PayPal Holdings Inc (PYPL) — Q2 2020 Earnings Call Transcript

Thanks, Gabrielle, and thanks, everyone, for joining us on today's call. And I hope that all of you are safe and well. I'm pleased to say that PayPal just had its strongest quarter since becoming an independent public company 5 years ago. Simply put, our business has never been more relevant and important than it is today. In the midst of the COVID pandemic, we have seen substantial macro changes that we believe will have a lasting and profoundly positive impact on our business. The world has accelerated from physical to digital across multiple industries, including retail. Merchants are embracing a digital-first strategy, and these trends have fueled the rapid rise of digital payments. These are durable and meaningful tailwinds, and we are fortunate to have the scale, scope of services and brand reputation to capture the benefits of these trends and extend them to our customers. Consumer behavior has shifted in a discontinuous manner, and PayPal clearly has a unique opportunity to accelerate its path to becoming an everyday essential service. The strength that we saw across our business in April continued to gain momentum throughout Q2. Our transactions grew by 26% to 3.7 billion, consistently rivaling the volumes that we usually experience during the 5 days between Thanksgiving and Cyber Monday. Transactions on our PayPal Checkout experiences remained especially strong, growing almost 40% year-over-year. TPV grew at 30% on an FX-neutral basis, with a record $222 billion of processed volume in Q2. TPV accelerated throughout the quarter, and June marked our highest growth rate since our separation from eBay. We added a record 21.3 million new customers in the quarter, increasing nearly 140% year-over-year. To put this in perspective, this quarter's net new actives were greater than our total net new actives in 2016. Nearly 1.7 million merchants signed up for PayPal in Q2, and Honey net new actives were nearly 3x that of Q1. Importantly, we continue to see increased levels of engagement. Our 10-day adoption rate for our newest cohorts grew by 20% to 30% over last year. And across our PayPal base, our daily active users have accelerated by almost 40% from last year. We ended Q2 with 346 million active accounts and over 26 million merchant accounts. Given our momentum, I believe that we will add approximately 70 million net new actives this year. These trends drove record financial performance in the quarter. Revenues grew by 25% on an FX-neutral basis to $5.26 billion, accelerating after our strong 20% revenue growth in April. This is the first time our quarterly revenues have exceeded $5 billion. Due to the strength of our PayPal-branded transactions, our non-GAAP operating margin increased by a record 500 basis points to 28% this quarter. As a result, our non-GAAP EPS grew by 49% year-over-year to $1.07. And all of this led to record free cash flow of $2.2 billion in the quarter, up 112%. In the first half of 2020, the penetration of e-commerce as a percentage of retail sales outpaced prior external forecasts by an astonishing 3 to 5 years. In this environment, the demand for our products and services has dramatically increased and unleashed multiple opportunities. We are focused on several key initiatives to fully leverage this unique moment in time. First and foremost is our push to accelerate in-store contactless payments. Both consumers and merchants are rapidly moving towards digital payments across their online and offline experiences. This is an existential issue for merchants who realized that reopening their retail stores depends on touchless forms of payments to keep both their employees and customers safe and healthy. There are numerous market research studies highlighting that consumers no longer want to handle cash or other forms of payments that require any physical touch at checkout. We are significantly investing to accelerate our presence in all forms of omnichannel commerce, from point-of-sale in-store to buy online and pick up in store, order ahead, pay at table and home delivery. In addition to iZettle contactless cards and integration with both Google Pay and Samsung Pay, we announced that our QR code functionality is now available across 28 countries for small and micro merchants. And we are working with leading retailers throughout the U.S. and Europe to aggressively roll out an integrated point-of-sale QR solution beginning this quarter with expansion planned throughout the year. For instance, we are working with CVS Pharmacy to enable PayPal and Venmo QR codes for payment at their cash registers. And we expect a full national rollout to their 8,200 stand-alone store locations by the end of the year. Our merchants and our consumers want us to expand in-store, and we will not let this opportunity pass us by. The rollout of QR functionality will also accelerate our Venmo monetization efforts. Venmo also had a very strong Q2 with record NNAs and an active base that now exceeds 60 million consumers. In Q2, Venmo grew its TPV by 52% to almost $37 billion. Revenues continue to outperform our expectations with year-over-year growth rates of greater than 60% during the first 3 weeks of July. We are seeing substantial increases in the use of Venmo as the pandemic continues on as more consumers turn to Venmo to live their financial lives, including adoption of direct deposit functionality, and later this year, the Venmo credit card. We recently introduced business profiles, a unique new way for consumers and merchants to connect on Venmo and exchange goods and services with the same protections enjoyed by PayPal customers. These initiatives will drive significant additional value to Venmo users and consequently drive new vectors of monetization. We are also expanding functionality beyond omni checkout in both our PayPal and Venmo digital wallets. We will roll out additional services over the next several quarters, including bill pay, subscriptions and rewards management, shopping tools from Honey and new forms of credit and budgeting tools, to name just a few. Our goal is to meaningfully expand the range of services provided inside our wallets. We believe these and other actions will bring us closer to having a full set of capabilities for consumers to use on a daily basis. Our rapidly increasing scale makes us highly relevant to merchants of all sizes and provides us with large sets of data to offer customized services and solutions. Over the last few years, we have developed, acquired and grown a strong and diverse portfolio of capabilities that address many of the current needs of our merchants. These range from end-to-end digital payment processing to sophisticated risk management and shopping tools that ultimately help to drive increased sales and engagement so that our merchants can thrive in the era of digital commerce. And it's the combination of these assets together that provides unique competitive differentiation for our enterprise merchants, channel partners and small business customers. Providing merchants with a comprehensive, consistent, simple and unified experience remains a guiding principle for us as we continue to add new products and services. And as is evident by the number of merchants signing up for PayPal, our integrated platform has never been more relevant or needed. We continue to extend our platform capabilities around the world. We recently entered into an important commercial relationship with Gojek, a leader in mobile commerce in Southeast Asia with 170 million users. In Brazil and Mexico, PayPal is available as a payment option in the Mercado Pago online checkout for shoppers. And PayPal is now available for cross-border transactions on MercadoLibre. And we continue to build our team and capabilities in China as we integrate with our GoPay platform, partner with China UnionPay and other leading Chinese players. COVID-19 was not the only set of issues we addressed this quarter. As all of you know, we are witnessing an outpouring of emotion and determination to address centuries of systemic racism. In June, we announced a comprehensive $530 million commitment to support black and minority businesses and to fight economic inequality. We felt it was necessary to not just condemn racism, but to commit to doing the necessary work over the long term to help create a more socially just society. Even as we navigate these unprecedented times as a business, we have the ability to act in a way that clearly represents our values, especially around inclusion. We still have lots of work to do, but we are fully committed to a future where all people can live with dignity and respect. This is also a special quarter for PayPal because it marks our fifth anniversary as an independent publicly traded company. During that time, we've dramatically expanded our platform capabilities, value proposition, geographic footprint and our market leadership. However, I believe the next 5 years will bring about even greater opportunities. We have an ambitious vision for PayPal to be a central player in the future of the digital economy. I'm confident we can drive towards that goal. We have a solid track record and an unwavering dedication to delivering essential, differentiated and best-in-class services to merchants and consumers. This is our time, and we intend to seize the moment. Our products and services have never been more important, and we are ready and well positioned to capture the opportunities that lie ahead of us. And with that, I'll now turn the call over to John.

Thanks, Dan. I'd like to start by thanking the entire PayPal team for their efforts to serve our customers and execute on our priorities during these unprecedented times. Since our last earnings call, the encouraging business trends that we've called out have persisted, and we're reporting the strongest quarterly results in our history. As Dan discussed, in the current operating environment, our business has inherent advantages. By many estimates, the pace of e-commerce penetration has accelerated by several years in a single quarter. And there is greater demand for contactless payments than ever before. These shifts play directly to our strengths and will enable us to advance our competitive positioning. At the same time, there is ongoing uncertainty as it relates to both the progression of the coronavirus as well as the state of the macroeconomic environment. We are carefully monitoring the pace of recovery and these interconnected dynamics. This overall level of macro-related uncertainty has resulted in increased complexity in building our forecast. It is with this backdrop that we're updating you today on our business and our outlook for the remainder of the year. Our second quarter performance highlights the benefits of PayPal's diversification and scale and our resulting earnings power. We delivered 25% revenue growth on a currency-neutral basis, 49% growth in non-GAAP earnings per share and generated $2.2 billion in free cash flow. We did all of this while absorbing ongoing pressure from reduced travel and event spending and lower revenue from our credit products. I'll now provide the details of our financial performance for the quarter and then our expectations for the rest of the year. Revenue in the second quarter increased 25% on a currency-neutral basis to $5.26 billion. Transaction revenue grew 30% on a currency-neutral basis, the strongest growth we've ever reported. Growth accelerated 13 points year-over-year and 15 points sequentially. Transaction revenue growth was primarily driven by strength across our PayPal Checkout experiences, which more than offset the approximately 60% decline we saw within our travel and advanced volumes. For context, travel and events represented slightly more than 10% of our TPV in the second quarter last year. In addition, cross-border volumes increased 24% in the quarter, which also supported transaction revenue growth. Other value-added services revenue declined 26%. Lower credit revenue in the quarter resulted from a number of factors. These included customer relief actions, fewer merchant loan originations, the lapping of $58 million of interim servicing revenue from Synchrony recognized in Q2 last year, and an approximate $17 million impact from increased expected credit loss provisions related to macroeconomic adjustments. Lower interest income due to lower interest rates globally also contributed to this decline. Revenue from Honey, also part of this line item, only partially offset these headwinds in the quarter. In the second quarter, transaction take rate was 2.23%, and total take rate was 2.37%. Compared to the second quarter last year, these declined 2 basis points and 13 basis points, respectively. Transaction take rate increased sequentially, and excluding the effect of person-to-person volumes, increased year-over-year as well, reflecting strong volume growth from PayPal checkout experiences. Moving to our volume-based expenses. As the rate of TPV, we're reporting record low transaction expense and transaction loss performance. Transaction expense was 83 basis points as a rate of TPV, a decline of 11 basis points versus Q2 last year, primarily due to the funding mix on our platform in the quarter. Transaction loss was 12 basis points, an improvement of 2 basis points year-over-year and the fifth consecutive quarter in which we performed in this range. Risk mitigation strategies and risk model enhancements continue to drive this improved loss experience across our platform. Together, transaction expense and transaction loss provided 335 basis points of leverage. At the same time, given current economic forecast, we increased our macro-related reserves for expected credit losses by $117 million. This flows directly to our income statement, increasing credit losses by $100 million and reducing other value-added services revenue by $17 million. After taxes, this adjustment to our provision represented a $0.07 per share impact to earnings. Entering the quarter, our reserve coverage was 17%. With this additional increase in our reserve, we exited the quarter at 22% coverage. Overall, the combination of our strong revenue and volume-based expense performance resulted in transaction margin dollars increasing 26% to approximately $3 billion. Our transaction margin expanded 179 basis points to 56.6%. 335 basis points of margin expansion from transaction expense and transaction loss was partially offset by 156 basis points of de-leverage from loan losses. Nontransaction-related expenses increased by 10%, resulting in 326 basis points of leverage. Customer support and operations as a line item contributed more than 40% of this leverage. Excluding the impact of our recent acquisitions, nontransaction-related expenses increased 3% or only $0.04 for every incremental dollar of revenue, once again, demonstrating the scalability of our business and our operating discipline. Operating margin for the quarter was 28.2%, improving more than 500 basis points year-over-year, the highest level of operating margin expansion we reported in our history. Strength across all parts of our business contributed to this performance. Non-GAAP other income in the quarter declined by $60 million relative to last year, predominantly driven by increased interest expense from a higher debt balance and reduced interest income from lower interest rates. For the second quarter, non-GAAP EPS increased 49% to $1.07. Our earnings performance demonstrates our ability to successfully execute in the face of a more challenging operating environment as well as the strength and resilience of our platform. Excluding the macro-related charge for expected credit losses, non-GAAP EPS would have increased 59%. We ended the quarter with cash, cash equivalents and investments of $16.2 billion. In May, we raised $4 billion in long-term debt with a weighted average effective interest rate of 2.26%. We ended the quarter with $9 million in long-term debt. In addition, we generated $2.2 billion in free cash flow in the quarter or approximately $0.42 of free cash flow for every dollar of revenue. And year-over-year, free cash flow grew 112%. We're very well positioned from a balance sheet and liquidity perspective. This solid footing gives us the flexibility to successfully navigate this environment and emerge stronger. We've identified several opportunities to accelerate our long-term growth and advance our leadership position in digital payments. As a result, in the back half of the year, we plan to invest heavily in support of these plans, which I will discuss in more detail shortly. I now want to shift to our expectations for the rest of 2020. With more than half of the year behind us, our strong results and ongoing momentum as well as the secular tailwinds that have accelerated this year, we are reinstating our full year guidance. While the timing of the end of the pandemic and the eventual path to economic recovery remain unclear, we have more visibility and confidence in our trajectory for the remainder of 2020. Our updated full year outlook is a significant raise relative to our prior guidance for revenue, earnings and free cash flow. For the back half of the year, our overall expectations are that TPV and revenue will perform in line with the second quarter, with 30% volume growth and 25% revenue growth on a currency-neutral basis. We also believe non-GAAP EPS will grow approximately 25% on a spot basis in both Q3 and Q4, based on the strong leverage we're seeing and our investment plans. As a result of these expectations, for the full year, on a currency-neutral basis, we now expect TPV to grow in the high 20s percentage range and revenue to grow approximately 22%. In addition, for the full year, we now expect to grow non-GAAP EPS in the range of 25%. I'd also like to note that included in this guidance for 25% EPS growth is our expectation that the other income line item will reflect a net expense for the year, given lower interest rates on our corporate cash and the debt we've recently raised.

Relative to the guidance we provided in January, our updated guidance represents a raise of approximately 3.5 points of growth to revenue and 9 points of growth to earnings. In addition, we now expect to generate more than $5 billion of free cash flow this year, an increase of $1 billion relative to our prior guidance. I'd like to give some context for this improved outlook. The revenue growth we expect reflects continued strong performance in transaction revenue, partially offset by ongoing pressure in our credit products. It also reflects a 1-point headwind to growth from the eBay managed payments migration. The rate of growth we're expecting for the year represents a 7-point acceleration from 2019 and is indicative of the elevated and sustained engagement we're seeing across our platform. In addition, we now expect our operating margin to expand by at least 100 basis points relative to our prior guidance that would have been flat versus last year. Based on the mix of transaction volume and our strong business trends, we expect to continue to show transaction margin expansion throughout the rest of the year. At the same time, included in this guidance and partially offsetting transaction margin expansion are our plans to invest approximately $300 million in the back half of the year to advance our key priorities and accelerate our growth initiatives. We believe that we have a unique opportunity to strengthen our competitive positioning and extend our leadership. We've never been more relevant to our customers around the world, and we're focused on doubling down in several areas to help ensure that we sustain and enhance our strategic advantages. This is quite a costly inflection point in the growth of e-commerce and digital payments. And as a result, we're electing to invest much of our margin improvement to help ensure our long-term success. We believe that the guidance we're providing today is consistent with the significant advantages from which our business is currently benefiting. Relative to when we last reported earnings nearly 3 months ago, we have more confidence in the sustainability of the elevated e-commerce trends we are seeing. When it first felt like a potentially short-lived phenomenon resulting from initial panic and pantry packing and even stimulus checks, has become a much more durable and profound behavioral shift. We've seen the strongest and most encouraging new customer volume and engagement trends in our history. At the same time, given our exposure to travel and live events, we've watched demand in these verticals essentially grind to a halt. Our business has demonstrated its ability to withstand exogenous shocks. And the diversity and scale of our platform is allowing us to outperform even while absorbing meaningful pressures. Three months ago, the idea that our PayPal-branded experiences would enjoy TPV growth for an entire quarter at a level consistent with only previously seen during high-velocity holiday selling days like Black Friday and Cyber Monday was bold and even somewhat inconceivable, especially in the midst of a global pandemic and the highest levels of unemployment in our lifetime. And while we know more today than we did a few months ago about both the virus and the economy, there continues to be palpable uncertainty. As we sit here today, the concept of normalcy is being redefined, and at times feel elusive. What we do know is that this is a pivotal moment in PayPal's history. We believe that we've never been better positioned to realize our ambition for greater relevance, ubiquity and impact as a global payments leader. We recognize that this is our time to capitalize on our strategic position and financial capacity to serve our customers better and to advance our platform, and we're committed to achieving our full potential.

I'll now turn it over to the operator for questions.

These results are impressive. I’m thinking about my questions here. You have record new additions, high volume, and great engagement numbers. Can you clarify what has changed since April that is driving this performance? If you had to identify the main factors that give you confidence to reinstate guidance and expect sustainability in the third quarter based on our previous discussions, that would be helpful.

Certainly. It was our best quarter yet, with significant increases in new active users and engagement. In particular, we recorded 21.3 million new active users, with strong performance in May and June following a robust April. The quality of these new users is notable, mostly coming from our key global markets, and we saw merchant numbers tripling compared to our usual figures. This growth reflects a trend of industries adopting digital-first strategies, and I expect this trend to continue. Honey has seen a threefold increase compared to the first quarter, appealing to consumers during these economic times. Venmo accomplished a record number of new active users this quarter, and we also saw Xoom's new active users surge over 600% from the previous quarter. Overall, we anticipate adding around 70 million new active users this year, which is at least double our typical annual addition. On the engagement front, we observed an even more positive trend, particularly in the engagement of new cohorts within the first 10 days, which is up 20% to 30% from earlier groups. Daily active users have increased by around 40% year-over-year, and we’ve seen a significant reduction in churn, which is crucial for future new active users. Volumes have been growing noticeably; April marked our low point, whereas June reached our peak—this growth occurred despite a 60% decline in travel and ticketing events. Braintree is also seeing some of its best growth in a long while. The current influx of new cohorts includes many who are new to e-commerce, especially in the silver tech demographic, which is our fastest-growing segment for new active users. We’re witnessing a variety of new use cases; for example, people are engaging in different ways, such as P2M activities related to streaming workouts. The digital economy has become central to various industries, including health care, education, fitness, restaurants, and entertainment. Brands are now more frequently selling directly to consumers online. Traditional online verticals like groceries and home and garden are experiencing tremendous growth, approaching triple digits. From a PayPal perspective, our large scale and the accompanying network effects make it nearly essential for merchants to include PayPal in their offerings, as doing so can result in sales increases of over 50%. Furthermore, our positioning among merchants is improving as they recognize the importance of PayPal for their revenues. Our brand's reputation and the quality of experiences we offer, including upcoming products such as QR codes, give us confidence that our results will remain strong moving forward, which is why we feel justified in reinstating our guidance for the year. John, do you want to add anything to that?

Yes. So I'll just add one small comment, Tien-Tsin. I think for everyone, the sustainability of these elevated levels of e-commerce and digital payment trends is the big question. And I think one of the things that gives us a little more conviction is we're 3 months further along than we were on the last call. As you've seen, the elevated levels of these trends and particularly in regions that have relaxed some of their shelter-in-place or social distancing measures, and even when consumers are going back to somewhat normal activities like eating out at restaurants or shopping in grocery stores, the level of e-commerce penetration is still much, much higher than what we saw pre-COVID-19. And so I think that's one of the things that we've watched closely that I think is a fairly good indication of the trends going for the rest of the year.

Great. Dan and John, really, really appreciate the level of detail in all of that. To dig into one area, with the eBay expiration, can you update us on the strategy and positioning in marketplaces, particularly how you're servicing some of the faster-growing ones, like Shopify, given what's going on there today. What does the strategic road map look like? And what does it mean for PayPal?

Yes. It's a good question, Heath. I'll start off with that. I'd say, first of all, eBay is going to remain a very important customer over the foreseeable future. Jamie and I have had good conversations about that. They've been quite positive. And I thought you saw that reflected in some of his comments yesterday about our partnership. It is what our mutual customers want. And the impact of managed payments has been forecasted by us for quite some time. John mentioned it's part of what we're putting into our guidance for the rest of this year. And honestly, on that front, from what we see with a very high share of checkout with merchants who have moved to intermediated payments, our checkout share can be from 50% to 75% depending on the country. And when we do research and we do a lot of it with merchants who use both PayPal and eBay, the difference in NPS in terms of how they think about an intermediated approach and the PayPal approach is quite substantial in favor of PayPal. And so we really have seen, obviously, some merchants move, but not a large number to date. And if anything, we're feeling better about our projections than we have, but we're just beginning the end of the operating agreement right now. So we feel comfortable that this is a very manageable transition going forward. I think your point is a really interesting one about other marketplaces. And if you look at the top 15 marketplaces that we serve today, Shopify being one of them; Etsy, for instance, being another, and you look at their growth rate, the growth rates of all 15 of those marketplaces we're quite close partners with approached 100% in Q2. Yes, it's just amazing growth to go and see that. It was 3x the growth of what we saw on eBay. If you look over the last year or so, it's something like 7x the growth of eBay. And we have spent a lot of time working with those marketplaces to be quite close partners with them. From Shopify, some others that are just beginning but may have the potential of being meaningful marketplaces like Facebook and Google or Facebook or the underlying payments platform for Facebook Marketplaces and InstaShopping. We just announced a comprehensive partnership with Google, and we are working with other major marketplaces as a result of the expiration of the operating agreement. And so I think it's a huge growth vector for us. We are participating in that growth, and our road map is quite focused on providing additional value-added services for those marketplaces. But things like payouts, which we really have taken a good lead in and other things, are crucial as well as all the regulatory elements around the world that we can provide services and capabilities to those marketplaces because we are a global player. John, anything you'd add on that?

No, nothing to add, Dan.

Dan and John, can you elaborate a little bit on the QR code strategy? Specifically, what types of merchants are you targeting? What steps are you taking that are going to drive consumer adoption of actually whipping out the PayPal or Venmo wallet at the physical point of sale? And then what's the monetization strategy for QR? Meaning, in which cases is it monetizable for PayPal versus being a pass through?

I’ll start by discussing our QR code strategy, which is a key strategic priority for us and essential for increasing daily usage. We are committed to making the necessary investments for success, understanding that this is an ongoing process that won't yield immediate results. However, we believe it can significantly contribute to our business over the medium term. The demand is evident; consumers and merchants are reaching out to us for implementation. Right now, 70% of people have health concerns about shopping in person, leading to a demand for touchless payments. Retailers recognize this need, and we are rolling out our services to small and micro merchants in 28 countries, experiencing encouraging growth. Currently, we are collaborating with over 100 large enterprise merchants in the U.S. and Europe, though not all of these partnerships were established this year. We also have many channel partners, including terminal, point-of-sale providers, acquirers, and networks, to distribute our QR codes across Venmo and PayPal. Today, we announced our partnership with CVS, which aligns with our goal of engaging with popular merchants that consumers visit daily. Our strategy focuses on demand rather than supply push, and we will invest significantly in marketing to ensure consumers are aware they can use QR codes, including promotional efforts in the latter half of this year. Merchants appreciate our scale and brand recognition; together, Venmo and PayPal reach 150 million to 175 million digital wallet users in the U.S. This gives us an edge as merchants look to target the Venmo demographic through QR code implementation, unlike some other options that lack broad customer bases. The use of QR codes goes beyond simple touchless payments. It encompasses a valuable proposition, integrating rewards and capabilities from our Honey platform. Merchants will benefit from features like proximity messaging and the ability to utilize various funding sources, including rewards points. We will begin rolling out this expanded functionality over the next six months. The emphasis is on creating a compelling value proposition that promotes safety and a seamless experience across all devices and operating systems. Regarding economics, the monetization model will be similar to our online rates, though not identical. For larger merchants, the rates will align closely with other in-person payment rates. We view the long-term economics as favorable, with many opportunities for incremental revenue. John, would you like to add anything?

Lisa, I would just add one other thing as we think about what this offering provides for our consumers but also the economic benefits of PayPal, it's not just in the direct unit economics that come through a point-of-sale transaction. Very importantly to us is what this will do to the overall level of engagement for consumers. So if you're using us in an offline setting, you're much more likely to use us when you have the opportunity online. So there's a halo benefit that comes along with this usage that is very important to us as well.

Nice results. Given the substantial incremental margins, we're seeing overall margins increase by over 500 basis points. Can you discuss your strategy regarding the balance between the investments you want to make in the business and margin expansion? It's great to see the higher base, but we're hearing from clients that you should be capitalizing more on the opportunities available. I would love to hear more about where you plan to allocate those resources and how you will maintain that balance.

Thank you, Darrin. I’ll begin, and then John can chime in. Generally, we invest where we identify opportunities, which has been our approach over the years and is reflected in our results. While we could achieve higher margins without reinvesting in the business, that’s not what we believe our shareholders expect from us. There is significant opportunity ahead, potentially more than we’ve ever experienced. We can invest in new aspects of the business that we believe will contribute to our growth and, more importantly, benefit our customers, merchants, and consumers by enhancing the capabilities they are seeking. As John mentioned, we plan to invest approximately $300 million in the second half of the year, focusing on in-store solutions, which I previously highlighted as crucial, and on enhancing our digital wallet capabilities. Our goal is to integrate ourselves into the daily routines of customers within the digital economy. Over the next few quarters, we will be introducing various new features, including QR codes, tap-to-pay cards, and rewards programs. We’ve noted an increase in the use of rewards points for purchases through PayPal, as people are less able to use those points for travel. We are nearing completion of our Paymentus integration, with plans to roll out bill pay options in our apps by the end of the year. We also plan to incorporate Honey’s shopping tools into our PayPal and Venmo apps, focusing on wish lists, coupons, rewards, subscription management, and additional financial services. Expect to see significant enhancements to the capabilities of our digital wallets across both PayPal and Venmo. Additionally, we see substantial investment opportunities in specific international markets, including China through GoPay, and we are experiencing rapid growth in Mexico, Japan, Brazil, and Western Europe, where the developments have been impressive. We will continue to invest in our business as needed to drive results. If we find more avenues for investment, we will pursue them; if not, we will return the excess to our shareholders. Our guidance reflects our commitment to making the right investments to seize the available opportunities, as we recognize that this is a pivotal moment for us.

Darrin, if I can just add quickly, you referenced our margin profile in your question. And I think that's pretty important to this discussion because what we're demonstrating right now is the real scalability of our operating model. And Darrin, like I frequently focus on the incremental margins in our business. How much profit did we bring in for every incremental dollar of revenue? And in the quarter, those incremental margins were the highest they've been for us ever at 50%. But actually, I think that a better way of looking at that is more apples to apples. And that's if you exclude the losses related to the credit reserve and you exclude acquisitions, that incremental margin was actually 70%, 7-0. And what that does is result in free cash flow like you saw us generate in the quarter at over $2 billion. And so as it gets to how we spend that, we've always been balanced between M&A, organic investment and returning cash to shareholders and we've also been opportunistic. And to the point that Dan was making, this is a time that we think it's very important to invest in a lot of these initiatives because, as I said on the last call, while these trends are seemingly changing right in front of us, we don't want to just want to be on the receiving end of that. We want to help shape the outcome here. And so we want to invest into that.

Congratulations on the positive trends. Regarding Venmo, I wanted to follow up on its 60 million customers. The last revenue figure we received indicated a $450 million revenue run rate in 2019. There are several developments happening, including the direct deposit strategy, commercial strategy, QR codes, and the integration with Honey. Can you provide an update on the revenue run rate? Additionally, could you share some insights on the direct deposit strategy? Which of these strategies do you anticipate will have the most significant impact? I believe direct deposit could be transformative, but I'm uncertain if Venmo's customer base will easily adopt it. Any insights on Venmo's various strategies and revenue trends would be beneficial.

Sure, Bob. It's good to speak with you. We don't provide an update on Venmo's revenue each quarter, and we don't have one this quarter. But I want to say that I think across the board, this was one of Venmo's best quarters ever. We saw growth on their platform reaccelerate from the dip in Q1 to where it's over 50% growth in volume. And I think what's notable about that is we all recognize that much of the Venmo usage historically has been around social experiences. And as those have, by and large, gone away for the most part, we're seeing new use cases developed with Venmo, which really demonstrates its relevance and importance to our customer base. I think, as good as anything. And so with respect to the monetization strategy, it's not just 1 strategy. It's a multifaceted approach that includes things like direct deposit to increase usage, include things like business profiles, include things like QR code. And then, of course, we're eventually launching the Venmo credit card later this year. And we'll continue our efforts as well around the pay with Venmo in an e-commerce setting.

Yes, I just wanted to add that we should not underestimate how passionate Venmo's customers are about managing their finances on the platform. Each of the new features, including direct deposit, business profiles, and the credit card, is being quickly embraced. It’s fascinating to observe the new trends, as millennials are shifting from dining at restaurants to eating at home or outdoors, and are opting for streaming fitness classes instead of heading to the gym. Similarly, they are choosing to engage in online entertainment rather than attending concerts. We are seeing these shifts reflected in Venmo's usage. This was indeed Venmo’s strongest quarter, and as mentioned, we are committed to investing in it because we believe it has a promising future and remains a key asset for us.

Dan and John, can you explain the factors behind the significant increase in new accounts for Honey? Also, what advantages do you anticipate for the PayPal ecosystem as a result?

Yes. In this economic environment, many people have been struggling to make ends meet, which has been exacerbated by the pandemic's economic impact. Honey's capabilities align well with the needs of consumers and merchants right now. I see the potential to establish Honey as a highly efficient market-making platform for shoppers and merchants. Consumers can find the best prices on the items they want, and they receive rewards that encourage further engagement, enhancing their demand. Merchants can tailor their offers to match this demand, allowing them to meet specific targets. Historically, we've understood who our customers are and their purchase behaviors, but we've lacked insight into their intentions upfront. We now possess a valuable set of data that benefits our two-sided network. Additionally, Honey's net new accounts grew threefold, and their revenues significantly increased as well. The integration is progressing smoothly without any delays. We plan to export Honey's tools through APIs into our PayPal wallets and QR codes. Our goal is to create a seamless one-click PayPal checkout experience for Honey merchants. Overall, I'm very happy with how the integration is going, and we have a strong set of capabilities ahead.

Congratulations.

Yes. Thank you.

Dan, John, you guys have highlighted a lot of the strong trends and your increased confidence that those can sustain. If we look at your second half guidance and the strength you're anticipating there, how should we think about extrapolating that into the future in terms of what makes sense to think about from a growth and margin expansion perspective going forward? And kind of what are the key things that we should be looking for in '21 and beyond?

Sure, James. This is John. I'll take that. There's still some uncertainty out there, including macroeconomic factors and the trajectory of the virus. It's a challenging environment to forecast. However, we feel confident enough about our current business performance to provide guidance for the second half of the year. The broader question is how this impacts our medium-term guidance, which is difficult to assess. There are clear structural benefits emerging for our business, with significant long-term growth opportunities. While we are not ready to provide updated medium-term guidance today, we are reinstating our guidance for the year. We are seeing cumulative benefits to our platform, and trends we expected, like the adoption of contactless payments in stores, are occurring now. We've discussed the decline of cash for years, and this may be the turning point. We believe PayPal is well-positioned to benefit from these changes. Although it prompts us to reconsider our medium-term guidance, it is too early to make any adjustments at this time.

If I can add to John's comments, it's clear that we've entered a digital-first economy. The number of merchants joining our platform has reached 1.7 million in just one quarter. We are engaging with merchants globally, both large and small, all seeking to expedite their digital strategies. Recent market research indicates that 70% of consumers plan to shop online more frequently due to the ease and convenience it offers. Across various industries, it's evident we are evolving into a digital-everything world, and this acceleration will persist. Numerous studies support this trend. As John mentioned earlier, in regions where retail has reopened, 80% is now operational compared to only 30% previously, and we continue to see high daily active user levels compared to last year. From my perspective, the medium-term outlook presents more opportunities than challenges. We anticipate needing another quarter or two, but it's likely that positive trends will continue. We are investing in our growth, with the expectation of a return on that investment. We feel confident enough to reinstate guidance from 2020, and we're optimistic about the opportunities we are pursuing. After another quarter or two, we will provide an update on our medium-term guidance. I want to thank everyone for your time today and hope that you and your families remain safe and healthy. We look forward to seeing all of you in person again soon. Thank you, have a great evening, and take care.