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Okay. very honored to welcome Gabrielle Rabinovitch, Interim CFO, SVP of Investor Relations and Treasurer of PayPal, for a chat with us today. Gabrielle, it's always a pleasure to talk with you. I hope you're doing okay today.
Thanks for having me.
Maybe we'll just jump right in. You know, as we gain a little bit of distance from the pandemic, you know, obviously macro trends are kinda tricky. It's a noisy environment. You've got, you know, discretionary versus non-discretionary services versus goods. It's a tough time to get a really crystallized view of what's kind of impacting the business. What's the latest view out of, from you guys on just macro trends? And maybe you can weave into, like, what's kind of contemplated in guidance.
Yeah, you bet. Well, great to be here. We reported our 1st quarter results last week, you know, what we really spoke to was that we saw a much stronger macro environment in the 1st quarter than we'd expected. On a branded basis, our business accelerated about 200 basis points to 6.5% branded checkout growth globally. Our unbranded business actually also accelerated about a point. It grew 30% in the 1st quarter after growing about 29% in Q4. Overall, we actually saw a much more benign environment than the one that we contemplated. When we started the year, we talked about expecting to see some deceleration of top-line performance in the back half of the year.
Part of that was just some lapping of some impacts, but it was also this idea that the overall macro continued to have some real visibility issues. What we said last week is that based upon what we were seeing, if macro conditions hold as they are, we actually expect to see pretty balanced growth and sort of roughly in line growth in the back half as in the first half, which would be sort of mid to high single-digit top-line performance. That said, obviously there are a lot of factors at play, there are a lot of sort of dynamic factors that we watch, and we feel very good about the things in our control. I think you've seen us, you know, deliver some sequential quarters of performance where the things that we can control were doing quite well.
That said to your point, the broader macro environment, inflation, the crowding out of discretionary spend, and overall just the more muted e-commerce growth is something that we're watching very carefully.
One thing that I've been thinking about with PayPal is that you guys have kind of narrowed your strategic focus to some core capabilities. You know, it feels like the environment might be opening up a bit for you all in terms of your relationship with big platform folks. It feels like, the Pay with Venmo implementation at Amazon, Apple, other big platforms. Has there been any change in terms of how the market is perceiving PayPal in terms of maybe being less, more of a super app, consumer-focused, you know, competitor to sort of more of a of an enabler? Has that opened up any opportunities, or is that overstating things a little bit?
I don't think it's overstating things, but I think, you know, this has been part of what we've done over the past eight years, right? If you look at our business and how it's grown since separation, on average, you know, the CAGR of our TPV is 25% a year. That process has really been about continuing to build these very strong relationships, both with the FI community, with networks, as well as large technology platforms, and we brought Facebook Marketplace onto our platform many years ago. We obviously work very closely with a number of other large entities, and so I don't think this is something new.
I think this is really the continuation of what's been really sort of critical to our success overall, which is we believe in ubiquity, we believe in interoperability, we think sort of connectivity and sort of network effects are very powerful, and with a scale of our size, you know, we wanna take volumes everywhere we can because we know ultimately that accrues to our benefit. Not all of them are gonna have the same margin structure, not all are gonna have the same growth rates, but ultimately, you know, we last year, we processed $1.4 trillion of volume. Within that, it was about $1 trillion of commerce volume. This sort of very large platform that continues to grow at scale is, you know, is a huge part of our strategy, and partnership is just a piece of that.
Sort of a continuation of existing, you know, relationships and trends.
We think we can just do more, right? This is, you know, this is something where we've talked about this relationship with Apple that's developed over time and sort of how we're moving forward even in year. We see greater opportunities to work with a number of partners in this space.
Braintree, and really unbranded in general, but Braintree evidently had a great quarter, another great quarter. You know, talk a little bit about the driver of sort of outperformance in that business. What's the Braintree kinda secret sauce that allows you guys to, you know, keep putting up those types of volume growth numbers?
Yeah, absolutely. Just to be clear, we talked about unbranded processing growing about 30%. Within that, Braintree actually grew faster. Braintree's just had a tremendous amount of growth. Last year, I think we called out Braintree grew about 42% volume, you know, year-over-year. It just continues to grow. Peggy Alford, who's essentially our EVP of Sales and our Chief Commercial Officer, was at another conference yesterday, and part of what she really spoke to was our whole sort of sales team has totally transformed itself over the past few years. The way we think about serving our merchant set has also very much changed.
Some of that work we've done sort of on the strategy side to make sure that we're serving our merchants in the absolute best ways, really end-to-end with all of their needs. It's not just about the sales function and the customer support function. Like, my treasury team has connectivity with the treasury teams of those large merchants as well. Sort of, you know, we think about the relationship in total and sort of how we can serve those merchants. In addition to that, just given our legacy, given our heritage, we're very good at processing tough transactions, right? Just because of the legacy of processing very idiosyncratic transactions, our ability to risk decision is best in class.
Auth rates are incredible, our service levels are great, the stability of the platform is great, and these relationships sort of beget each other, right? Because at that large enterprise level, people know that, you know, we are the primary or exclusive processor for a number of very important merchants in the space, and so that helps us just win more business.
The outsized growth in unbranded has kind of shifted the spotlight a little bit to transaction margins. You know, help us think through the key drivers of transaction margin and maybe start there.
Absolutely. Maybe just sort of thinking about transaction margin and what it contains, the pressure you saw in the quarter, in the first quarter, which, you know, we've seen some of this come through in prior quarters as well, comes from our transaction expense rate, which is really an expression of the funding cost on our platform. The funding mix of unbranded processing is much more weighted towards card-based funding, which is the most expensive funding that we process. When we see this sort of outsized growth from unbranded processing, it has a disproportionate impact on the overall TE rate. In the quarter, our TE rate was about 92.6 basis points as a rate of TPV, that's five basis points increased from where we were in Q4 or rather in Q1 of last year.
You see this sort of increase overall on the funding cost. In addition, the other major component that contributed to the increased, like, volume-based expenses was really related to our loan losses. We've seen this tremendous growth on the buy now, pay later platform. I think we're gonna get to some of that later in our conversation. buy now, pay later volumes grew about 70% year- on- year in the first quarter. Now, when buy now, pay later volumes grow, certainly they're short-duration loans that have performed very well, but we do provision for them, right? They're on balance sheet today, and so we'd have to provision for them. That increased provisioning on the loan loss side also contributed to some of the transaction margin pressure we saw.
We also did call out that in just a very small part of our overall loan portfolio, we have a business called PayPal Business Loan. It's about 17% of the overall volume in our portfolio. We did see some deterioration in that portfolio, and that also caused some increased provisioning. All in all, that was about 130 basis points of pressure in the quarter just from the loan loss side. Over time, we do see an opportunity to sort of improve the transaction margin profile, but it is dependent on some macro factors as well as some things we're doing internally.
Maybe following up on that a little bit, I think you also mentioned that there are some products and services and other trends with the unbranded that might alleviate some pressure, some new products like PPCP, maybe overseas mix. I think they're, you know, value-added services. Talk a little bit more about what you guys can, you know, what you can launch, what you can kind of what you're in control of in terms of a way to bring those transaction margins up on unbranded a little bit.
Our strategy is about accelerating growth of branded, which absolutely benefits our overall transaction margin profile. We can talk a little bit about that, and then the other piece of it is certainly increasing the higher profitable revenue streams in the unbranded business. When we think about our unbranded business today, there are a number of value-added services that we do simply today do not offer in the Braintree business. We need to add in these higher margin revenue streams to help support better transaction margin growth in that business.
When we think about the other pieces of the strategy on unbranded, today, our Braintree business, which again is sort of this LE business that is predominantly in the U.S., we do serve some other markets, and we do have some important customers in other markets, but today it is heavily weighted to the U.S., which happens to be the highest cost market. With an LE base, you have sort of a take rate that reflects the volume they bring to our platform. In addition to adding on more higher margin revenue streams, we are also looking to broaden the geographic footprint of our Braintree business. Those two parts of the business are sort of pieces that we see that we're able to grow over time. You also mentioned PPCP.
Our PayPal Complete Payments platform is really taking the best in breed from Braintree and making it applicable to an SMB base and a channel partner base. We see this, you know, pretty significant addressable market on the SMB long tail, which on the unbranded processing side, we've sized at about $750 billion. When we think about how we address that market today, the product that we have in the market today, which is called PayPal Pro, it's been in our portfolio for about 15 years, and it really does not represent best in class. It's suboptimal in terms of what an SMB would need today and what we would even view as competitive in the market.
We've been working to bring to market a, an unbranded processing platform that really is incredibly relevant for the needs of SMBs and channel partners. That's beginning to launch. Launched in the US in the first quarter. Will launch in other markets, as we move through the year. That sort of, the unit economics of that business are just far more attractive than what we see on the LE side.
Double quick. I hate that expression.
Double quick a little bit on the piece, PPCP, and I think I'm gonna start calling it PayPal Complete because it is a mouthful.
Yeah.
Double quick a little bit. I sometimes get investors asking me, like, "What exactly are we talking about? How does it differ from PayPal Pro?" You sort of started touching on it a little bit, but expand on that a little bit.
Yeah. I think without going into some of how we think of PayPal Pro being suboptimal, what Braintree does is it provides incredible authorization rates, incredible access to alternative payment methods, great risk decisioning, you know, great performance, great stability of platform, but it also provides things like payouts. Payouts are actually quite important to merchants. There is a whole set of services and solutions that we offer through Braintree today that simply are not part of the set in PayPal Pro. PayPal Pro is does not have any of those products and services. I mean, on the payout side, we have Mass Pay, which is really just payouts into PayPal accounts. That's not competitive in the market today.
In addition, sort of just the overall stack, less stability, the authorization rates sort of not the same as what we see on the Braintree side, and the alternative payment methods are not as widespread. It's just a much more sophisticated platform. What we're doing is really bringing what Braintree does and the volume growth in Braintree is clear. I mean, it's just continued to grow at scale year after year, bringing sort of that set of solutions to a merchant size that's smaller. It's much more standardized. What we do on the Braintree side at times involves some customization, just given these very large merchants and some of their idiosyncratic needs. Some of what we're doing with the complete payment stack is we can just push it out.
When we do this, the other sort of critical part is these SMBs also have our branded button. Our, you know, SMBs, you know, see tremendous amount of uplift when they put a PayPal checkout button on their website that has been the case for years, and sort of all the data continues to prove it out. I mean, the PayPal checkout button is quite important, especially in the SMB space. When one of these SMBs comes onto our latest integration and sort of the Complete Payments platform, we actually can push out updates to them in real time. They don't need to do anything to get updated integrations, to get updated experiences.
As an example, if, you know, a merchant has a buy now, pay later button upstream, and we're adding sort of an additional funding method or we're adding sort of a different rewards program, they don't have to do anything, right? They literally just get the best in breed updates by virtue of being on this platform. Part of this benefit too is just it really speeds the integration process and it eliminates all the work for the merchant.
Is there any distribution chain, you know, any changes in sort of the distribution approach or distribution strategy? Or is it just sort of you just basically replace the PayPal Pro offering with this and whoever comes, you know, sort of gets it? Or is there any push or any way that you're kind of getting that out there?
Yeah. I actually think about the addressable market for the complete payment stack is actually much greater and much more diverse than what we have with PayPal Pro. We'll be using sort of some of the same strategies that we've used to grow Braintree. We have a very, you know, sophisticated sales force, we have inside sales, we have, you know, account management sales. We'll be running through the same process that we would, on the branded side and on the LE side.
Okay. you know, one topic that's obviously comes up quite a bit is just the overall competitive environment and market shares, PayPal is such a large organization, you're in a lot of different, you know, a lot of different products. There's probably places where you're gaining share, you know, losing share, et cetera. How are you looking at that overall? You know, how do you answer that overall question? What's PayPal's competitive moat, environment, you know, the competitive landscape as it pertains to you guys?
You bet. Maybe it's easier to talk about it on an unbranded basis than a branded basis. Again, just to sort of that's been how we've discussed the business today. On the unbranded side, look, we're clearly taking share, without a doubt. We're taking share from legacy players and we're, you know, we do quite well when we RFP against the more traditional online acquiring set as well. You've seen those volumes just continue to grow. When we called out that for 2022, unbranded processing overall was about 30% of our overall volume, you're talking about a really sizable piece of business that continues to grow at an exceptional rate. There, our market share continues to increase.
On the branded side, sort of how I would position us is that in the U.S., we believe we're sort of holding share, and that's based upon all the data that we look at. In continental Europe, we would say that we're gaining share. We have some very strong markets in continental Europe, where we continue to do quite well, and that's benefited us. There are other markets that are more competitive, I'd call out the U.K. as being amongst the most competitive markets that we face. In addition, the macro happens to be the weakest, that puts the most pressure on discretionary spend in that market. We continue to see the consumer under a tremendous amount of pressure in the U.K.
I think some of that will persist in part because of mortgage rates resetting so rapidly in that market and the interest rates. When you've got consumers having mortgages reset every three to five years, they're now seeing probably a 50% increase in their cost of owning their homes. We're watching that market very carefully. There's some competitive dynamics, but there are also just some macro factors where that market has been a tougher market for us.
In the quarter two, we saw that net active accounts fell a bit. How do we think about that metric going forward? I mean, I know that, you know, one very bright spot in your reporting over the last many quarters is just engagement and the increased engagement. You know, the growth algorithm of the business evolves. How should we think about net active adds? I guess, how should we think about it trending, and also how important of a metric is it, in a sense, to track the business?
It's a great question. We sort of messaged for a while now that we'd expect to see a decline in active accounts overall in this year. Our active account base today is about 433 million active accounts. It was down about a million and a half in the 1st quarter, and we'd expect as we move through the year that you'll see a little bit of pressure as we move down. The overall active accounts could be down in the sort of low single digits year-on-year. Honestly, like, that's not what we're most focused on. You know, adding low-quality, minimally engaged accounts in markets is actually quite easy to do, right? Marketing dollars can take us wherever we'd like to be if active accounts were really what we were managing for.
What we're really focused on is continuing to grow our monthly active unique user base. Within that 433 million active accounts overall, you'd call it you've got about 35 million merchant accounts, you've got about, you know, 400 million consumer accounts globally. Most of those sit in our core markets, which are the U.S., U.K., Canada, Germany, France, Australia. Most of them sit there, and what we're really focused on doing in our core markets is continuing to increase the level of engagement we have across our customer base. We've called out that we have about 190 million monthly active unique users on our platform. It's this very sizable number. Our monthly active unique users are actually 20-30 times more valuable than an overall kind of average active account.
What we're really focused is on growing that number, 'cause when we get someone to use us instead of, you know, 8 times a month, 16 times a month. The incrementality in our business is very, very significant. When we think about, like, the best use of our marketing spend, the best use of our rewards program, it's really about more deeply engaging our base today so that we increase the monthly active unique users relative to just sort of growing active accounts. I mean, that's really where the focus is, and that's what we plan to do. In the first quarter, we did call out that we'd seen some improvement and some growth in our monthly active unique users, and we hope to see that continue as we move through the year.
That makes a ton of sense. What about take rate performance in the quarter? What were the drivers there? How should we expect take rate to trend through the year?
Yeah, you bet. Transaction take rate in the quarter was down about 6 basis points. The 2 main drivers of that were really our branded take rate declined in the quarter. The reason for branded take rate decline is that we saw a merchant mix shift in the direction of larger merchants. Some of our branded checkout experiences that we've been talking about that have started to see improvement, we've actually sold into some of our largest merchants. We've seen our branded checkout grow, and we've seen some of that growth come more from larger merchants, lower take rates. That had sort of just a volume mix. On a like-for-like basis, we did not see any pressure in terms of take rate.
The other piece I'd call out just affected transaction take rate was really FX fees and the rate environment and just the strength of the dollar continues to have a negative impact on some of our business. That also played a role in that take rate performance.
I wanted to ask about EBITDA margins and, you know, effectively, I guess investors sometimes will ask, once the current kind of cost takeout cycle runs its course, what happens as we move forward? I think some of the focus on transaction margins is really a sort of a downstream focus on margin. What should we expect as we move forward in terms of, you know, how you guys will, you know, how you adjust the EBITDA margins with trend, how you kind of match the cost base of the business to the, you know, the new higher growth areas of the business?
It's a great question. You know, we spent a lot of time over the past few quarters talking about the way we're improving our efficiencies, the way we're gaining productivity, and just some of the sheer cost takeout. We are on that journey. We will not be complete with that journey in 2023. As we've gone down this path, we've seen more and more opportunity in certain areas to operate more efficiently, and so that's certainly what we plan to do. I see the opportunity to drive leverage on our non-transaction related OpEx for a long time. You know, we see the path to get there.
It won't be the same in every quarter. There's a lot of opportunity to rationalize in certain areas, to your point, sort of make sure that the cost structure is reflecting sort of where we're seeing the greatest growth and that we're running our business as efficiently as possible. We also, you know, I mentioned that we'd on average grown, you know, our volumes 25% every single year since separation. With that kind of growth, we haven't always scaled in the most efficient way. That's just not how things work.
Now when we take a step back and sort of look at how we work today relative to before the pandemic, look at the footprint that we need, look at the vendor base that we use, look at the leverage that we have in the market, we're a much, much larger entity, with almost, you know, we'll have nearly $30 billion of revenue this year than we were even just a few years ago, even pre-pandemic. How we think about vendor relationships, how we think about driving efficiency, even just the evolution and the maturity of how we think about productivity metrics as it relates to parts of our organization, we just continue to get more sophisticated. With that comes the opportunity to just, you know, to have some cost takeout.
It really is a by-product of providing better services to our customers and driving the business more productively. We also talked a little bit about sort of the PayPal Pro to PayPal Complete Payments migration. There's some other product migration work that we're doing as well to consolidate platforms and really to eliminate sort of duplicate stacks that at this point, you know, require maintenance, support, customer service, that really is duplicative in nature. This year, we're consolidating PayPal Here and iZettle. Those businesses have run separately really since we acquired iZettle in 2018, closed in 2019. We've had sort of a similar product and market, and we've had to stand up two separate support units really on the engineering side, but also on the customer support side.
Some of the work we're doing on PayPal Pro also allows us to consolidate. There's just a lot we're doing that really is providing better service to our merchants and to our consumers, but also just allows us to naturally, you know, lead to more efficiencies.
Is there more OpEx associated with $1 of branded volume versus unbranded volume? In other words, as you know, it would seem with branded just externally, there's marketing expenses and customer service expenses, et cetera, relative to the unbranded perhaps. Is there the concept that as the mix shift between branded and unbranded kind of settle in, that there's a natural expense benefit, or is that maybe overstating things?
I think there could be over time.
Yeah.
We'll have to see. Yes, I mean, the branded business does require a certain kind of CapEx or OpEx, certain kind of investment in the cost structure that we don't see necessarily all the time on the unbranded side. That said, large enterprise relationships often do come with them, sort of marketing programs where we're doing, you know, joint marketing, and other types of services as well. I wouldn't sort of overgeneralize.
We do see opportunities as we're continuing to see more growth come from our unbranded business to run that branded business in a much more efficient way.
Back to buy now, pay later, which you touched on earlier. I mean, that business seems to be doing quite well. You called out plans to externalize the portfolio, I guess. Could you comment on timing there and on any way that we should be thinking about the impact? I also wanted to ask you about there are some other credit portfolios that, you know, you haven't externalized. Is that something that's on the roadmap as well at some point?
We wanna operate the business as efficiently as possible. We wanna be as disciplined about capital allocation as we can, and we wanna be really thoughtful about what we use our free cash flow to fund. And in the case of buy now, pay later, because we actually don't generate sort of interest income on the vast majority of that book, most of those loans are six-week loans, eight-week loans. They're interest-free. We don't charge late fees. There are certain specific products, longer-term installments, as well as some other features that we add on where we do generate revenue. For the most part, we're talking about a product that really drives engagement, TPV growth, stickiness, and really high, high-value customers to merchants. It's a very powerful business.
At the same time, strategically, there's no reason why we need to fund it on balance sheet. When we think about sort of all the important things we're trying to do, which does include capital return, there are ways that we can fund that business that's more effective and also can support this very strong growth in the business, right? We've had tremendous growth in buy now, pay later, and we really wanna find a partner to help us grow that business sustainably going forward and in a, in a responsible way as it relates to our own balance sheet. What we're looking to do is externalize part of that portfolio. We've talked about that we're looking to externalize the European buy now, pay later portfolio. That's UK, Germany, France, Italy, and Spain.
It's a really diversified, nice pool of loans. It includes some short duration, includes long-term installments. There are some products in there that do generate revenue. Importantly, Europe has been a core market of ours for a very long time, so we have incredible customer data. That portfolio just performs very nicely. We have a tremendous amount of sort of user data. About 90% of the volume in buy now, pay later comes from existing customers, so our ability to sort of risk or invest decision in these loans is also exceptional. We're looking to externalize European buy now, pay later. We, of course, have a back book on that, so we have, you know, on-balance sheet buy now, pay later today from Europe.
Of course, you know, we also originate on a daily basis those loans. The way I think about the structure of what we're looking to do, we'd be looking to do a back book sale and then some type of forward flow agreement where we're originating and then we're selling to a partner, call it weekly or biweekly, and it could be a partner or a group of investors. We'll be, you know, we would look to be able to be in market with this by the back half of the year. We think it's a really important way to move forward. I think to your point, sort of what about the rest of the portfolio? You saw us externalize the US revolve portfolio. That deal was announced in 2017, closed in 2018.
We went through the pandemic where our credit portfolio overall just the mix changed pretty meaningfully in terms of how we think about the book. And now, of course, it's been growing again with the advent of the buy now, pay later portfolio. I would say yes, we wanna be very thoughtful about how we externalize, and we think that there are a number of partners in market that would be very interested in taking on some of our credit book.
On a completely separate note, stock-based compensation, how do you guys think about that in the context of, you know, moving forward, percentage of revenue? Just in terms of hiring, maybe the labor market gets a little looser. How should we think about stock-based compensation to kind of trend over time? Sometimes people are focused on GAAP versus non-GAAP, et cetera, these days. What are your thoughts?
Yeah. Absolutely. Look, stock-based compensation is a real cost of doing business, right? It's an important, you know, component of the way we think about compensation with our teams. Overall, stock-based compensation has really grown with headcount. When we take a step back, we look at the average headcount growth, sort of the CAGR on headcount growth pre-pandemic, it was about 8.5%, close to 9% a year, from 2015 to 2019. It then stepped up to twice that growth rate through the pandemic, and now we're sort of obviously in a little bit of a decline, having done a layoff this year. All that to say sort of the number itself grows with the overall base. At the same time, we manage it kind of very closely.
We also guide it, we hold ourselves accountable to that guidance. Overall, our stock-based compensation has been about 5% of revenue. That's been relatively consistent over time, and the guidance we gave for this year is also about 5% of revenue. The CAGR on stock-based comp over the past two years, based upon the guidance we gave, is 4%. You're not seeing sort of a tremendous amount of growth in that number, and it is certainly a cost of doing business. We disclose it, and we guide it, we'll continue to provide that clarity. We think it's sort of something that we need to manage very closely alongside all of our other costs.
Fantastic. Out of time. What a great conversation. Thank you so much for joining us. Appreciate it.