Yahoo Finance PayPal Holdings, Inc. (NASDAQ:PYPL) Q1 2024 Earnings Call Transcript
PayPal Holdings, Inc. (NASDAQ:PYPL) Q1 2024 Earnings Call Transcript April 30, 2024
PayPal Holdings, Inc. misses on earnings expectations. Reported EPS is $0.828 EPS, expectations were $1.2. PayPal Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. 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 first quarter 2024. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star, one again. I would now like to introduce your host for today’s call, Ryan Wallace, Head of Investor Relations. Please go ahead.
Ryan Wallace: Good morning. Thank you for joining PayPal’s first quarter 2024 earnings conference call. Joining me today is Alex Chriss, our President and CEO, and Jamie Miller, our 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 website. All information in this presentation is of as today’s date. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Alex.
Alex Chriss: Thank you Ryan, and thank to you everyone for joining us this morning. This quarter, we delivered a solid set of results and the year is off to a good start. Our new leadership team is operating well together and we are really starting to get our arms around the business. You will see in our numbers and the read-through that our efforts are beginning to make a difference. We also see substantial need for continued retooling of the company, how we work with our customers and how we execute. We are encouraged by the progress to date but remain realistic that we still have a lot of work to do and a lot of opportunity to drive profitable growth ahead of us. What we said at the start of the year still holds: this is a transition year where we are focused on execution and making critical choices that will set the business up for long term success.
We have a plan that will return this company to where it needs to be and remain focused on execution to get there. We see clear opportunities for operational improvements across our large enterprise, small business and consumer businesses, including Venmo, and in driving more efficiency across the organization, but it will take time to prudently drive a meaningful and sustainable transformation. In the first quarter, we delivered 10% revenue growth on a currency-neutral basis on $404 billion in total payment volume. Transaction margin dollar performance grew 4%, which was better than expected thanks in part to actions we took. Our non-GAAP earnings per share increased 27% year-over-year. Our results are stronger than we expected earlier in the year, and they require some unpacking to put them in the context of the full year.
What I want you to understand is what we are focused on, namely making surgical changes to the way we are running the company. Some of these will have immediate impact and others will take longer to bear fruit. As such, we need to maintain flexibility throughout this year to make important decisions to drive the long term growth of the business. This includes decisions about where we prioritize and reinvest, how we go to market, and actions that can be taken to sharpen our value proposition for consumers and merchants. With that in mind, we do now expect full year EPS to grow mid to high single digits, which is partially driven by our better than expected start to the year. Jamie will take you through our Q1 results, contours of the year, and updated guidance in just a few moments.
Let me first spend some time providing an update on our execution against our customers strategies and investment priorities and detail progress on our efforts to operate more efficiently. Turning to our three customer groups, we continue to make steady progress on strengthening our strategic positioning and product portfolio. For large enterprises, we continue to focus on accelerating growth in branded checkout and driving the profitability of our business. We are executing to get upgrades to our core branded checkout experiences to the market. We continue to make good progress in our early testing of Fast Lane by PayPal with a focused group of merchants, and data from those alpha merchants show that returning Fast Lane users are converting at nearly 80%.
We are just getting started and already creating a low double-digit lift in guest checkout conversion for participating merchants. The results so far are encouraging as incremental conversion improves our merchants’ growth and profits. Demand for this product is promising and we expect to make Fast Lane generally available in the U.S. in the second half of the year. Additionally, we are continuing to focus on making it even easier to pay with PayPal by removing friction from the checkout process. In the coming months, we will continue to move to more password-less authentication processes like biometrics and launch a redesigned mobile checkout experience which we will believe will result in higher conversion rates. We’ve begun active discussions with our largest enterprise customers to focus on commercial outcomes that reflect the true value of our payments processing platform and the services we provide.
As we speak, many of our top merchants are gathered in California for our annual Commerce 360 customer conference, where our teams will go deep on the innovations we plan to bring to market this year and the value they can provide. We are also in the early stages of evaluating the overall dynamics and pipeline of our top 10,000 merchant accounts. As we evaluate our programs, we see clear opportunities to price to value not only with our PSP processing but especially with our value-added services that we already provide, services such as payouts, fraud prevention and processing orchestration. This process will take time, but we have a focused game plan and we are already having fruitful conversations that are helping merchants understand the additional value they can unlock by strengthening their relationship with us, including through our value-added services.
For example, Draft Kings recently went live with our fraud management solution, Fraud Protection Advanced, which combines our intelligence with advanced machine learning and analytics to help businesses protect themselves from ever-evolving fraud threats. This is an example of a best-in-class offering and a key differentiator against our competitors. It also showcases our ability to leverage AI to drive customer benefit and is an area where we can price to the value we provide. For small and medium sized businesses, the launch of our PayPal Complete Payments platform has been gaining momentum over the past couple of quarters. We’ve made good progress in expanding PPCP’s geographic reach to now more than 34 countries. In the first quarter, we expanded the platform to Canada, the U.K., and more than 20 European markets.
We also added new features to PPCP in Australia, Germany and the U.S. in recent months. Additionally, we are seeing positive response to our new low and no-code tools for merchants and developers to integrate PPCP, which we launched in March. As of the end of the first quarter, approximately 7% of our SMB volume is already on PayPal Complete Payments, with our team focused on distribution through partners that can accelerate adoption to the largest number of customers. Our efforts here are important because PPCP ensures merchants have our latest branded checkout integration, which will include Fast Lane, so that consumers have a best-in-class checkout experience wherever they shop, and merchants will benefit from higher conversion. On average, merchants who adopt PPCP use approximately four PayPal products, which deepens the relationships and reduces churn.
This translates to an average revenue per account for a PPCP full stack merchant that is nearly two times that of an SMB on a legacy integration. As you all know, I have a deep passion for helping small businesses succeed. Frankly, this is an area where PayPal took its eye off the ball. Over the years, we’ve deprecated products and made pricing decisions that negatively affected our market positioning. Despite that, we still have the largest population of SMBs anywhere, who are using our products and eager for us to do more for them. This is an area where we are investing to correct our course. We are here to serve and win the small business market. On the consumer front, the PayPal app is at the center of our strategy to leverage the power of our data to create more value for our customers and unlock new sources of revenue and margin expansion opportunities.
In the first quarter, we revamped the PayPal app with a new look and feel and introduced enhancements to our rewards program to enable shoppers to get the most out of their money while increasing conversion for merchants. Additionally, we began testing a comprehensive rewards-focused lifecycle marketing program. When tested with approximately 20% of our PayPal app users, we saw it drive a nearly 7% increase in weekly app log-ins and 4% increase in transaction margin per user. Introducing consumers to new products, like our debit card that can help maximize the value they receive from PayPal, is a major focus. The enhancements our team made to our on-boarding flow enabled a 38% increase in debit card first time users during the first quarter.
On average, a customer who adopts the PayPal debit card is more engaged, generating a 2x lift to transaction activity and a nearly 20% increase to average revenue per account compared to users who primarily use checkout. Approximately 4% of our active PayPal consumer accounts in the U.S. have a debit card, so while we have a lot more to do, this work is meaningful to the economics of our business. In the quarter, we on-boarded BigCommerce and WooCommerce to our package tracking solution. In the 12 months since launch, we’ve had approximately 7 million active accounts use package tracking. This is a key pillar in our post-purchase strategy. Package tracking not only allows consumers to track their shipments within the PayPal app, but will also enable us to make personalized purchase recommendations and present relevant offers through the app and our AI-powered smart receipts.
We believe these innovations will drive engagement with the PayPal app and incentivize future branded checkout activity. For Venmo, we are focused on giving our customers more ways to immediately use their Venmo debit card in person with Apple Pay and Google Pay, which you will see in the market in the coming months. In the first quarter, we saw a 21% year-over-year increase in consumers using our Venmo debit card. Remember, Venmo debit cardholders are among the most engaged accounts and on average drive six times the incremental revenue than that of a P2P-only customer. Simultaneously, we are making it easier for consumers to use their Venmo balance when making payments or sending money to friends. In the first quarter, balance-funded P2P senders grew by 17%, which contributed to our overall transaction margin dollar growth in the quarter.
Our leadership team is continuing to go through our business from top to bottom, understanding where we can operate more efficiently and invest in the innovation that will offer the greatest impact for our customers and PayPal. This is a mindset shift we are driving throughout the entire organization. Investing for durable growth backed by a clear payback path and time horizon remains a top priority. Investing in branded checkout and better serving our small business customers are two focus areas you heard me talk about today. We are also actively evaluating and greenlighting new investments to accelerate future growth that support and strengthen our strategic priorities. A good example of this is our remittance business, Xoom, which has stagnated while similar services have gained share.
This business has been on a negative revenue trajectory due to a lack of prioritization and clarity about its value proposition. That is now changing. We are executing the right product refinements bundled with an enhanced and more customizable pricing model intended to promote growth over the long run. We plan to reduce the cost of cross-border transfers and provide consumers the option to eliminate transaction fees altogether when funding with our PY USD Stablecoin. We are activating those plans and we expect to see tangible progress throughout 2024 and beyond. The key takeaway here is that we are in the process of assessing a handful of areas of investment where we believe there are compelling unit economics and market upside. These may mean that we will make decisions to invest in 2024 where we believe these investments will ultimately contribute to the sustainable and profitable growth of the company.
At the same time, we must maintain our focus. We are continuing to evaluate the markets we operate in and the products we offer. Where we see areas to improve focus and prioritization, we will take action and update you accordingly. Finally, a few words on our continued efforts to drive operational efficiency and productivity across PayPal. We are instilling a rigorous cost benefit discipline throughout the company and leaving no stone unturned when it comes to reducing unproductive costs. We are also investing in automation that will help answer our customers’ frequently asked questions, simplify the integration process for our merchants, and enable our team to deploy solutions more quickly. As mentioned on the last earnings call, we have started reporting stock-based compensation as part of our non-GAAP metrics, beginning this quarter.
In addition to our annual incentive plan shifting to cash payment from stock, we have also better aligned our incentive programs to performance, particularly focusing on transaction margin and non-GAAP operating income growth. We will continue to focus on a pay-for-performance culture that appropriately aligns pay with results. I’ll conclude by thanking the PayPal team for continuing to innovate and serve our customers. While we are still in the early innings of driving a meaningful and comprehensive transformation of PayPal to deliver the sustainable and high quality growth we are aiming for, our first quarter results are an encouraging indication of what our teams’ renewed strategic focus and persistent execution can achieve. We will continue to update you on our execution throughout the year and be transparent about our progress.
I’m confident that we are taking the right steps to build long term profitable growth. With that, I’ll hand it over to Jamie to take you through our first quarter results.
Jamie Miller: Thanks Alex. Good morning everyone. We had a solid start to the year with first quarter results that were above our expectations. As Alex mentioned, it’s still early in the company’s transformation. We are getting deeper and understanding both our challenges and our opportunities with much greater clarity. Our goal for 2025 is to foundationally set up the business for the future by making key decisions and aligning our investment path for growth, and to do so, we are laser focused on strategic analysis and decision making, driving innovation back into the business and executing with excellence. While it will take time for our efforts to sustainably flow through results, the speed at which the team is moving is encouraging and we are making steady progress.
Let me start with a summary of our financial performance. As a reminder, our non-GAAP results now include the impact of stock-based compensation expense and related payroll taxes. This change is intended to enhance transparency, operating discipline, and align our performance measures to how many investors already evaluate our business. Now moving to our results, as Alex mentioned, in the first quarter revenue increased 9% at spot and 10% on a currency-neutral basis. Transaction margin dollars grew 4% year-over-year, improving in growth by more than 400 basis points from the fourth quarter. I’ll walk through the drivers of that growth in a few minutes and provide context on the shape of the year, including tailwinds that we expect to be more pronounced in the first half compared to the second half.
Under our updated non-GAAP methodology, earnings per share were $1.08, representing 27% year-over-year growth. Under the company’s prior non-GAAP methodology, which excluded the impact of stock-based compensation, earnings per share would have increased approximately 20% to $1.40, above our guidance for mid-single digit growth on a comparable basis. Relative to our outlook, higher earnings per share were driven by a combination of factors, including better than expected transaction margin dollars, ongoing expense discipline, the timing of certain investment in marketing spend, and interest income. Now I’ll walk through some key operating metrics that support those results. We ended the first quarter with 427 million total active accounts and 220 million monthly active accounts.
Total active accounts increased by nearly $2 million from the fourth quarter and included growth in PayPal merchant and consumer accounts in addition to other products. We were encouraged to see total active accounts inflect positively in the quarter and we remain focused on driving deeper relationships and more activity across our customer base. Monthly active accounts continued to show steady progress, up 2% year-over-year to 220 million, with contribution from both PayPal and Venmo. Transactions per active account, which is a trailing 12-month number, was 60 in the first quarter, up 13%. Excluding PSP processing, which is primarily Braintree, transactions per active account grew 7%. Moving to volume growth, in the first quarter TPV grew 14% on a spot and currency-neutral basis to $403.9 billion.
U.S. TPV grew 12%. International TPV grew 17% on a currency-neutral basis, primarily driven by strength in continental Europe and improvement in Asia. Global branded checkout growth accelerated to 7% on a currency-neutral basis from 5% in the fourth quarter. The first quarter included about a one point benefit from leap day, as well as ongoing benefits from the growth of global marketplaces. Within branded checkout, large enterprise and international markets were the biggest contributors to growth. We remain laser focused on driving deeper adoption of our best-in-class solutions with small and medium sized businesses and improving our mobile [indiscernible], which are critical particularly in markets like the U.S. and U.K. PSP processing volume grew 26% in the quarter driven by continued momentum from Braintree compared to 29% in the fourth quarter.
Conversations with merchants have been encouraging as we shift our focus to a more disciplined go-to-market and renewal process that emphasizes a focus on profitable growth. Merchants recognize the product and performance improvements we have already started to make and are excited about the pipeline of upcoming innovation. As I noted earlier, revenue in the first quarter increased 9% at spot and 10% on a currency-neutral basis to $7.7 billion. Transaction revenue grew 11% on a spot basis to $7 billion, driven by Braintree and branded checkout. Other value-added services revenue in the quarter declined 2% on a spot basis to $665 million. Within other value-added services, interest on customer balances continued to be a meaningful tailwind. Our credit business performed relatively in line with our expectations, with revenue lower because of two main factors.
First, we are carrying lower merchant receivables after tightening originations last year. Second, we have had lower revenue share on our off-balance sheet U.S. consumer revolving credit portfolio due to ongoing normalization of loss rates. Transaction take rate declined five basis points to 1.74%, driven primarily by lower foreign exchange fees and lower gains from foreign currency hedges. In addition, mix shift to large merchants continued to impact our branded checkout take rate. Transaction margin dollars increased 4% in the first quarter. Higher interest on customer balances, branded checkout, better transaction loss performance and lower credit losses were the largest contributors to growth. While the performance of the core business has been relatively consistent, we expect that a few of these tailwinds are likely to be less meaningful as we move through the year.
Specifically, we expect to see lower year-over-year benefit from interest on customer balances and lower year-over-year improvement on transaction and loan loss performance. Non-transaction related operating expenses declined 2% as we continue to actively manage our cost structure while reinvesting into key strategic initiatives. Part of the decline in operating expenses is a result of certain corporate and marketing investments deferred to the second half, as well as lower stock-based compensation. Non-GAAP operating income grew 15% in the quarter to $1.4 billion, and non-GAAP operating margin expanded 84 basis points to 18.2%. PayPal generated $1.8 billion in free cash flow in the first quarter, or $1.9 billion excluding the impact of held-for-sale accounting related to our European buy now, pay later externalization.
In the quarter, we completed $1.5 billion in share repurchases, bringing share repurchases over the past 12 months to approximately $5.1 billion. We ended the quarter with cash, cash equivalents and investments of $17.7 billion and debt of $11 billion. I’ll now move to our second quarter and 2024 guidance. Consistent with the approach we share in February, we will continue to provide revenue guidance one quarter at a time. For the second quarter, we expect revenue to increase approximately 6.5% at spot and 7% on a currency-neutral basis. In addition, we expect non-GAAP earnings per share to increase by a low double-digit percentage. For the full year, we continue to plan for a relatively consistent macroeconomic and consumer spending environment.
With respect to earnings per share, we now expect 2024 non-GAAP EPS to grow by a mid to high single digit percentage. As Alex said earlier, we are in a transition year and we do not expect that our quarterly progression will be linear. To help bridge this outlook compared to our prior guidance for approximately flat non-GAAP EPS, there are two main factors I would point you to. First, our inclusion of stock-based compensation expense within non-GAAP results is expected to benefit EPS growth by approximately three percentage points this year. Second, we saw meaningful outperformance in the first quarter relative to our plans. We intend to reinvest a portion of this performance back into the business. We expect earnings growth to be more muted in the second half of the year due primarily to less benefit from interest income on customer balances, normalization in transaction and loan loss performance as we progress through the year, and the expected timing of investment actions.
Underpinning our outlook, we now expect transaction margin dollars to be slightly positive for the full year. We expect non-transaction operating expenses to increase slightly. Embedded within this outlook is the flexibility to make key strategic decisions to invest and reinvigorate profitable growth within components of the portfolio and accelerate go-to-market efforts. For the full year, we expect other value-added services revenue to be roughly flat year-over-year. This excludes any potential impact from the CFPB late fee regulation, given pending litigation across the banking industry and uncertainty on both timing and implementation. As a company, we have already taken steps to mitigate the future impact, those these take time to fully take hold.
Consistent with the approach we shared last quarter, our guidance includes minimal impact from the new innovations rolling out this year. Our focus is on execution as we begin moving from test and pilot phases into launch. We continue to expect free cash flow for 2024 to be approximately $5 billion and for at least $5 billion in share buybacks. In closing, 2024 is off to a solid start as we drive significant change across the company. We have clear opportunities to lean in further. We are doing the hard work now to position PayPal for profitable growth in the years ahead, and it has been incredibly energizing to see the teams’ commitment to this goal. With that, I’ll now hand it back to the Operator to begin Q&A.
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