PayPal Holdings Inc (PYPL) — Q1 2021 Earnings Call Transcript

Thank you, Gabriel. Good afternoon, and thank you for joining us. Welcome to PayPal's earnings conference call for the first quarter 2021. Joining me today on the call are Dan Schulman, our President and CEO; and John Rainey, our Chief Financial Officer and EVP, Global Customer Operations. We're providing a slide presentation to accompany our commentary. This conference call is also being webcast. And both the presentation and call are available on the Investor Relations section of our website. In discussing our company's performance, we will refer to some non-GAAP measures. You can find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in the presentation accompanying this conference call. Management will make forward-looking statements that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include our guidance for the second quarter and full year 2021. Our actual results may differ materially from these statements. You can find more information about risks, uncertainties and other factors that could affect our results in our most recent annual report on Form 10-K and quarterly report on Form 10-Q filed with the SEC and available on the Investor Relations section of our website. You should not place undue reliance on any forward-looking statements. All information in this presentation is as of today's date, May 5, 2021. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

Thanks, Gabrielle, and thanks, everyone, for joining us today. I'm pleased to say that on the heels of the strongest year in PayPal's history, we just completed our strongest quarter ever with record financial and operating results. Customers across the world have clearly embraced the digital economy, and PayPal has become an essential platform for both consumers and merchants. Consequently, I'm pleased to share that we are raising our annual targets for revenue, EPS, TPV and net new active accounts. As much of the world begins to shift its attention towards a post-pandemic recovery, we continue to see strong demand for a comprehensive set of services from both our merchants and consumers. Over the coming year, we will accelerate our customers' digital engagement through the rapid innovation of our digital wallet and merchant commerce platform. Our addressable market continues to significantly expand, driven by accelerating secular trends and the proactive steps we are taking to become a full commerce and payments platform. We believe that the shift in consumer digital behavior will remain essentially unchanged in a post-COVID world. Consumers have expanded their digital lives into a seamless online and offline experience. Our products are an essential enabler of the digital economy, and our mission to shape a future where everyone can participate fully in this new digital paradigm has never been more important. Our Q1 trends are strong across the board and were further accelerated by favorable comps from a year ago. Our TPV grew by 50% on a spot basis, or 46% on an FXN basis to $285 billion. eBay now represents 5.5% of our volume, and we expect their TPV to be approximately 3% of total volumes by year-end. Excluding eBay, our MS volumes grew by an all-time high of 54% on a spot basis and 50% on an FXN basis. Our transactions in the quarter were approximately 4.4 billion, growing 34% year-over-year. We added 14.5 million net new active accounts, ending the quarter with 392 million active accounts, up 21% year-over-year. We added 1.4 million new merchants in the quarter, continuing the heightened pace from prior quarters, and we now have 31 million merchant accounts on our platform. By the end of Q2, we expect to exceed 400 million active accounts. And for the year, we now believe our NNAs will be between 52 million to 55 million, up from our previous expectations of approximately 50 million last quarter. I'm particularly pleased to see our transactions per active account begin to accelerate due to increased engagement across our portfolio. Normalizing for Honey, our Q1 TPA grew by 8.3% year-over-year to 44.1. We generated $6.033 billion of revenue in Q1, growing a record 31% spot and 29% on an FXN basis. eBay revenues declined 12%, and we expect they will substantially complete their migration to manage payments by year-end. On the back of this strong revenue growth, we delivered non-GAAP EPS in Q1 of $1.22, up 84%. Venmo continued its strong performance in Q1 with $51.4 billion of TPV, up 63% year-over-year. We recently launched the ability for Venmo customers to buy, sell and hold cryptocurrencies. We are heavily investing in Venmo's commerce capabilities, which include rapidly upgrading the Pay with Venmo customer experience with initial rollout beginning this quarter. The Venmo credit card is outpacing our expectations for both new accounts and transactions. And we're also making it easier for small businesses and casual sellers to accept Venmo payments. We now have over 300,000 small business profiles currently established, including $200,000 in Q1 alone. Our Venmo Commerce TPV and revenue growth continued to accelerate, and we remain confident in our $900 million revenue target. We expect to roll out our next-generation digital wallet in Q3. It will be an all-in-one personalized app that will empower our users to make the most of their money and strengthen their financial lives every day. We will provide increasingly customized and unique shopping, financial services, and payments experiences for our customers. Consumers are turning to brands that they trust when it comes to choosing a super app. That clearly plays into our strength as a recent external survey of over 300,000 consumers across the globe selected PayPal as the second most trusted brand in the world. Merchants continue to turn to PayPal in record numbers as we are now an essential platform to enable their transition into the digital economy. Small businesses who used PayPal during the peak of the pandemic saw their overall revenues grow by 25% versus a negative 9% for all other small businesses in the same time period. Small businesses who used PayPal last year drove 75% of their online sales from outside their local neighborhood, clearly expanding their addressable market. And 65% of small businesses in the U.S. who use PayPal have cross-border sales versus less than 5% of all other small businesses. Across the shopping journey, merchants who use PayPal see a substantial lift. According to market research reported by Nielsen, merchants with PayPal experienced 17% more repeat buyers. Their checkout completion goes up by 34%. And PayPal consumers spend an average of 12% more at PayPal merchants. And finally, PayPal consumers are loyal to PayPal merchants, buying 11% more often when PayPal is accepted. These are powerful facts that support our brand promise to retailers as we add more and more capabilities to our platform. For instance, our Buy Now, Pay Later product continues to move from strength to strength. In the short time from our launch, we've processed over $1 billion in TPV in the U.S. alone. Early results continue to show a significant 15% engagement lift in transactions and TPV. In addition, nearly 30,000 merchants have implemented our Buy Now, Pay Later capabilities upstream on their product pages with a corresponding lift in our overall share of checkout. Demand for our PayPal and Venmo QR codes and in-store payments remains strong, with an additional merchant signing up every 28 seconds. We now have nearly 1 million merchants accepting our QR codes with continued momentum across our large enterprise merchants. Our early adopters of QRC are spending 19% more TPV on the PayPal platform. Our overall in-store efforts across QR and cards equaled $6.4 billion in Q1. As I discussed during our Investor Day, we believe the current technological underpinnings of our financial system will be substantially upgraded over the coming years. Both cryptocurrencies and central bank-issued digital currencies can play a critical role in shaping a more inclusive recovery and a more equitable financial system. Our leadership in all forms of digital currency has been widely embraced, enabling numerous positive conversations with central banks, regulators and government officials around the world. I'm also pleased to share that we closed our Curv acquisition last month. And Curv's talented team will bolster our existing technology resources and accelerate our efforts to shape a new financial infrastructure that is efficient, low-cost and inclusive. We have an extensive roadmap ahead of us, and our innovation will be pursued in partnership with governments and in compliance with local, national and global regulatory frameworks. The expiration of our operating agreement with eBay has enabled us to launch an extensive partnership with Alibaba. This global agreement will enable hundreds of millions of consumers outside of China to shop across Alibaba sites in China. PayPal is now available as a payment method on Alibaba's wholesale marketplace as well as AliExpress, its global retail marketplace. We are excited at the pace of our current ramp and the ultimate potential of this new partnership. Additionally, our commercial agreement with FlutterWave enables businesses across Africa to have significantly more access to PayPal consumers in order to receive and make payments online. In this quarter, we also collaborated with TelR in the Middle East, allowing merchants in the UAE to accept PayPal for customers shopping online. These efforts serve to significantly broaden our reach and tap into rapidly growing marketplaces across the globe. We clearly have a lot of momentum as we exit Q1. We will continue to accelerate new product innovation throughout the year. Our increased expectations for 2021 reflect our conviction that we will continue to grow share and increase our addressable market by capitalizing on the accelerating shift to digital. I'd like to thank our employees who continue to work tirelessly on behalf of our customers. Their hard work drives our market leadership and positions us to continue to deliver value for all of our stakeholders. And with that, let me turn the call over to John.

Thanks, Dan. I want to start by thanking our customers, partners and employees for helping us deliver an outstanding quarter. We recently marked 1 year into the COVID-19 pandemic. Notwithstanding the challenges that our teams have faced, our focus on execution and culture of collaboration are allowing us to deliver very strong results. We're off to a great start to the year. In Q1, we outperformed on both revenue and earnings and built on our operational and financial momentum exiting 2020. In looking at our results for the quarter, the year-over-year growth rates benefit from the comparison to a softer March last year when we absorbed the most meaningful negative COVID impact. That said, our business is growing at structurally faster rates than pre-pandemic. And as a result, we're raising our guidance for this year. Before discussing our updated outlook, I'd like to highlight our Q1 results. Total payment volume grew 50% at spot and 46% on a currency-neutral basis. This is the strongest quarterly growth we've ever reported. Our Q1 TPV grew at a 2-year compound annual growth rate of 33%, accelerating from 30% in Q4 and reflecting our strong momentum in user growth. Notably, while we typically experience a sequential decline in volumes from Q4 to Q1, this year, our volume grew 3% quarter-over-quarter. Versus the first quarter last year, merchant services volume grew 50% currency-neutral. And volume contributed by eBay marketplaces declined 3% on the same basis. In Q1, eBay represented 5.5% of our volume, down 53 basis points sequentially and down 260 basis points from Q1 last year. Revenue increased a record 31% on a spot basis and 29% currency neutral to $6 billion. Transaction revenue grew 33% to $5.6 billion, representing 20 points of acceleration from last year on a spot basis and 8 points of acceleration sequentially. Strong performance across core PayPal, Braintree and Venmo drove these results. Excluding eBay, transaction revenue grew 42%, indicative of the ongoing strength of our diversified 2-sided platform. Other value-added services revenue grew 2% on a spot basis and 1% currency neutral to $412 million. These results were driven by strengthening credit performance, which was partially offset by lower interest income on customer balances. In the first quarter, transaction take rate was 1.97%, and total take rate was 2.11%. Nearly 1/3 of the 24 basis point decline in transaction take rate resulted from the mix effect of eBay. A reduction of $101 million in international transaction revenue from foreign currency hedges, growth in bill payment volumes, and accelerating Venmo volumes also contributed to this decline. The 31 basis point decline in total take rate resulted from these factors as well as lower growth in other value-added services revenue. Volume-based expense performance was the strongest in our history. These expenses increased only 9% to $2.5 billion on 31% revenue growth. As a result, transaction margin dollars grew 52% in the first quarter, and transaction margin reached 57.8%. Normalizing for the macroeconomic-related credit loss provisioning last year, transaction margin dollars grew 38%. Going into the expense highlights. Transaction expense improved 12 basis points as a rate of TPV to a record low of 80 basis points, driven by both volume and funding mix. Continued improvements in our risk decisioning and mitigation strategies resulted in transaction losses improving 3 basis points to another record low rate of 10 basis points overall. In discussing our credit losses for the quarter, I want to provide additional context given the increased provisioning last year and the complexity in the year-over-year comparison. As a reminder, in Q1 2020, we increased reserves by $227 million for expected credit losses due to the deterioration in the macroeconomic environment. After taxes, this represented a negative $0.17 per share impact. During 2020, we increased our reserve coverage ratio and ended the year at 23%. In addition, our gross receivables balance declined from $4.5 billion at the end of the first quarter last year to $3.6 billion at the end of 2020. Tightened underwriting and strong repayment activity contributed to lower balances in our merchant loan portfolio. This decline was partially offset by growth in our consumer portfolio. These trends continued in the first quarter of 2021, and we ended the quarter with $3.5 billion in receivables. More favorable economic conditions and portfolio performance resulted in a partial release of reserves in Q1. This reserve release benefited credit losses by approximately $87 million and provided an approximate $0.06 benefit to EPS. As a result, at the end of the first quarter, our reserve coverage ratio declined to 21%. In the quarter, nontransaction-related operating expenses increased 31% and represented 30% of revenue, remaining essentially flat to last year. We are prioritizing growth. And to advance our key initiatives, we're continuing to invest more in sales and marketing and technology and development. On a non-GAAP basis, operating income was $1.67 billion, and our operating margin was 27.7%, our strongest performance for any first quarter. Normalizing only for the macro-related provisioning last year, operating income grew 46% and operating margin expanded approximately 300 basis points. In Q1, on this normalized basis and inclusive of our elevated investment spend, we earned an incremental $0.38 of operating income for every additional dollar of revenue generated. Non-GAAP other income declined by $39 million relative to last year. This was driven by reduced interest income from lower interest rates and higher interest expense from our debt issuance last May. The negative impact on non-GAAP EPS from the decline in other income was largely offset by a lower effective tax rate. For the first quarter, non-GAAP EPS grew 84% to $1.22. Again, normalizing for the $0.17 negative impact last year related to increased credit provisioning, non-GAAP EPS still grew 47%. We ended the quarter with cash, cash equivalents and investments of $19.1 billion. In addition, we generated $1.54 billion in free cash flow, representing 27% growth from the first quarter last year. For every dollar of revenue in the first quarter, we generated $0.25 of free cash flow. Now I'd like to discuss our updated guidance for 2021 and our guidance for the second quarter. This updated outlook reflects our ability to accelerate growth at scale at increasing rates of profitability as well as the underlying strength of our core business. For the full year 2021, based on our record first quarter performance and sustained momentum, we are raising our net new active TPV revenue and earnings outlook. Relative to our prior expectations, eBay's managed payments transition has accelerated, and we now expect a greater percentage of the migration to be complete by the end of the third quarter. This acceleration puts more near-term pressure on our revenue and earnings growth. At the same time, this more compressed timing allows for a cleaner exit in 2021. Broad-based strength in our Merchant Services business and improving credit performance allowed us to more than offset this impact. We now expect revenue to be approximately $25.75 billion for a growth of approximately 20% on a spot basis for the year. We are raising our expectations for revenue growth by 1 point while at the same time absorbing an additional 2 points of pressure to revenue growth from eBay. In addition, we expect to generate approximately 100 basis points of operating margin expansion this year relative to the more modest margin expansion we had guided at the start of the year. As a result, we now expect non-GAAP earnings per share to be approximately $4.70, representing growth of approximately 21%. Relative to the guidance we provided at the start of the year, this is an additional 4 points of non-GAAP earnings growth in 2021. We're executing from a position of strength and seeing strong adoption of our new products and services. Our updated guidance includes increased investment in our digital wallet initiatives to drive further innovation, adoption and engagement. The strong underlying trends in our business and Q1 outperformance are allowing us to offset these incremental investments and the more pronounced eBay headwinds to deliver stronger earnings growth than we previously expected. For the second quarter, we expect revenue of approximately $6.25 billion, representing approximately 19% growth at spot. In addition, we expect non-GAAP earnings per share for Q2 to be approximately $1.12, representing growth of approximately 5%. As a reminder, last year, operating margin expanded more than 500 basis points in the second quarter. Favorable volume and funding mix dynamics, combined with COVID-related underspend and nontransaction-related expenses, contributed to the strong margin performance and resulted in 49% growth in non-GAAP EPS. This record growth last year creates a tougher comparison. On a 2-year compound annual basis, our earnings guidance reflects 25% growth. I'd also like to discuss our updated net new active outlook. We're raising our guidance for 2021 net new active accounts. Based on the 14.5 million additional accounts in Q1 and our current trends, we now expect to add in the range of 52 million to 55 million net new users this year. This is an increase from the 50 million net new actives that we guided to start the year. On top of the approximately 73 million users added last year, at our current pace, we'll add more new users between last year and this year than we did in 2016, '17, '18 and '19 combined. As a reminder, in Q2 last year, we added 21.3 million accounts and are now lapping this growth. Given this tougher comp, and the ramp of our initiatives throughout the year, we expect Q2 net new actives to be lower than Q1 and for Q3 and Q4 adds to be sequentially stronger. It's worth noting a couple of points related to our guidance and our business overall. First, the environment in which we are operating, while more stable than a year ago, continues to be very dynamic and more challenging to predict than in normal times. In many of our core markets, we're on the threshold of some degree of a return to normalcy. People are getting vaccinated. There's a return to physical experiences. Travel is resuming. Some of this is certainly pent-up demand from the void that resulted from COVID-19 over the last year. For some, perhaps it may be a reversion to the way things were prior to 2020. The pace and degree of this change and its impact on the trends on our business is challenging to predict from one quarter to the next with the same level of certainty that we have in normal times. This brings me to my second point, which is unassailable. Our business has and will continue to benefit from the changes in consumer behavior that have resulted from this pandemic, namely, the acceleration of the continuing trend of the growth in e-commerce penetration and importantly, the growing ubiquity of digital payment experiences. We continue to see elevated e-commerce spending well above pre-pandemic levels, even in countries and markets that have begun to reopen. We're positioned to be a long-term beneficiary of these secular trends and as we've repeatedly said, are investing heavily to help shape this outcome. That said, our short-term forecasting is susceptible to more variability than normal. To wrap up, our first quarter results underscore the ongoing strength, diversification and relevance of our scaled, two-sided global platform. We extended our leadership position in digital payments and delivered some of the best performance in our history on both an absolute and relative basis. And our strong trends across the business reflect enduring secular trends and continued business momentum. We're continuing to invest aggressively to drive accelerated growth in a post-pandemic world and capture the significant opportunity ahead. At the same time, our meaningful scale enables us to realize additional efficiencies, expand our operating margin and support significant free cash flow generation. With that, I'll turn it over to the operator for questions.

Hey, thanks, guys, and great results here. When we look at coming out of last year's record NNAs, we thought 50 million was a good number, and now you're raising that. If you could just touch on the dynamics you're seeing around the net new actives, what's driving the upside even after these kinds of record rates? And especially as we go into reopening in the market, can you just talk through the activity and the churn levels? And then maybe on the other side of the funnel, if you could touch on the incremental users coming on, even as the world reopens, is it partnerships like Alibaba you mentioned today or other kinds of international? Or just really what's the big driving force for that confidence? Thanks, guys.

I will begin by answering your question, Darrin, and then see if John has anything to add. We had a strong first quarter, with growth of 46% excluding last year's one-time Honey additions. We ended the quarter with 31 million merchants and 392 million active accounts. We're reaching a scale that creates significant network effects. In the first quarter, we added two new customers every second and one new merchant every five seconds, resulting in 1.4 to 1.5 million new merchants—over 100% increase from the previous year. The primary growth drivers remain PayPal and our core markets, along with strong performance from Venmo. In terms of new actives, there is still substantial opportunity for us to expand internationally, and our marketing efforts are starting to yield impressive results. We're only beginning to explore that potential. Our engagement levels are rising significantly; our total payment activity grew by 7%, and if we exclude Honey, it increased by 8%. Normalizing that to our previous figures indicates a 14% growth. This uptick is driven by a 33% increase in daily active users this quarter, and our new products and services are enhancing engagement. For instance, with Buy Now, Pay Later, 50% of users repeat their purchases within three months, and 70% do so within six months. Our in-store cohort is generating an additional 60 to 120 transactions. We mentioned this previously, and it remains valid. About half of our crypto users engage with the app daily. We're beginning to see an upward trend in user acquisition while also improving the conversion at the bottom of the funnel, which makes me optimistic about our new actives. However, it’s important to note the pattern of those new actives. The first quarter performed well, but the second quarter is traditionally our weakest due to last year's 21.4 million net new actives. Even though churn rates have decreased and last year's cohort was one of our best, it adds some pressure for the second quarter. We expect to see increased new actives as we progress through the year. Overall, we're experiencing strong growth in new actives and engagement, and we anticipate more positive developments ahead.

I'll just add quickly, Darrin. If you look back to a year ago or perhaps three quarters ago, the record number of net new actives we had in the second quarter likely surprised everyone. It was an enormous figure. Then you start thinking, 'Okay, what’s next?' We need to ensure that we are engaging these customers and they are utilizing our services to their fullest potential. Even at that time last year, we were aware that this year's second quarter would present the toughest comparison in terms of net new actives. Despite the improvements we've made in reducing churn, there’s still considerable pressure. Therefore, we anticipate that Q2 will be the lowest point for us this year, followed by expected growth in Q3 and Q4. What gives us confidence is that these have been the most engaged cohorts we've ever experienced, and those trends continue without diminishing due to the return to physical activities. This strengthens our belief in raising expectations and reflects positively on the future of our business.

Okay. That’s great. Thanks, again, guys. Congrats again.

Yes. Thanks, Darrin.

Thank you. Thank you. Really impressive results on many fronts. I wanted to ask on the first quarter revenue. So you beat your revenue guidance, looks like, by 3 percentage points. I think that's the widest margin of upside we've seen in a few quarters. So I'm curious, what surprised you? Can you rank for us what surprised you? What drove the upside? And how does it change your revenue outlook for the year? It sounds like it's enough to offset the bigger eBay drag, but would love it if you could rank it for us maybe. Thanks.

Yes. Tien-Tsin, do you want me to start, Dan?

Yes.

Starting with the full year, the momentum we're experiencing in the business has helped us navigate the challenges posed by eBay's faster transition to managed payments. Regarding Q1, there were several factors that performed differently than we anticipated. In January, we experienced an extended holiday shopping period, leading to much stronger e-commerce activity than usual in the first couple of weeks. By March, there was a quicker resumption of travel than we had predicted. Additionally, the impact of stimulus measures, while somewhat accounted for in our forecasts, was evident but not overstated. However, if we look at these factors as possibly temporary, the more significant, lasting change is the trend of moving away from cash. We're observing an increase in digital solutions replacing cash transactions. For instance, last Saturday night at a restaurant that had just reopened, I noticed that instead of handing my credit card to a waiter, I received a printed receipt with a QR code for payment. This shift from traditional to digital experiences is clearly unfolding before us. This small example illustrates the ongoing convergence of online and offline experiences, which is positively impacting our business.

I'll just add on to that, John, because I think that is the strength that we're seeing even in markets that are opening. If you think about, we did a 100-point raise in guidance for revenues, you had 200 incremental points of pressure from eBay. That's really, in effect, a 30-point raise on our core business. And that's because we are now seeing people living a digital life. And what used to be and for us as well, like 1 year, 1.5 years ago is there was a separate distinction between in-store or the physical world and e-commerce in the online world. And now what we're seeing is that it's just a digital world. Even as economies open, more and more of those payments are moving to digital. Think about it, like Uber would be a good example. As more and more rides start there, they're moving into a physical environment, but it's all done through a digital platform and digital payments. And so clearly, that is something that we see as a sustaining and growing trend going forward. And I think John mentioned cash is definitely being replaced. There's just a study done a week or 2 ago by one of the major networks that said anywhere between 60% to 70% of consumers are going to use cash less frequently, and that's moving to digital. It's moving to digital forms of payment, and it's moving to P2P. And by the way, when it moves to digital, it's moving predominantly to debit, which obviously is also great from a funding perspective on that. And so I think we have this portfolio of services right now, whether it be Zettle or Braintree or QR codes or just what's happening in the physical world that complements now what's happening in the online world with our more traditional products. And that's kind of a 1-, 2-punch that I don't think any of us really understood the extent of or the depth of the transition to a digital economy.

And just if I can add one more thing. For those reasons that Dan mentioned, it's also why we are investing as heavily as we are. At no point in time in our 6 years as a public company, have we invested as heavily as we are right now because we want to capitalize on these secular tailwinds, and we think it's really important. And that's why you see us not rolling through the entirety of that in terms of our EPS guidance because we think it's more important to invest right now, and that is clearly our bias. And fortunately for us, we're able to do that while still expanding our operating margin in terms of our guidance 100 basis points for the year.

I had a follow-up on your comments, Dan, on digital currencies and their ability to potentially drive financial inclusion globally. As you're engaging with governments around the world that are experimenting with CBDCs, how are they thinking about the role of the private sector? And specifically, what role or roles could you see PayPal playing? Meaning, more broadly, how should we think about how CBDCs could impact your business?

We have had numerous discussions in the U.S. and globally with leaders of regulatory bodies and key government figures. While I can't share specific details from those conversations, I can say that they are centered around learning from one another, understanding each other's capabilities, addressing the concerns of central banks and governments, and exploring the benefits a platform like PayPal could bring to the issuance of CBDCs. Based on my discussions, it's clear that each country will progress at its own pace, with varying levels of regulatory oversight. However, every country we’ve engaged with seems to envision a future that includes digitized fiat currency. Digital wallets show a lot of synergy in this context, and there are exciting advancements in next-generation technology that could enhance payment utility, reduce costs, eliminate unnecessary intermediaries, and speed up access to funds. We are seeing great results from our cryptocurrency initiatives and are investing in them. The establishment of a digital currency and blockchain business unit within PayPal aims to shape the future of the financial system rather than just react to its changes. The openness of governments and central banks to explore new ways of managing and transferring money has exceeded my expectations.

I had a question on the reopening trends seen thus far this year. And any discernible trends that you might have observed, like how it's affecting volume mix, funding mix and just overall engagement with the PayPal ecosystem?

Sure, Sanjay. I'll start there and Dan may want to add a little bit. I think there are several things we're observing. Building on your question about debit, that's definitely something that stands out. We see a shift in funding towards more debit compared to credit, and this is evident across our broad portfolio of products. A good example is Buy Now, Pay Later, where in the previous quarter, about 78% was funded with debit; that has now increased to 82% in the most recent quarter. This shows a clear shift. Additionally, we believe some of this is due to the displacement of cash. In terms of overall trends related to reopening, travel has definitely picked up, occurring a bit earlier than we anticipated. Among the verticals, fashion continues to be one of the largest growth areas for us in terms of overall volume. However, the highest year-over-year growth rates are still seen in food and groceries, even in markets that have experienced some reopening. This really supports what consumers have been indicating in surveys over the past year, and now we are witnessing it reflected in their behaviors. This aligns with many of the themes we are discussing regarding the convergence of the physical and online worlds and the need to provide omni-channel experiences for customers. These are a couple of observations I wanted to highlight.

How you're feeling at this point about the original full year revenue target for that business? And related to that, if you have any feedback on how crypto integration and business profiles are impacting how people are using Venmo? And if you could just remind us how the pipeline of other enhancements to the app will sequence over the course of the year.

Yes, Venmo had another impressive quarter with a 63% increase in total payment volume (TPV). It has also started strong in Q2. Currently, the annualized TPV of Venmo is about $205 billion to $210 billion. When we went public, our annual TPV was $285 billion, meaning we essentially have another PayPal emerging within PayPal. There is significant monetization potential, and while we are confident in the $900 million projection, that only scratches the surface of what Venmo could achieve. The user base is expanding, and the team is effectively executing all their strategies. The credit card has performed beyond expectations, with new sign-ups and transactions reflecting a strong consumer value proposition. Crypto has ramped up from an initial 1% to 5% and is expected to reach full ramp by the end of May. Recent surveys indicate that around 74% of millennials foresee using crypto within the next year or two. Business profiles are exceeding our plans, and features like goods and service protections will drive significant revenue on the PayPal peer-to-peer side, which will also translate to Venmo. The Pay with Venmo feature, while not a large part of the current revenue, is projected to become a major revenue source in the coming years. We are enthusiastic about its rollout. Eventually, Venmo will evolve into a super app similar to the PayPal digital wallet, integrating more capabilities and services related to shopping and consumer financial needs. There’s potential for international expansion as well. We believe strongly in Venmo’s potential and are committed to ongoing investment in that area, as we are starting to see this potential come to fruition.

Good to see the strong growth engagement from Buy Now, Pay Later customers. Can you talk about your expectations for Buy Now, Pay Later for the balance of this year? More broadly, how you expect the most engaged Buy Now, Pay Later customers to engage in the PayPal ecosystem overall?

I'll begin, and then John may add his thoughts. Firstly, we have a compelling value proposition in the market that is well understood. There’s no additional cost for merchants to offer Buy Now, Pay Later; it’s simply part of their take rate and easy to integrate. PayPal is a trusted name, and consumers readily recognize this, making them comfortable engaging with this offering. With 392 million customers on our platform, we have a good understanding of their behaviors, resulting in higher approval rates and lower defaults compared to the broader Buy Now, Pay Later landscape. To highlight our success, we’ve processed over $2 billion in total payment volume globally since launch, with more than $1 billion just in the U.S. We’ve issued over 14 million loans to more than 5 million unique customers and have more than 500,000 unique merchants. We're experiencing a significant increase in engagement, with leading merchants showing strong interest, and we anticipate expansion into Australia by the end of Q2 and further into Europe by year’s end. Additionally, we’re observing a 15% uplift in total payment volume from customers using Buy Now, Pay Later, along with a 16% reduction in our cost per transaction driven by increased debit funding. This makes it a valuable offering for merchants. Yes, it's a bit early since we've launched all of these initiatives in the last 6 to 8 months. However, the repeat behavior and increased engagement are promising for both transaction performance and reducing churn, especially as we scale significantly for a company of our size.

I wanted to ask you, John, about the impressive operating leverage and the increase in non-GAAP operating margins, which I believe is about 100 basis points. Can you share what led to this increased confidence? Even though eBay presents a larger challenge and you're making more investments, you're still managing to raise operating margins. There are many positive factors at play, so I would like to hear more details from you.

I'm happy to address that, Bryan. I want to emphasize the significant number of 38% in incremental operating margins for the quarter. This highlights the scalability of our platform, especially considering our internal investments. If you review our year-over-year expense comparisons, it becomes clearer. There are various areas where we've seen improvement, but notably, the transaction-related operating expenses and transaction losses stand out. Achieving record lows in both of these areas demonstrates the effectiveness of our enhanced risk capabilities in reducing transaction losses, which we began discussing around 5 or 6 quarters ago. While I can't guarantee a consistent 10 basis points every quarter, I certainly hope for it. This performance was hard to imagine a couple of years back, but the improvements we've made are definitely sustainable. Regarding transaction expenses, you can analyze any part of our profit and loss statement. For instance, we've seen declines in take rate, partly due to our increased focus on bill payments, which have a lower take rate but also lower transaction expenses. We've always focused on maintaining the margin between these two. We're pleased to report that our transaction margin is approaching 60% this quarter. The key question now is where this will stabilize over time—whether it will decrease or increase from 80 basis points. It’s difficult to predict, yet I don’t expect us to return to the levels seen pre-pandemic. There may be some inflation, but due to changes in our business mix and the growth in e-commerce, we anticipate that transaction expenses will stay lower than pre-pandemic levels, which provides us with remarkable leverage on this platform.

Yes. Thanks so much. Thanks you everybody, for all of your questions, and thank you for the time you spent with us today. I hope that all of you and your families are safe and healthy. We look forward to not just speaking to all of you soon, but hopefully seeing all of you soon as well. So again, thank you for your time. Take care and goodbye.