Guys, thank you very much. All right, good morning again, everybody. For those of you who I don't know, I'm Darrin Peller. I head up FinTech research at Wolfe Research. Really happy to have Jamie with us today from PayPal. He's the CFO of the company. And I think this is your first investor conference since in the role, right? So thanks for.
Thanks for having me.
Thanks for being with us. Look, I mean, a great place to start might just be what you've seen the last few months since you're in the role and maybe what attracted you to the company, why PayPal, and how's it been?
Well, it's been great. I'm really excited to be here. Thank you for having me. You know, it was super interesting because when Alex and I first started talking, you know, I've worked across most industries. But this is not one I've actually worked in. I started really just doing research on PayPal. What got me super excited about it is, first and foremost, it just has a formidable market position. The brand, the global reach, the scale of what we do is incredibly impressive. At the same time, it's a company that, in my view, had probably a series of self-inflicted wounds. There was a lot of opportunity for self-help, which was really exciting. Alex Chriss is awesome. I thought that before I joined, it's even more underscored since joining in terms of just understanding the kind of leader he is.
Yeah.
Just given where the valuation is with the company, it just felt like a place I could come in and really help have impact. So it's been super fun. The team is amazing. You know, the culture side of it, the culture is very change agile, a lot of smart, awesome people who just genuinely want to help drive good things for the company. So the barriers to change right now are really low with a new team coming in. But it's really fun.
Any surprises, positive or negative, in the last couple of months of what you've seen as you really look under the hood?
Yeah, for sure. I mean, from a surprise perspective, maybe I'll just underscore so first, when you move into a new organization, there's a lot you think you know about the company. But you don't really know until you're in. And I would say the first is everything I thought I knew, I would completely underscore, which is awesome. I mean, the assets we have are even more impressive. The kinds of self-help, the things we can do to help ourselves are really tangible and clear.
Good. Good.
Alex is really impressive. He's strategic. He's a product guy. He's focused. He's an executor. It really focuses on results, which he's the kind of guy you just want to work with.
Yep.
And then, like I said, the people, the teams are just fantastic. But I would also put a couple of other things in the surprise category. Number one, it's interesting coming in with a whole new team. Our entire management team is basically new, and some from inside PayPal, many from outside of PayPal. And everybody likes each other. They want to help each other win. It is definitely something where people are passing the ball, working as a team sport, which is super exciting. And so a surprise to the upside in terms of the barriers to change right now are very low, which is great. And I'd say the other piece of it, as I've reflected on it, is I'm surprised at how much opportunity there is for finance to really lean in and make a difference. PayPal has really run itself as one big company.
When you start to look at how we can deconstruct finance, push into the business, bring more around operating structure, transparency, visibility, accountability, kind of all those things finance needs to do for a company, it's a huge opportunity. It's something, too, as we've looked to really get deeper on how investors want to see us, what do they want to understand? We have a big opportunity, too, to bring more of that structured data to investors and think differently about how we can not only tell our story, but more importantly, share disclosure and data that can help investors hold us accountable to that.
Yeah, that would be welcome, I know, for a lot of our clients, just to see really a helpful understanding of what's happening under the hood a little more. When we think about the assets you said you were so excited about, you said you underscore that when you came, you were pretty excited about what you saw. And what are some of those examples of what you were really thrilled to see when you first got here?
When you look across both, well, all, Branded, PSP, Venmo, each one of those is in a category by itself compared to competitors in terms of the value it brings, the brand trust it generates, the kind of operational systems we have behind it. And I think, really importantly, our global reach is not only reach, but it's deep. And it runs really well. And you kind of put all that together. And it's a pretty powerful value prop for customers and consumers. Clearly, we have a lot of work to do to continue to invest and bring our experiences to be either on par. In some cases, we are already best in class. We're just not commanding our price in the market the way we could be. And in other cases, like Venmo, we have this amazing asset.
But we have a real opportunity to shift how we can bring that asset to bear for shareholders in a different way.
OK, that's helpful. That makes sense. Let's shift back. You mentioned how great Alex is. And that's great to hear. And I think a lot of investors have been complimentary about him on the first earnings call. But talk a little more about the overall management reorganization a little bit in terms of what the goal was, why the different approach to management in terms of organization. And it's, like you said, I mean, it's very much a new team.
It's very much a new team. The base around our management reorganization is our view that we have to work customer and markets backed. We've been a very product-centric organization. When we really flip the lens to customer and think about merchants, we think about consumers. We really force that back into our system. It brings a different kind of thinking around how ease of use, frictionless, what do people want to do with us, how can we make it more simple for them. It's not us finding something to build and pushing it. It's about delivering what the market needs. It's a really important lens for us and one that Alex felt very strongly we needed to shift and be far more customer-centric in terms of how we did it. The other piece around what we're really driving with the team is the theme of profitable growth.
Yep.
We've been a company that has been successful for a really long time. In the past couple of years, we've made significant investments, particularly in Braintree and some of our PSP businesses to really drive scale. But they've been significant investments for us. And at the same time, we've invested in those platforms. But when we think about this real push towards not just top line, but margins, operating leverage, full stack, all teams working together across, that's been a really important part as well of that whole reorg.
OK, so a little more focus on the specific types of customers versus the product per se. And that's helpful. Maybe we shift gears. I mean, obviously, one of the most common questions as an analyst we're getting is around your guidance. And we're only a month or so since you've reported. And so if we can just touch on starting off on that front, your fourth quarter was pretty strong. We had some questions on whether there's a lot of conservatism or some element of conservatism in your outlook, given some of the comments you made on the last call. Maybe just talk us through the puts and takes of that guidance, I think, especially on the gross profit side, how we should think about the magnitude of conservatism embedded in guidance around new initiatives. And I'll let you just take it from there.
Yeah, so let me just start by I've been here four months. Alex has been here a few weeks longer than that. But most of our leadership team is new in position. And so when you think about guidance, we feel really strongly that we want to give you guidance that we are convicted around, that we can meet or exceed. And we need to get back into a rhythm of really meeting our commitments. And that was our underpinning philosophy in terms of how we set that. We also candidly wanted to have some flexibility. I mentioned before, we need to make investments in the business. We want to position this place for long-term, durable growth. And we think 2024 is a really important year where we've got new leaders coming in, really pivoting their teams.
And we'll probably learn more than we knew two months ago when we thought about guidance. But we wanted to give ourselves both flexibility to make different decisions, but also to invest in ways that would really help us position, too, if we saw it. But then when you start to talk about margins, margins is a really interesting one. And part of what we talked about on the earnings call, we gave flat guidance. But.
For transaction growth, margin growth.
For transaction margin growth. Yeah, thank you for the clarification. But when you look at that, Branded Checkout is growing healthily. We grew 6% last year. And along with that, transaction margin is growing healthily. We had a big lift from our interest income on customer balances last year. And we also saw drag from some of our smaller products. And so when you start to put this into place this year, we continue to think that Branded will grow healthily. We're already seeing that. We think our PSP business, as we really shift towards profitable growth, that'll have some nice shifting there, too. We expect slightly smaller interest income on customer balances and some slight pullback in credit revenue and slightly higher credit losses. So when you look at that contribution from our Other Value-Added Services line, maybe just a push on that.
And then these smaller products, which are things where they're either acquisitions that we've made where we have underinvested over the last few years or, in some cases, products that we've deprecated where we're just seeing some drags come through, I mean, this is a bucket where we're very focused on grinding our way through it in terms of what are we growing, what are we fixing, what are we just exiting, and shifting the profile there. However, that's still going to have an impact on us this year. So that's sort of the plan of what we looked at when we looked at the guidance.
Those are the assumptions you did incorporate. It sounds like you didn't incorporate some items that seem like they could be pretty accretive to gross margins. Is that fair?
Well, when you look at the initiatives and Alex has talked a lot about these both at the First Look event as well as in a lot of different investor forums, which are investments in Branded, investments in our consumer app, just really looking at Venmo in a different way, we know these are things that have been on our docket for a year or two. Yeah, and people haven't seen the execution. I can assure you Alex is laser-focused on getting these executed and pushing them through our results. Having said that, we didn't want to promise. We wanted to put ourselves in a position where we could deliver and tell that story in a way that was very visible.
Can I ask this? I mean, we get a lot of investor questions about the story all the time. And I think you're going to hear from your one-on-one meetings the same. But when it comes down to it, I think you'd probably agree. Or maybe I should pose it as a question. Do you and Alex and team really know that it's gross profit growth acceleration that's what's really what investors are looking for versus earnings? Or do you think something it's more about a mix, a balance? Or I'm just curious how you view what investors are really looking for.
I think investors are looking for all three. I think they're looking for top line, margin growth, and bottom line, operating leverage. Yeah, however, I think our emphasis over the last couple of years has been perhaps more on top line and operating leverage. And we are really squarely focused on repositioning the sights of the team on that gross margin line. And we're overemphasizing that right now. Having said that, if I pull back, our goal over time is that we need to bring to the market an algorithm that really makes sense and works. Works for us. We can be convicted around delivering it. But something that investors can also say, OK, got it. That's a really great play.
Right, that's great to hear. So it sounds like you do know short-term at least, that's a big focus.
For sure.
Over time, a balanced approach, obviously, is important. OK, I mean, we've seen a lot of the initiatives we've researched. And we think that when they kick in and we know the when is a question, it should be margin accretive to gross margins. We just don't know exactly how long it'll take. And some of these take some time. Investments, I mean, you mentioned investing in different areas. I think one of the categories that investors were a little bit surprised about also is that, look, you've gone through, and under the prior team especially, a lot of cost takeout, cost management. And then when you guided, you said, I think, low single-digit growth in OPEX, non-transaction expense growth. Maybe just help us understand the thought process and really where those investment dollars are going.
Yeah, so the team has done a really nice job in 2022 and 2023 really shifting the OpEx profile. Having said that, coming in and maybe this was a pleasant opportunity, we have a lot more opportunity to drive OpEx transformation. I can talk about that. We announced a headcount transformation right before our earnings call. We've got a nice profile of OpEx coming out. We are reinvesting pieces of that back in. The primary areas where it's being invested back in is first, you have things that naturally grow in the business, merit increases, cloud computing, some other things that just naturally are going to grow year-over-year. That's a piece of it. A big piece of it is we took $200 million and put it back into engineering, product, and marketing.
And then the other piece is last year, we paid our bonuses in stock. This year, we're paying our bonuses in cash. And we think it's the right thing to do for our employees. But that does shift through on that OpEx line, too, by a couple of points. So when you put that together absent that, it would have been flat. With that, it's up a couple of points. But when you pull back and just look at the OpEx line generally, it's really clear that we have more opportunity. And when you look at our opportunity for AI, for automation, and when you look at where the clusters of headcount are in the company, customer service, customer ops, how do we really optimize in a different way, we have a continued journey here.
That, over time, should both fund more investment if we need it, but also maybe create some more operating leverage.
OK, so it sounds like I'm not pegging you to any type of guide. And I know Ryan and everybody are staring at me. But net-net, you basically sound like you have some things to do this year to kind of and you're paying in cash more, which I think a lot of investors prefer to get away from stock comp as much as possible for at least clarity of earnings power. But there's room to probably maintain expenses, not have to grow dramatically over the years to come.
That's exactly what you're saying.
Okay, maybe we shift to some of the specifics on the business. We'll start with Branded Checkout experience and improvements. Again, it's an area that you said Branded grew, what, 6% from a volume standpoint last year. You suggested it's still growing well. When we think about the Branded experience and what's being done to try to make that even better and hopefully grow at a notably faster rate than overall e-com, perhaps, at some point because it's so margin accretive, tell us a little bit about what's going on.
Yeah, so as you mentioned, I mean, Branded is growing. And when you look at our global position, it continues to be very strong. And it's a healthy business. When you look at the investments we're making, though, they're really pretty straightforward on Branded. I mean, Branded is our number one priority right now. And part of this experience is when you look at online, we're great. When you look at our mobile experience, it has not been as good. And so while they might seem relatively simple, they're a big deal in terms of frictionless login. When you look at reducing latency, when you look at no-code, low-code ways for our merchants to really bring the latest experience to their integrations, those kinds of things actually bring us on par very quickly with other experiences that are out there. So that's first.
Those are already in the hands of our consumers and merchants, which is really powerful. The other side of it is bringing a different experience to our consumer app, both with respect to all the same kinds of things I'm talking about, but also the experience of how they engage with us, how we can bring other things like rewards and other elements to the consumer value prop to bring more of the whole equation working across.
Is there anything you could share on timing expectations around Branded initiatives at all?
They are already rolling out and in the hands of both consumers and some merchants. Realistically, when you look across the entire set of initiatives we're talking about, it's over this year and next year. I mean, this stuff takes time. And it depends on whether it's something we can easily push or whether it's something that requires a larger or very large merchant to integrate into their roadmap and really pull in on their side of things. But it will depend.
OK, let me shift now to the PPCP initiatives, which for everyone here is an initiative basically to attack the small but offer your small businesses basically a one-stop shop full stack that's even better than what you've done before. And in our view, it's a huge opportunity because you have so many the majority of 35 million merchants on PayPal are SMBs. Why not get them all, do everything for them instead of just the Branded side? Huge yields, too. Could be 2.5%, 3.5% takes if you get that business. Can you talk about how that initiative is going and what kind of progress or data points you've seen so far?
Yeah, it's going really well. I mean, and just to unpack PPCP a little bit, we used to have a suite of solutions. PPCP is a fully integrated stack that is much easier for our merchants to onboard, use, engage with us in a totally different way. We've been driving this over the last year. In fourth quarter alone, 36% onboardings versus the prior year's quarter. So really significant ramp. And when you start to isolate even months, more accelerated ramp even going into this year. So what's exciting about it is it's a great platform. It is best in class. Our SMBs are loving it. What we've got to continue to do is really bring it through our go-to-market process and make sure we continue on the path that we're on.
But I can tell you, as you look at where Alex spends his time and what his priorities are, PPCP growth and that continued embedding is a huge part of that.
To be clear, I mean, if I'm not mistaken, if you have this is unbranded volume and branded, but really unbranded volume that can then come on at SMB take rates, which are obviously going to be better than the enterprise unbranded side. So the initiative is a huge opportunity.
Huge opportunity.
OK, when we think about one other piece I want to ask you that's been a big initiative is unbranded around Fastlane, which is a cool, really, really cool feature we've seen. And we've seen Alex talk about it a lot. A little bit more, I think, the enterprise side, though. Can you just touch on what that is for the audience and what's going on around that?
Yeah, and maybe I'll take a step back and talk about PSP or unbranded first a little bit around our margin profile and the things that we're really focused on. And then I can talk about Fastlane as well because I think that is an enhancer to both our speed and ability to do it well with our merchants as well as what they can get out of it. So I mentioned before, we've had a lot of top line growth in our unbranded business and really important growth, I mean, with really mega merchants, large merchants. But it's also been something where we've invested to do that. And it's an opportunity for us to play in a different way as we think about profitable growth, as we think about pricing to value, not just pricing to win, to really shift our margin profile there.
We've made significant investments in the Braintree platform. We have a best-in-class product now. It has higher reliability, availability, better auth rates, which make a meaningful difference in a competitive bid situation where we can price to value. Often, that can be higher than what our competitors can do because we have a more holistic value prop to bring, which is huge. So playing that game differently, coupled with really having a different kind of conversation, not just with new merchants, but with the whole book of merchants that we have, is a really powerful sort of self-help sort of way we can engage differently. And the team's really focused on that. But Fastlane is something that is a real enhancer to the process because what Fastlane does is it allows us to, if you go into guest checkout, to recognize about 70% of consumers out there.
When that happens, we can not only pre-populate but help our merchants convert at a much higher rate than what's currently on the market. Our merchants have gone out. They have been kicking the tires, working with people who have used it and have piloted it. It's becoming something that's not just a conversation we can have about, hey, we need to work on this together about Fastlane. It is becoming a conversation that when we're in competitive bids, it's, OK, we're going to implement this now. But we want to fast follow with Fastlane because we see what it can bring. It's going to be a really nice curve for us, I think, in terms of how we can drive integration.
Effectively, if you have the data on the consumer because they've shopped at another one of your Braintree accepted sites or branded sites, you can therefore populate off that data on another merchant that you're accepting on and therefore make the experience seamless. Is that right? Quick for the consumer and the merchant. I imagine checkout time is much faster. The approval, the checkout flow through is much better. Is the pricing also potentially going to be better than typical unbranded, lower price unbranded for enterprise?
When you look at the whole suite, the holistic solutions, things together where people can work with us globally versus a partnered kind of offering by others, it will bring us to a higher margin rate over time. But Fastlane's certainly a part of that.
It should help. And then just kind of staying on the topic of unbranded for a minute and margins, I mean, another area is obviously just pure price in terms of what you're charging for the pure basis points on top of interchange, et cetera. Has that stabilized? I think you talked about making sure to charge for value. And Alex has also talked about being more thoughtful and not just offering price to low price to win business for any sake. So just touch on that for a minute in terms of where we are now.
I think that it is very clear in our organization that we're looking at price differently. Having said that, we're a highly customer-centric company. This is something where we really believe in having the right value prop and the right value equation and partnership with our merchants over time. This isn't a complete sea change, right? But it is saying, we're going to have a different kind of conversation. When you look like what we were talking about at unbranded pricing and sort of the kind of conversation we are now having, it is different. It is higher. It is more holistic. It is charging for what we need to charge for and realizing that we've got a best-in-class product.
I mean, this may be a little off the cuff, but in terms of guidance, was pricing embedded in your guide in terms of upside to price? Or was that just basically assuming a similar profile to what you are today?
Yes, in that if you remember when I was talking about the margin walk specifically on unbranded, that's a component of goodness to share.
OK, cool. I think you could offer value-added services and different offerings in Braintree, or unbranded more broadly, that probably also drives incremental revenue. Is there been progress on that front? I know you talked about that being a big driver at some point.
It is. There is progress in the teams. Right now, it is really focused on what we have and how can we bundle that and bring that to market now versus what we've got on the roadmap for later.
OK, let's shift to capital allocation. It seems like another year, based on your guidance, of healthy share repurchases. It doesn't seem like as much is being discussed around M&A, at least as much as we've seen in prior years. I think you guys really want to focus on the core business and organic for a little while. Maybe just help chime in on what you're seeing.
Well, I mentioned before, we've got a lot to execute right in front of us. That execution is with our merchants and our consumers, improving their experiences. It's around we've implemented completely new operating structures in the company around business unit reviews, how we do product reviews, sort of talent, full kind of top to bottom. Most importantly, it's how we improve our say-do ratio both for ourselves and externally. We got a lot in front of us on this. When you start to look at capital allocation, we believe to a fair degree, we have to earn the right. We have to get ourselves running before we engage meaningfully in inorganic. Having said that, we're in a healthy capital position. We continue to have very healthy free cash flow.
As a result of that, our decision early on was we have to begin returning more of that to our shareholders until we've got a more formed play around growth and how we want to deploy. So for this year, we said we will deploy or do buybacks of at least $5 billion, which will be more than 100% of our free cash flow, which we think is a pretty healthy profile for now. And then we'll reassess that as we get later in the year.
OK, OK. Maybe we'll shift to credit for a minute because it's also a pretty hot topic right now. I mean, it's an area of focus for investors just given the overall environment and questions on unemployment especially. If you could just talk on how the company's managing the credit book just in light of, like we said, some higher delinquency trends in recent quarters and just how you're thinking about the balance sheet versus the externalization of credit for the company?
Yeah, so credit for us is really an enabler of the rest of our business. So we don't consider it per se to be primary. It's more of a how does it integrate and how does it help us enhance conversion or other elements. And when you look at the business, we did have higher delinquencies in some books of our business late in the year. And we expect loss rates, for example, to go up a bit in 2024, particularly on our consumer credit card portfolio. Now, that is off balance sheet. But we have a revenue share with our partner. And as loss rates normalize to pre-pandemic levels, which we expect to see, maybe not quite to pre-pandemic levels, but certainly ticking up, that affects our revenue share on that product.
The flip side, when we look at the merchant book, that had some higher delinquencies later in the year. We've pulled back. We've really shifted our underwriting on that as well. Some repositioning. When you look at the balance sheet side of it, we have been asset light in terms of our consumer partnership. Late in the year, we executed our KKR partnership with the Buy Now, Pay Later book for Europe. That's a core part of our strategy, which is to be asset light but continue to use credit as a way to enhance the rest of our business.
I think just while we're on the topic of credit, I know the CFPB just finalizes late fee ruling for credit card accounts. I don't know if you could just remind us if there's any potential impacts to your business and maybe if that's in your guidance, if there is.
That impacts our business through our consumer partnership where we have a large book of credit cards on our partner's balance sheet. We have a revenue share.
It's a Synchrony, right?
Yep. And so when you look at that, there's a lot of debate around when and how that's actually going to get implemented. Most of the big banks, our partner, have said late in the year, early next year in terms of timing of implementation being most likely. And if you say, OK, late in the year, for us, it would have an impact. Having said that, we also expect at this point interest rates to be higher for longer, most likely. And any impact, if it were to come in the fourth quarter, likely is not particularly material for us. So we'll see how that plays out over the course of the year. But yeah, it is something that we're working actively to get it.
OK, and just quickly before we wrap up, one more financial question.
By the way, that was not in our guidance.
OK, but again, it's probably late in the year if there's much of an impact at all. Float income, I mean, obviously, that's been a big factor for you guys given how many balances you guys carry. And so just touch on that again in terms of, like you said, I mean, earlier, you're going to have tough comps in OVAS this year. How do you think about managing investments and the cash in terms of generating float?
Yep, so OVAS last year, we had about $600 million year-over-year increase in interest income on customer balances. And as you know, it's supported by a very large $30 billion balance on our balance sheet. Now, some of that is in transit at any given point in time. We really manage this portfolio for liquidity just given its customer funds than anything else. And so when you look at just our investment framework, it is all around commercial paper, government bonds, just very high-quality U.S. corporates but short duration. So it's really more around four months. And so it's a very safe portfolio. And that's how we manage it.
OK, I think if we summarize a lot of what you've said, there's a lot of exciting initiatives happening across both the branded and the unbranded side. Correct me if I'm wrong. You did not incorporate most of them in your guidance. So there's inherent conservatism in the outlook on the top line and gross profit side. Expenses, this year has some elements that you want to add in terms of cash payout versus dot-com that has a year-over-year impact on your expense growth and investments in the business. But bigger picture, you think you have room on the expense side to manage your expenses. And I don't know, actually. I don't want to put words in your mouth. But would you say there's conservatism in the expense guide too? Or is that?
I would view the expense guidance as we want to retain flexibility. As we get deeper into the business and really look to position ourselves for the future, if there's places where we need to make investment, we'll make them. So I would say it's rangy, probably how I would think about it.
So if we looked ahead at, let's call it the end of the year. It's December 31st, 2024. What would you say is a sign of success that you had the year you wanted to have and accomplished what you wanted to accomplish?
I would say we met or exceeded what we said we were going to do. And more importantly, have a really refined view of what the algorithm around the company can be and can really share that with investors with the building blocks behind it in a very convicted way with the disclosure to support it so that you can hold us accountable as we execute. To me, I mean, that's what I'm really driving for is deep clarity and then pulling up around, OK, let's go do it and laying it out.
Is 2025 going to be a year that we can see some of these initiatives really kick in, if not in 2024?
Absolutely.
I mean, it may be 2024. But OK, thank you very much, Jamie. Really appreciate you being here with us. Guys, next up, we have Mike Milotich, CFO of Marqeta, on stage at 11:00 A.M.