We'll go ahead and get started here with PayPal this afternoon. Thank you very much to everybody for joining us at this year's TMT conference. Before I get started with Dan Schulman, President and CEO of PayPal, I do have some important disclosures to read. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.
So, Dan.
James.
Welcome in. You have your boots on. I have my boots on. This is the start of the last rodeo tour.
Yeah.
Is that the deal?
Exactly.
At least as far as investor conferences go. All right. Look, I've got my questions here, but maybe we'll start at a high level. Over the past year, you and the rest of the team at PayPal have taken a number of steps to adjust to both the softer e-commerce environment as well as general macro environment. How do you feel about your positioning today, and what will you be most focused on in the coming year? Like, what does the to-do list look like?
First of all, thanks for having me, James, thanks for wearing your cowboy boots in empathy. Look, it's been an interesting last several years for all of us, especially if you were in the e-com sector. You know, we went into the pandemic, you know, everything doubled. You know, our volumes doubled. We put on over 100 million new actives. You come out of the pandemic, you need to adjust to a new reality, you know, as online to in-store adjusts, people are trying to figure out what did that look like. At the same time that's happening, you have, you know, the war breaking out in Europe ravaging the European economy. You have COVID shutdowns in China, you know, really limiting exports out of China.
You have inflation across the world, which is affecting discretionary spend. All of that impacting kind of the e-commerce market. On top of that for us, we also had to absorb $1.9 billion of revenue coming out of our revenue streams as eBay moved to their Managed Payments. All of that happened in the last three years. As I think about kind a where are we right now, you know, eBay is done. We've lapped that. It was 40% of our profits when we spun out of eBay. It's less than 2% of our profits now, less than 2% of our revenue. So, we've lapped that, and we're kind of moving forward on that.
In terms of kind of the economy and e-commerce, you know, I said, a month ago when we reported Q4 that the quarter was off to a strong start. Here we are about a month later.
Yep.
I would reiterate that again. I think across our business, we're seeing strength, that's beyond what we expected. Both branded checkout is accelerating. Unbranded is doing quite well. We're either beginning to see the beginning of a turn of e-commerce, the inflation cooling slightly, maybe discretionary spend coming back, maybe our products really taking an impact in the market. The third thing, obviously, is our cost structure now is exactly where we want it to be.
Okay.
We spent a lot of time on that. I'm sure we'll talk about cost structure going forward, but we feel highly confident in our ability to meet or exceed that 18% EPS target that we put out to grow our operating leverage at least 125 basis points. Clearly our products are beginning to make a mark now with our merchants especially. We're seeing a lot of uptick in share types of things where we have our latest integrations. Many of our competitors are actually weaker right now.
Right.
People talk about the competitive environment. If you look at the Buy Now, Pay Later players, they're having a very tough time. They're pulling back. They're desperately trying to figure out how to make money, while we continue to gain share off of that. I think, it's been a real focused couple of years for us. We've had to do quite a number of things. I think we're going into 2023 with the potential for it to be, I think, a very strong year and to come out of it with a lot of momentum.
Let's talk about some of the underlying assumptions there and as you look at 2023. Importantly, when we go back to a month or so ago when you reported earnings, you did not provide a top-line outlook for 2023. Can we talk about how you're thinking about e-commerce through February and what that portends for the rest of the year? It's obviously a hard question, but what's your view right now of the world from the e-commerce perspective?
Yeah. Well, it's still obviously an intensely complex set of things that you need to think through. You do have inflation coming down slightly, but it's still stubbornly high. Fed and other central banks will definitely need to continue to take up interest rates, that's for sure. By the way, you know, higher interest rates actually help our business model given the amount of balance we have on our balance sheet, unlike a lot of our competitors. But we are still seeing the strength that we saw coming out. I feel like one of two things are happening. I think from our perspective, you know, we thought that e-commerce was going to be, you know, flat, maybe up low single digits. I think it's gonna be higher than that.
I think it's gonna be higher than what we expected, in the short term and what we expected for a full year. Again, we're seeing that across the business.
Interesting
checkout is accelerating from Q4. Unbranded, you know, continues to go from strength to strength. We're starting to launch, you know, new products into the market, like our PayPal Complete Payments down market for unbranded and putting all of our best integrations of branded checkout into that. We look at this quite carefully. Obviously, it's our whole business, and we have quite a bit of the share of the online market comes through our platform. As we look country by country, it's different. China clearly opening up, seeing exports starting to come out of that. European economy much better than a lot of us feared it would be.
The U.S., you know, if we do go into recession, I think it will be shallow, shallower than we anticipated, and we are beginning to see people spending more on discretionary items, at least through our platform. Let's, you know, wait until the quarter ends.
Sure
let's wait till we see what happens. I think, our view is that e-commerce growth will be stronger than at least we expected.
Right
going into the year.
There's that, and the macro environment sounds good. Frankly, we heard something similar from Visa, and they talked about their card not present volumes in a press release late last week. That seems relatively consistent. What about the branded checkout? You said that seemed to be tracking a little bit better than maybe that was in the Q4. You know, how do you expect that branded checkout to grow relative to kind of the underlying volumes of the stores where PayPal is accepted this year?
Yeah.
I mean, can it continue to take share online, do you think?
Well, I think that's gonna be a debate that will go on until there's a accurate single metric...
Right. Right.
that measures that. Look, we are trying to work with a couple of the big measurement firms out there, whether it be Euromonitor or Salesforce or others, to try and get a consistent view of market share.
Right.
Look, you know, we've tried to be quite transparent about it. We think there are certain markets where we are gaining quite a bit of share. There are markets where we're losing share, and there are markets where we think we're basically holding share. One way or another, that debate will go on and we'll try to prove our hypothesis that I think overall, we are holding or gaining share. One way or another, you know, acceleration of branded checkout from Q4 into Q1 is a good thing.
Yeah.
It doesn't matter where you are.
For sure.
on that debate. You know, as you see branded checkout accelerate, that is a positive thing for us. I think, you know, we look at kind of what the dynamics are in the market. We are anywhere between 3 and 5 times the market share of checkout of our nearest competitor.
Right.
Of course, when you're the biggest, growth rates can be different. This isn't a zero-sum game between digital wallets. We are all feeding off of people manually entering their card. That's still 25%-30% of the market. We're taking a lot of share from that, as are other digital wallets. The other thing is we're now beginning to take share, and quite meaningfully so from other Buy Now, Pay Later players.
Right.
You know, where we have our best integrations in place, it doesn't matter who we're competing against, we hold or grow share. We obviously have size advantages in terms of our scale. You know, 80%+ top 1,500 merchants in the U.S. and Europe, 35 million active merchant accounts throughout the world. Consumer preference clearly skews towards PayPal when doing an online checkout. There are a lot of things that, you know, are advantages for PayPal. That said, there are also places where we need to get better. We're quite upfront about that as well. I think when it comes to mobile checkout, where people aren't on our best integrations-
Right. Right.
they're not on our Braintree integration, they're not on our mobile SDK, where you're not native in the mobile app, where you have to go into the app and then jump out to the PayPal servers to complete your PayPal transaction, then go back into the merchant. That adds latency, it adds clicks into it. We know that conversion goes up almost 10%. We have our latest native integrations into that. That's where we're putting all of our efforts in terms of checkout and our digital wallets and our unbranded efforts to carry our best integration. We know where we need to focus, where we do have those integrations going to place. We see them doing exactly what we expected.
Now it's just a matter of time for us to roll that out to our base. We've got, you know, quarter by quarter objectives. We've made good progress. We'll continue to make good progress, and we've got a lot of assets to build off of.
I wanna ask a couple of follow-up questions to a few of your points there. First, back on branded checkout. You know, our own proprietary research shows that, and I'm sure you know this better even than we do, is that brand-wise, Venmo skews to a younger demographic that is really kind of entering the workforce in force now and with strength. We've had Pay with Venmo roll out at Amazon. We're also seeing Venmo, Pay with Venmo expand to other merchants as well, so you can start to monetize that. How should we think about the path forward for Venmo, and what does that look like? Are we at a point yet that that's contributing to this improvement in branded checkout that we're seeing?
You know, there are places in our business where I give us, you know, an A for execution, I think. Our unbranded right now, some of our checkout experiences, some of our SDKs and APIs have gone from really 0 to being best in class over the last year. On Venmo, it would be a harder grader on that. Look, Venmo is a beloved brand. You know, you got some 90 million active accounts just here in the U.S. It's almost a third of the U.S., 60 million or so monthly active accounts on Venmo. It's beloved. It's a verb. People use it. You know, when I go to college campuses and I always ask this question like, "How many of you use Venmo?" It's 100%. It's not like 85% of the crowd.
Right. Right.
It's 100%. It's exactly that demographic that you're talking about. It's got huge potential in terms of its monetization capabilities, the reality of that versus the potential is not what I would expect at this time. By the way, that's not to say that it's not growing great. You know, it's doing over $100 million of revenue every single month, growing at double digits. You know, it's obviously, you know, a meaningful part and a growing part of PayPal, I think there's so much more that we can do with the franchise. Pay with Venmo is slowly but surely coming along. You know, when you went into Amazon, it's basically like getting 1/3 of the market or more.
Right. Right.
of acceptance. You know, we just were accepted at Starbucks. We're in, you know, all the leading mobile apps right now, and you're beginning to see that, take hold, but that will take some time. I think that, Tap to Pay, our partnership with Apple, moving into the Venmo business accounts could be a meaningful mover of that, and we need to and should do a much better job on linking credit and debit, into the app because where we have, people who have done that, you see, CLVs of, you know, five times that
Oh, wow!
of a Venmo customer. I, there's a lot to like about it, but we need to do a lot more to really take full advantage of its potential.
Got it. Got it. Then back on capability and product capability on branded, you know, let's talk about the You mentioned the competition a little bit in passing, but the one that we hear about a lot is Apple Pay. I think that's probably a key source of concern even with particularly Apple Pay's growth online. What advantages do you see or do you think PayPal has relative to Apple Pay, and where does PayPal still need to do work to be comparable in terms of tech, user experience, adoption, et cetera? Where have you executed well on the to-do list, and what's still on the to-do list?
Well, we clearly have a lot of advantages in general, not just versus Apple Pay, but others. You know, our acceptance at merchants is, you know, magnitudes greater than any other wallet. Consumer preference is at least two to three times. Some studies have shown eight times for using PayPal at checkout. We have kind of the highest conversion rates in the market, the lowest loss rates in the market for our merchant partners. We also accept a wide range.
Okay
of payment financial instruments. You can pay with rewards points. You can pay with your balance. You can pay now or you can pay later. Our Buy Now, Pay Later, you know, which is now accepted over 300,000 merchants upstream on product pages. Over 2 million merchants have had a Buy Now, Pay Later experience with PayPal. Over 30 million consumers have used Buy Now, Pay Later at merchants 200 million times.
Right.
It's an amazing franchise that grew at 160% last year that is differentiated than an Apple Pay or others. Our app has more services in it. You can go to it beforehand, you can look for coupons, promotions, discounts. You know, we're putting in order tracking post
Right
you know, purchase as well. We have a lot of things that an Apple Pay or others don't have. Where we have some gaps versus Apple Pay, which are in things like authentication, we're closing that gap quite a bit. Our passwordless login now is up to about 60% in the U.S. You know, we're implementing passkeys that enables us to move right into biometrics across both Android and Apple. We're closing those kind of gaps. Where Apple still has an advantage, and it's one where I think it's in, you know, an unfair playing field, is we don't have access to the NFC chip.
Right.
In store, they have full access to that, and that will inevitably be a regulatory issue at some point in time. I think we're closing the gaps where we think we have gaps, and we're doing that quite aggressively and quite quickly. We also have a number of advantages that others right now just don't have.
Right. Right. No, that makes sense. Let's talk about profitability, margins, et cetera. You talked about that as being, you know, that you think that you can grow EPS this year at least 18% on the back of at least 120 basis points or a little better of margin expansion. You know, clearly for investors, and it makes sense, as, you know, cost of capital goes up, interest rates go up, near term profitability becomes more important for investors. You have a large-scale cost savings plan out there. Can you take us through some of those cost savings, where they're coming from, how they're progressing?
you know, if we were to see a better top line year than you would expect, how do you mix the flow through versus returning some incremental investment, et cetera?
Well, we're kind of ahead of the targets that we talked about. Last year, we laid out that we thought we'd do $1.3 billion of savings this year. We added another $600 million
on top of that. I think we are at the beginning of that cost journey. We just had a long multi-day staff meeting, looking at kind of the impact of our machine learning and our AI capabilities inside the company. Literally every part of the company is gonna be impacted by that. Our back office, our front office, our coding, our legal teams, our marketing, all of that we're gonna be able to do at much lower cost structures than we have and much better.
Right
than we do today. I think this idea of us having operating margin and leverage as we expand our revenues going forward is something that we see for multiple years ahead. This is not a 2023, and you're where you need to be. This is 2023, 2024, 2025. There is so much that we're gonna be able to do to reduce costs. Not just reduce costs, because that's never your way towards greatness. It's important to be as efficient as you can be. I think reduce our costs and become just much better at what we're doing. I'm already seeing that in our product delivery.
Right. Right.
in terms of our ability to say we're gonna do something and then go do it, and then for it to do what we thought it was going to do. I think as we grow our revenues, I feel good about our momentum on that front, you will see a lot of that drop down to the bottom line. That's why we're highly confident of our 18% EPS growth, but highly confident of operating margin leverage in the years ahead.
Right. Well, that's good to hear. Let's talk about management. You know, yesterday it was announced that Blake is stepping down as CFO. On that news, you know, certainly my own heart goes out to him and his family for all the best for him. You know, so that's a seat to fill. Obviously, your own seat to fill. Can you just talk about how we should expect that to progress? Maybe as you're talking about the progression, maybe more importantly, as we were kind of chatting beforehand, what do you see as the biggest challenges for the next CEO of PayPal? It's a multifaceted business that's got a lot of complexity that I'm not sure everybody always appreciates.
Yeah. Well, first of all, on Blake, you know, obviously it didn't work out as any of us hoped. You know, he came into PayPal, he was here for about three weeks or so before, you know, he had a medical condition that he had to address. We've been waiting to see how that goes and how he feels. You know, these jobs, as all of you know, they're 24 by 7. They are incredibly physically and emotionally demanding jobs. You've got to be a 100%. Blake and I spoke. We had been speaking all the time, and we both agreed that it was gonna be very difficult for that to happen. Gabrielle has done such a wonderful job for almost a year plus now.
We are very close partners. She is maybe the only person in the company who I know for sure works harder than I do and knows the business inside and out. We have not missed a beat since John left for Walmart. Gabs came in, and it's just been super. We'll continue on with that. As you were saying, I also wish the very best for Blake. He will be a senior advisor for us. He will help Gabs over the course of the next couple of months and hopefully help me as well. This was the right thing for both PayPal and for Blake.
In terms of the next CEO of PayPal, look, it's a very complex, global company that's got massive scale on the consumer side. You know, we have like 400 million active accounts across the world, 35 million business accounts. It's a big B2B company. It's a big B2C company. It's a big network company. It operates in an incredibly fast-moving ecosystem. I'd say are we in financial services? Are we in technology? Are we in other parts of the chain? Really kind of the underlying platform piece of it. Yeah. We're in all of that.
We are partners to the biggest financial institutions in the world, all of the networks, we serve small businesses to the largest enterprises and most sophisticated enterprises in the world, and we are massively regulated, and we are 67 regulatory entities throughout the world. We work with finance ministers and government officials on everything that we think about because we are at the leading edge of a lot of where the financial system is moving towards. You know, we have massive scale. We do 6 billion+ transactions a quarter. We do, you know, what did we do last year? $1.3 to 1.4 trillion through our platform. We need to be quite thoughtful and quite deliberate as we think about the next CEO.
They need to continue to assure that we continue on with the initiatives that we have in place. They have the same discipline around productivity and cost structure, but that they continue to evolve our value proposition going forward. We need to never stand still around that anticipating what customers need, assuring that we can deliver against that, which we are getting better and better at is incredibly important. I do think that the next CEO, because I do think we will exit this year with a good amount of momentum. I think a lot of things will be in place, and really, the next thing to really think about is what does the ecosystem look like.
Right
going forward. Clearly, you're seeing a lot of retrenchment.
in the ecosystem. Look, PayPal is a massively strong company, generate well in excess of $5 billion of free cash flow every single year. We have a incredibly strong balance sheet. We're gaining a lot of momentum. We have a lot of partnerships, kind of thinking about where the ecosystem is going and what is our part in that will be, I think, a big part of what the next CEO looks like, along with assuring that we have a value proposition that nobody can replicate. We have assets, and information and data and AI and machine learning tools that nobody else has.
Right
right now. We have the largest vault of financial instruments in the world by far and away. We have the largest data set. We should be able to, and we are beginning to work on kind of what does that next generation of checkout look like.
Right
and how is it that we can build something that actually nobody else will be able to replicate or be very difficult for them to replicate. So, there's a lot for the next leader for PayPal to focus on, to be excited about. You know, I couldn't be more excited about continuing on the board and helping them in that next chapter.
Yeah, no, for sure. It's like a very unique position and challenge because PayPal has tremendous strengths, but at the same time, even if just because of cost of capital, et cetera, the world is changing. Like, the way that you have to put together and manage those partnerships, et cetera, are changing as well.
Absolutely. Yep.
A big job to do.
Yep.
Well, Dan, thank you very much for joining us. That's all the time we have. Thank you to everybody.
Thank you, everyone.
listening in. Thank you.