new platforms. Good example of that is PPCP, we do see some drop-off. And we've got a few other products that, as you know, we have not invested as heavily as perhaps we should have in the last couple of years. And as we work our way through that, there'll be some offset there.

Your next question comes from the line of Jason Kupferberg with Bank of America.

I wanted to hone in on branded TPV growth a bit. I think it slowed by 1 point in the fourth quarter to 5%. Was hoping you could maybe take us through some of the monthly intra-quarter trends there, any market share observations you might have had from holiday season. And then just some general comments on what you're planning for on branded TPV growth in the first quarter and full year '24?

Thanks, Jason. Let me set the context and I'll see if Jamie wants to pile on. Our branded checkout performance was 6% for the year. It's been pretty consistent. And for what we're looking going into next year, we're expecting it to be consistent as well. And as we've talked about, that doesn't include or includes minimal aspects of the new innovations that we put out there. Let me talk about just some of the levers when it comes to the new innovations or ways that I think about accelerating branded checkout because this obviously is going to be a big focus for the organization. The first is we really have to improve the value proposition for our consumers. This is why you see us leaning into rewards, ensuring that we've got an improved experience that reduces latency and really leaning in on mobile as well so that our consumers have a better branded checkout experience. Second, the acceleration of Fastlane when it comes to our merchants not only improves the unbranded opportunity where we can see 70% of the customers that come through the Fastlane experience, but allows us to have a second engagement with our customers and bring them back into a branded experience at a later date, show them all the different reasons why they should be using PayPal or getting a reward back for a purchase that they made. So I think these, again, are just a couple of examples of innovations that we're leaning into now that allow us to really focus on that branded experience.

Your next question comes from the line of Darrin Peller with Wolfe Research.

Alex, Jamie, just to follow up a bit on some of this train of thought. I mean I know you're mentioning you're not incorporating these new initiatives in your transaction profit growth thoughts for this year. But when we think about some of these -- I mean most of these to your point, Alex, are going to be beneficial to gross profit growth. And so I guess we'd love to hear a little bit more around what you'd measure us, how you would measure success, whether it's the PPCP initiatives or unbranded as well as the branded checkout experience, what KPI should we look for? And I guess a little bit more on timing. If not this year, when do you want investors to expect some traction in actual gross profit re-acceleration?

Yes. Well, thank you, Darrin. And look, let me be clear. We are not putting in the expectations into the guidance until we see execution. We just think it's prudent for us to put points on the board before we put it into the guidance. That said, the teams are grinding on this every single day. We are having conversations with our merchants and introducing them. As I mentioned on the call, the reaction has been quite encouraging from the innovations. There is demand in the market, and we are starting right now. And I will tell you, the conversations that we're having now that we're focused on both innovations that are driving demand as well as improvements for these merchants are different than we've had in the past. So I just want you to know, we are working now on this, and we will update you as we start to see points on the board and adjust our guidance as needed. Secondly, back to your first question around how I think about this. Look, the thing I want you to take away from all of this innovation that we rolled out in first look is this is really changing the way we engage with our customers and our merchants. We are now creating experiences across the entire customer life cycle, not just at checkout. So we are driving not only a checkout improvement, the 50% improvement in latency being able to improve Fastlane, but now we're starting to see a customer value proposition with CashPass, giving rewards back to our customers so that they have a reason to choose PayPal at every purchase. We're improving the onboarding and the reboarding as they come back into the app and start to now attach our Mastercard or debit experiences or Buy Now, Pay Later. We're improving the post-purchase experience where we now have smart receipts or package tracking so that we can improve the engagement between our merchants and our consumers, and we now have an ongoing active use engagement. And then we're leaning into demand generation and actually solving the biggest challenge that our merchants have, which is finding new customers as we think about our Advanced Offers Platform or creating shopper insights so that our merchants can start to engage and personalize their experience through our data and through the AI that we can lean through. So the way I think about it is we are looking at the entire end-to-end experience, and we'll measure our success through the metrics that you have. It's going to turn into what does transaction margin look like? What are -- what does active use look like from our ongoing users? So that's how we think about it.

Your next question comes from the line of Michael Ng with Goldman Sachs.

I wanted to ask a question about PayPal's commitment to durable, high-quality profitable growth. How does that impact the pricing strategy in Braintree? What unprofitable is the system products will PayPal deemphasize? And how does that tie into your 2024 non-transaction OpEx outlook of flat?

Great. Thanks, Mike. Let me talk about Braintree and then I'll have Jamie talk about potentially some of the other products and businesses. So let me take you back. Braintree, if you go back a few years ago, was really trying to establish itself in the market. It hasn't delivered at scale, and there were gaps in the product. We've invested heavily in the product and have really focused on some of the largest U.S. enterprise customers, which now have proven the scale while we've gotten the product to parity. Then you look at what we just rolled out with innovations like Fastlane, I think we've now leapfrogged the competition. So what does that allow us to do? It allows us to be the one-stop shop for merchants, it allows us to provide a best-in-class experience on auth rates and give them the ability to have not only the best processing and unbranded, but also package that with PayPal and with all the other ways that customers want to pay, including Buy Now, Pay Later. We now are shifting towards being able to have a price-to-value conversation with our merchants and being able to really start to think about how will we ramp up go to market for not only Braintree, but also PPCP. We also are now moving into markets that have higher margins. So international and small business with both Braintree and PPCP allow us to now, again, price to value and have different conversations. So that is how we think about it. We're not focused on unprofitable growth when it comes to Braintree. We think we now have the product in market to be able to compete effectively and win.

Yes. And Mike, on the other part of your question, I guess what I'd say is we are just doing too many things. And our biggest opportunity is that we have to make decisions to stop things and to really focus and that gets into market competitiveness. It gets into pricing, it gets into really leaning into market opportunity and really stopping doing things that prevent us from doing the right thing in those spaces. So we are knee deep in that right now. And so when we talk about a year of transformation and execution, that's exactly what we're talking about.

Your next question comes from the line of Ramsey El-Assal with Barclays.

I wanted to ask about how much leeway or opportunity you have to continue kind of taking out expenses while simultaneously executing on the growth strategy? How are you thinking about striking that balance sort of cost control versus growth? And I guess, how confident are you that you have room to do both?

Yes, I would say that is definitely an and, not an or. And that's exactly what we're doing with the workforce announcements we made a week ago and really taking that and putting that back into product into engineering and into marketing, we have got to invest deeply to grow this place. And it's really important for us to just set the company up for the future. And to do that, the innovation muscle, the commercial muscle means that rightsizing our expense levels isn't going to be something that we -- that is a won and done. We know we have significant opportunity to continue to be more efficient, be that through automation, be that through driving deeper productivity. And as we harvest that, that just gives us more levers to invest that are -- the right things for our profile as we go forward.

Your next question comes from the line of James Faucette with Morgan Stanley.

James, a quick clarification and I have a question for Alex. But you said that starting from the first quarter, you'll be including stock-based compensation in your non-GAAP rather than excluding it. So does that mean that if we just imagine that we fast forward a few months, that the non-GAAP earnings would be reduced by roughly that $1.8 billion. Just looking for a little bit of clarification there. And then, Alex, you made an interesting comment in terms of like feeling things are too big organizationally. But I'm wondering how you're feeling about the tech stack right now and the level of integration and where we're at from that perspective in terms of your ability to drive the kinds of improvements and perhaps add functionality to improve the customer experience.

Yes, James, on your first question, you have it exactly right. So beginning in the first quarter, we'll start including stock-based compensation expense in our non-GAAP and closer to that time, we'll do the look back where we'll provide the retrospective data so that we've got everything on a comparable basis. But yes, you're thinking about that right.

And then, James, on your question around the tech stack. Look, I'll be transparent. The company has gone through significant growth over the last few years and a lot of acquisitions. We have not invested enough in creating a single platform. That again slows us down when it comes to innovation, and it slows us down when it comes to being able to leverage the data across the ecosystem. We are investing heavily in that now and starting to see real improvement. I mentioned a couple of things on the call, but really being able to put out a reporting system that now sees across the entire ecosystem, being able to see a single view of the customer so that now we can provide innovations to customers but also actually be able to cross-sell and be able to say, "hey, this is a customer that has this risk profile and should be in these 2 or 3 different products", is a huge win for us as we start to consolidate. It also just accelerates our engineering velocity, being able to have a services-based engineering team that can build once and deploy across the entire ecosystem is the direction that we're heading in. And so you started to see that. We -- even the innovations that we just put out over the last couple of weeks weren't really possible without us being investing heavily in the platform. But I also would say we have a ways to go. And so it's a primary focus for me and the organization and will drive velocity and efficiency.

Your next question comes from the line of David Togut with Evercore ISI.

A major regulatory change in payments just went through in Europe with Apple opening up its iOS and NFC chip for physical point-of-sale payments. What opportunity does this present to PayPal?

Yes. Thanks for the question, David. We are tracking this closely. Apple is a great partner of ours. And our customers that love PayPal on the online e-commerce side are demanding -- being able to have an omnichannel and off-line solution as well. So we'll be working closely on this. And when it is available, we will be ready to be able to deliver for our customers, both online and off-line.

Your next question comes from the line of Sanjay Sakhrani with KBW.

Alex, one more on the initiatives. I'm just trying to think through the prioritization of these additional investments you'll be making. Of those 6 initiatives, which do you think will sort of yield the returns quickest? And maybe a little bit more on timing of them, maybe not 2024, but how early? And then, Jamie, just a quick question on the interest rates. I think you mentioned, you don't expect it to have a big impact or as big an impact in 2024, but is there an explicit rate forecast you have? Like do you have lower rates in 2024?

So all of the innovations are incredibly exciting for us, but let me be specific on your question. The two that I am closely watching and our teams are executing on immediately is really a focus on the branded experience. This is both for the combination of merchants and consumers, easing that experience for a customer to choose PayPal, have a reward that comes back to them, ensure that they're able to get through the experience with velocity and check out every time with PayPal, is a huge focus for us, and that's where we are driving a new app experience. And again, all of these innovations will be coming out over the next couple of weeks to months. Then we have to drive adoption. So that is having conversations with merchants, ensuring that they're upgrading to our latest innovations, that's ensuring that we make it easy for them as well. So that's why you've seen us launch a new developer portal. We're creating no-code, low-code experiences so developers can take the demand that they've shown because they have a best-in-class experience now and get it into market. So step one is I'm very focused on that branded experience. The second one is on the unbranded side, which is ensuring that Fastlane gets rolled out. That, to me, starts to create an interesting network effect of us being able to have not only a branded experience, but for them, those consumers that pass a branded experience, whether it's ours or anyone else's and want to just go through a guest checkout flow, we're able to identify them, we're able to help them and our merchants complete the transaction. And then we're able to have a follow-up conversation with that customer as well because they've gone through our Fastlane experience. So those 2 to me, we need to get rolled out, we need to get points on the board and show that it's driving, but driving outcomes, but that is where I'm most focused on right now.

Yes. And Sanjay, on the interest rate question, we do expect that the interest income on customer balances will have a strong growth this year, but really it will be more first half-focused. The second half, we do expect a series of rate cuts that is assumed in our macroeconomic scenario that underpins our guide, and that's why the second half should be much lighter on that front.

That is all the time we have for questions. I will turn it to Alex Chriss for closing remarks.

Fantastic. Thank you, Sarah, and thank you all for joining us today. I want to reemphasize that 2024 is going to be a transition year focused on execution to position our business for long-term success. I'm excited with where we're positioned in the market, and I know that there is a real opportunity to grow our role in commerce. We're driving the foundational and transformative changes that will set the company up for the future. Thank you.

Thank you. This concludes today's conference call. We thank you for joining. You may now disconnect your lines.