PayPal Holdings Inc (PYPL) — Q2 2022 Earnings Call Transcript

Thank you, Savannah. Good afternoon, and thank you for joining us. Welcome to PayPal's earnings conference call for the second quarter of 2022. Joining me today on the call is Dan Schulman, our President and CEO. 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 our Investor Relations 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 third quarter and full year 2022 and comments related to anticipated cost savings, operating margin and share repurchase activity. 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 our Investor Relations website. You should not place undue reliance on any forward-looking statement. All information in this presentation is as of today's date, August 2, 2022. 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. I'm pleased to share that in the second quarter, we met or exceeded our expectations announced in April, marking the second quarter in a row of hitting our non-GAAP guidance. We are well underway in a deep transformation of our business to regain our momentum. This transformation is supported by three major initiatives. The first is to seize the opportunity to grow our market share as many of our competitors retrench and reorient their business models. We are focusing our investments in the areas where we have tremendous advantage due to our scale and the inherent network effects driven by our two-sided network. We are doubling down on Checkout, our PayPal and Venmo digital wallets and our Braintree platform. These efforts are having their anticipated effect as we, once again, took share in Q2. Secondly, we are meaningfully reducing our cost structure. I will discuss this in detail, but over the past six months, we have taken action to exit the year with operating margin leverage that will continue to grow in 2023. And third, we have reinvigorated our organizational operating model, and we are recruiting world-class talent to our product, engineering and technology functions. And later in my remarks, I'll expand on our progress in these areas. With that in mind, I'm very pleased to announce that Blake Jorgensen will be joining us as PayPal's new Chief Financial Officer starting this week. Blake joins us from Electronic Arts, where he was CFO and Chief Operating Officer, driving extensive operational excellence and shareholder value. He has also been CFO at Yahoo! and Levi's and was co-Founder and President of the Investment Bank, Thomas Weisel Partners. I am looking forward to working with Blake as we enter the next chapter in PayPal's journey. I would also like to thank Gabrielle for all she has done to support me and the PayPal team in her role as interim CFO. I can't say enough good things about her performance, and I'm pleased to announce that she will be taking on the additional role of Treasurer as well as our investor relations and corporate finance responsibilities. Let me now turn to our results. Our revenues in the second quarter came in at $6.81 billion, up 10% FX-neutral and 9% spot. Importantly, the shape and dynamics of the quarter reflect the trends we anticipated in our full year guidance. April revenue growth was 7% FX-neutral, May was 10%, and June was 12%. Our preliminary revenue growth rate in July further accelerated to north of 14%. eBay payment intermediation was a 400 basis points drag on revenue growth in the quarter, and we anticipate that will drop to approximately 100 basis points in the third quarter and be inconsequential to our results in the fourth quarter. Non-GAAP EPS of $0.93 exceeded our guidance by $0.07 as actions we have taken slowed non-transaction-related expenses to 6% year-over-year in Q2. As we discussed during our last call, we have been working to drive productivity improvements across all functions. Our strategy shift to focus on customer engagement from our unparalleled network of consumer and merchant accounts led to significant opportunities for greater efficiency and importantly, deeper investments in our world-class portfolio of assets. We have narrowed our focus, driven greater productivity and increased our market share gains with profitable growth. We are leveraging our enhanced scale coming out of the pandemic to drive meaningful reductions in unit costs across our supplier base. As a result, we will realize our target of approximately $900 million of savings in 2022 across our operating expenses and transaction expenses, which was contemplated in our reset guidance last quarter. We anticipate this reduction in our cost structure will result in at least $1.3 billion of cost savings in 2023, which will result in operating margin expansion next year. These cost savings are not one-time in nature and will continue to benefit the company on a run-rate basis. We are also still sharpening our pencils to identify additional areas of productivity improvements across our servicing, marketing and engineering functions as well as opportunities to rationalize our real estate footprint and shift our hiring to lower-cost geographies. These efficiency gains will allow us to increase our investments in our highest conviction growth opportunities, which, as I mentioned, include Checkout, Braintree and our digital wallets. Importantly, as a result of this exercise and disciplined leadership from our team, we are targeting non-transaction-related operating expenses to be roughly flat as we exit 2022. Consequently, we expect operating margin expansion beginning in the fourth quarter of this year and continuing in 2023. As we said last quarter, new net active accounts for Q2 will represent our low watermark for the year. We are reiterating our full year guidance of approximately 10 million new net active accounts. However, as with all of our forecasts, new net active account growth could be affected by broader economic factors, given the channels that drive organic customer acquisition may be negatively impacted by falling consumer sentiment and reduced demand for discretionary goods. That said, almost 80% of our volume is driven by 30% of our active accounts, which is why our primary focus is on driving engagement across our base. I am pleased to report that our transactions per active account, or TPA, grew 12% to 48.7 times per year. Our core daily active users are up over 40% from Q2 2019, representing a three-year CAGR of about 13%. Signaling its confidence in our business, the PayPal Board of Directors has authorized an additional $15 billion share repurchase plan. We expect the pace of our share repurchases to remain aggressive as we believe there's currently a unique and attractive opportunity to return capital to our shareholders. Our Board is committed to evaluating all options for return of capital to our shareholders. We expect to share a financial and strategic update, including capital allocation, at an Investor Day in early 2023. PayPal is one of the most trusted consumer brands in the world, and we have built a diversified platform with unparalleled global scale. We believe the recent turmoil in both the e-commerce and fintech sectors has created an unparalleled opportunity for PayPal. In contrast to others in the industry, our strong financial model, which will generate more than $5 billion in free cash flow this year, provides us the flexibility to invest and strengthen our competitive position. We are clearly seeing a flight to quality in the market and expect to continue to drive market share gains. Our share of Branded Checkout grew in Q2 and remains strong with leading retailers, where we are retaining the share gains we drove over the last two years. We continue to leverage our inherent strengths in checkout, which include our base of more than 35 million active merchant accounts with billions of financial instruments vaulted across PayPal and Braintree. We are currently testing our new mobile SDK, software development kit, which enables native in-line checkout, removing friction to make our payment experiences faster and more convenient. We are also enhancing our checkout user experience to better serve our nearly 400 million consumer accounts by surfacing the most relevant funding instrument based on past purchase behavior, merchant category and purchase price, among other attributes. We believe innovations like these will continue to differentiate our value proposition and drive increased conversion for our merchants. We are making great strides in the presentment and global distribution of our branded marks. We have expanded our relationship with Shopify, and we are now powering Shopify Payments in France. In addition, we continue to win large and significant full-stack processing deals with leading merchants across the world, including Shein, Zappos, BetMGM and Carrefour. We intend to press the advantages we have in scale with our portfolio of payment assets to take additional share in this challenging macro environment. Our Buy Now, Pay Later products continue to distinguish themselves from our competitors. In the second quarter, we processed $4.9 billion in volume, up 226% year-over-year, with over 22 million consumers using our Buy Now, Pay Later services over 100 million times since launch. Our upstream presentment continues to grow with over 200,000 merchants displaying our Buy Now, Pay Later on their product pages. We recently expanded our offerings with the launch of Pay Monthly, which gives U.S. consumers the ability to spread payments over longer periods of time. A key competitive advantage for us is our deep expertise and experience lending through all types of credit environments. We benefit from both our scale and long-standing relationships with our customers. We know who we are lending to, and as a result, we have high approval rates and loss rates that are among the lowest in the industry. Our PayPal and Venmo digital wallets are formidable assets that drive engagement across our commerce and payments platform. Digital wallet users are twice as likely to choose PayPal at checkout. We have an opportunity to increase both engagement and ARPA by continuing to invest in commerce tools. As macroeconomic factors such as inflation impact our customers, our services like PayPal Honey are helping consumers make their money go further. Through the browser extension, PayPal Honey serves up targeted coupons and rewards at checkout, and through our digital wallet shopping hub at the beginning of the shopping journey. We are working hard to help our customers save money. Already this year, we've helped consumers save over $100 million. In an inflationary environment, these products are increasingly sought after and valuable. The PayPal Honey browser extension increased selection and conversion at checkout by 18%. In the second half of this year, we are focused on driving even more savings for our customers by redesigning the shopping hub and our digital wallet and unifying our rewards programs. Venmo remains a key growth driver for our business, with nearly 90 million active accounts, driving revenue growth in Q2 of more than 50%, with the revenues exceeding $100 million last month alone. We continue to see increased commerce transactions on Venmo with commerce volumes growing more than 250%. In Q2, we signed or launched Pay with Venmo with leading merchants, including DICK'S Sporting Goods, Draft Kings, Booking.com and The Washington Post. We look forward to launching Pay with Venmo on Amazon. We are also hard at work on new initiatives that will increase both scale and engagement, including allowing teens to create their own Venmo accounts. In September, we plan to launch the ability for charities to establish a profile on the Venmo app to encourage more giving ahead of the holiday season. As I shared last quarter, we are meaningfully streamlining our organizational structure to simplify decision-making, drive end-to-end accountability and make it easier for our teams to rapidly bring innovative products to market. Our new operating model is oriented around our customers. Our consumer business is led by Doug Bland, and Doug joined PayPal through our acquisition of Swift Financial, where he was Chief Operating Officer. He has been leading the rapid expansion of our global credit products, overseeing the introduction of a wide range of products, including our Buy Now, Pay Later services, and he has deep expertise in navigating challenging credit and economic environments. Our merchant business is organized into two primary areas of focus: enterprise and merchant platform led by Frank Keller, and small- and medium-sized businesses and partner channels led by Dan Leberman. Both Frank and Dan have been with PayPal since before separation in various leadership capacities and have extensive product and operational expertise. These changes will ensure we make the necessary decisions and trade-offs to accelerate our delivery of the highest-quality products while driving our operating metrics. Mark Britto, our Chief Product Officer for the past several years, will retire from PayPal at the end of the year. I'm very grateful for Mark's leadership, counsel and friendship during a period of tremendous growth for PayPal and for the strong bench of talent he has cultivated. An external search to replace Mark is well underway, and we expect to announce his replacement in the near future. In closing, I'd like to acknowledge again that it has been a volatile time for our sector, for our shareholders, for the market and the global economy at large. But we feel this is a unique opportunity for high-quality market leaders like PayPal with strong business models to increase their market leadership. We are laser-focused on delivering on our key initiatives. We continue to take share. While others pull back, we are investing to improve our value proposition. We are finally moving beyond the lapping of both the pandemic stimulus payouts and eBay intermediated payments. Our increasing revenue growth rate in each successive month of Q2 and July reflects this, setting us up to deliver on our second half expectations. We're driving meaningful productivity and cost improvement in OpEx and transaction expenses, and we expect to see these actions result in increased operating margins as we exit the year, setting us up for a strong 2023. We've made significant and positive changes to our organizational model with several additional talented leaders joining our senior leadership team. I want to thank our PayPal team for their continued dedication and commitment. I'm grateful for the outstanding support you provide each other and our customers each and every day. And with that, I'll turn the call over to Gabrielle.

Thanks, Dan. I'd like to start by thanking the entire PayPal team for their continued commitment to serve our customers and execute on our priorities. PayPal delivered another solid quarter, meeting or surpassing the second quarter non-GAAP financial targets we shared with you in April. We delivered on our commitment of sequential acceleration in our revenue growth and slowed our nontransaction-related operating expense growth. Our results are indicative of the strength, diversification and breadth of our two-sided global payments platform. Our team remains focused on what we can control. More importantly, we're committed to accelerating our core strengths and building PayPal for the future. We are guided by our relentless focus on creating the best possible experiences for our customers and value for our stakeholders. Over the past two quarters, we have seen even stronger opportunities to advance our leadership position in payments and add to our momentum, with our digital wallet, checkout and unbranded processing strategies. Although we are monitoring the impact of high inflation on economic growth, consumer demand and sentiment as well as broader global macroeconomic indicators, the backdrop continues to be complex, and we're taking an appropriately prudent approach to managing our business. PayPal's unique competitive advantages continue to drive us forward. Today, we believe we are better positioned to deliver sustainable long-term growth than we were before the pandemic. At the same time, we're increasing our rigor in managing our cost structure and prioritizing higher-return strategic initiatives. We are focused on improving our operating margin profile while investing in our key priorities. To highlight our second quarter performance, as Dan mentioned, revenue increased 10% on an FX-neutral basis, more than 0.5 points ahead of our guidance, and 9% at spot to $6.8 billion. At the time we provided guidance, there was an approximately 30 basis point difference between our spot and FX-neutral growth rates, which essentially doubled during the quarter, given dollar strength. We expect FX to continue to be a headwind as we move through the back half of 2022. Transaction revenue grew 8% to $6.3 billion, driven primarily by Braintree and Venmo. Other value-added services revenue grew 21% to $534 million. This performance resulted from solid growth of our credit products as well as increased interest income on customer stored balances. In the second quarter, U.S. revenue grew 18% while international revenue declined 1%. In addition, on a currency-neutral basis, international revenue increased 1% and, excluding eBay, 8%. On both a spot and currency-neutral basis, international revenue growth accelerated five points sequentially. Additionally, eBay Marketplaces' revenue declined 60% to $166 million and represented less than 2.5% of our total revenue. Our revenue, excluding eBay, grew 14% at spot. Transaction take rate was 1.85% and total take rate was 2%, both essentially flat to last year and to Q1 of this year. The blended take rate on eBay volumes declined to 2.13% from 3.22% in Q2 last year. This was offset by an approximately five basis point increase in the take rate on non-eBay volumes, resulting from gains from foreign currency hedges recorded as international transaction revenue, Venmo and lower P2P volumes. Transaction expense came in at 90 basis points as a rate of total payment volume relative to 81 basis points as a rate last year. This result was largely driven by the increase in contribution of Braintree, which is predominantly card-funded, to our overall mix of payment volume. To a lesser extent, funding mix also contributed to higher transaction expenses as a result of more normalized debit card usage relative to 2021. Transaction loss as a rate of total payment volume was 11 basis points versus 9 basis points in Q2 last year. In addition, credit losses were $68 million or two basis points of the rate of total payment volume. In the second quarter of 2021, we released $156 million of credit reserves, which benefited transaction margin and operating margin performance in the prior period by 250 basis points. In the quarter, loan originations increased and we ended Q2 with $6.2 billion in gross receivables, reflecting sequential growth of 9%. The growth in global Pay Later receivables was the largest driver of originations. The mix of shorter-duration originations from our Pay Later products and strong performance of our loan receivables portfolio resulted in our reserve coverage ratio declining to 7.3% from 8.3% at the end of the first quarter. Overall, our volume-based expenses grew 30%, which, in conjunction with 9% revenue growth, resulted in a transaction margin of 48.7%. This was 814 basis points lower than last year and represents a 7% decline in transaction margin dollars. Excluding the benefit from reserve release last year, transaction margin dollars declined 2% or 564 basis points as a rate, which was primarily driven by the total payment volume mix. Starting in the back half of this year, we expect to begin seeing benefits to our transaction expenses from leveraging our scale across the network ecosystem. In addition, we have directed our focus on rationalizing non-transaction-related expense growth. In the second quarter, overall, these expenses grew 6% year-over-year, relative to growth of 27% in the second quarter of 2021. Non-transaction-related expenses represented 29.6% of revenue, an improvement of approximately 80 basis points from the second quarter of 2021. The growth rates for customer support and operations, sales and marketing, and technology and development expenses were meaningfully lower than last year. Notably, sales and marketing spend declined 7% year-over-year in the second quarter, following a 68% increase in Q2 last year. On a non-GAAP basis, operating income was $1.3 billion. Our operating margin was 19.1%, which is nearly one point better than our outlook going into the quarter. For the second quarter, non-GAAP EPS was $0.93, $0.07 stronger than our expectations. In the quarter, we faced an approximate $0.11 per share headwind from the release of credit reserves last year. Our outperformance was predominantly driven by lower non-transaction-related operating expenses and a lower effective tax rate. We ended the quarter with cash, cash equivalents and investments of $15.6 billion, which includes approximately $6 billion of cash we estimate is needed to satisfy operational and regulatory requirements. Our cash position is inclusive of $3 billion in proceeds from debt we issued in May. Approximately half of the proceeds from this offering were used to refinance upcoming maturities coming due in September 2022 and June 2023. Importantly, through this transaction, we were able to extend our weighted average maturity by approximately five years while increasing our average bond coupon by only 70 basis points. During the quarter, we generated $1.3 billion in free cash flow, bringing year-to-date free cash flow to $2.3 billion. In the second quarter, we also completed an additional $750 million in share repurchases, bringing 2022 year-to-date repurchase activity to $2.25 billion, representing approximately 95% of free cash flow generated so far this year. We have taken a more aggressive approach to our capital return program over the past several quarters. We continue to believe that share repurchase remains an excellent use of capital for our shareholders. As Dan mentioned, our Board recently approved a new $15 billion share repurchase authorization. Combined with the $2.8 billion remaining on our 2018 repurchase authorization, this brings our aggregate outstanding authorization to nearly $18 billion. Given our desire to return capital to shareholders and the confidence we have in our business, we will continue to be opportunistic with the pace and quantum of our share repurchases. Overall, this year, we plan to return 75% to 80% of free cash flow to shareholders in the form of share repurchases. In addition, as we look to optimize our capital allocation and increase our flexibility, we are renewing our focus on credit externalization opportunities. Our last significant credit externalization event occurred in July 2018 when we closed the sale of our U.S. consumer revolving credit portfolio to Synchrony. Since that time, the composition of our on-balance sheet credit portfolio has changed meaningfully. While today, credit receivables represent about 7% of overall assets versus 17% at the time of the Synchrony transaction, funding our credit products continues to require an increasing amount of our free cash flow. Our credit products are an important driver of customer lifetime value and engagement. In addition, we believe they represent best-in-class products in each of the key credit categories in which we compete. That said, to optimize the use of our balance sheet and remain maximally capital efficient, we're assessing opportunities for additional strategic credit externalization. We will update you on our progress as we move through the back half of the year. I would now like to discuss our outlook for the remainder of 2022. When we provided guidance last quarter, we contemplated that there would be a challenging macro environment for the balance of the year. As everyone has seen across the market, macro conditions remain highly dynamic. We guided last quarter to a range of 11% to 13% revenue growth, and given today's environment, we think it's important to be conservative. Accordingly, I would point you to the lower end of that range on a currency-neutral basis. While the macro remains uncertain, I also want to underscore that we have strong momentum across the business with accelerating revenue growth from April to May to June and now through July. The team is focused on achieving our targets for the year. We expect third quarter revenue growth to accelerate two points to 12% on a currency-neutral basis and that we will exit the year with revenue growth of approximately 14% in the fourth quarter. It is important to note that we are facing a 150 basis point headwind in the third quarter related to revenue we recognized from the PPP lending program in the third quarter last year. Excluding this impact, we expect our third quarter revenue growth to reach nearly 14%, which results in relatively consistent growth in both the third and fourth quarters. The vast majority of the expected acceleration in our top line performance from the first half of 2022 relates to finally having the tougher eBay compares behind us. In addition, we expect the diversification of our platform and the contribution from new initiatives and our merchant pipeline to allow us to exit the year with our business in a stronger position than how we entered 2022. We are also raising our non-GAAP EPS guidance and now expect to deliver non-GAAP EPS in the range of $3.87 to $3.97. Our cost discipline in conjunction with our efficiency and prioritization initiatives, are enabling us to drive this improved earnings performance. We expect that this progress will allow us to deliver non-GAAP operating margin expansion in the fourth quarter and into 2023. In addition, we remain on track to generate more than $5 billion in free cash flow this year. In closing, we're pleased with the progress we're making across many fronts. We're advancing our strategic priorities and, at the same time, sustainably improving our cost structure. The cash flow generating power of our business is a strategic competitive advantage and continues to give us a high degree of flexibility as we allocate capital with discipline. We are focused on creating value for our shareholders and strengthening our position as the world's leading digital payments platform for our customers. While we are not immune to economic headwinds, we will continue to deepen our focus, invest for the long term and strengthen our competitive advantages. Finally, I'd like to welcome Blake to PayPal. I'm absolutely thrilled that he'll be meeting our finance organization and I look forward to supporting him. With that, I'll turn it back over to Dan.

Thanks, Gab. Before we start the Q&A section, I want to provide some color on the discussions we've had with Elliott Investment Management. First of all, the discussions have been both constructive and collaborative, and we appreciate the partnership we've built with Jesse Cohn and his team. We are completely aligned in our mutual goal to maximize shareholder value, and we are substantially aligned on the areas of focus for achieving our objectives. Our discussions are focused on operational improvements, revenue-generating investments and capital allocation, and they are consistent with our short- and long-term objectives and plans. We've been working on a number of initiatives such as improved profitability and return of capital and we appreciate Jesse's collaboration and input on these important topics. And as we discussed, we're pleased to announce the following: approximately $900 million of cost savings in 2022 across our operating and transaction expenses, with savings potential of at least $1.3 billion through fiscal year '23, an invigorated capital return program including a new $15 billion share repurchase authorization, full evaluation of capital return alternatives and an upcoming Investor Day in early 2023 to share operational, capital allocation and strategic updates. We continue to engage with Jesse and his team at Elliott, and they have communicated that their investment is a vote of confidence in our strategy, in our management team and our ability to generate long-term value for shareholders. We have also entered into an information sharing agreement to maintain our collaboration across the previously mentioned initiatives, and we look forward to our continued partnership. That's the extent of our comments on Elliott's position in PayPal. And now I'd like to turn it over to the operator to hear your questions on other areas of our business. Thanks very much, and operator, let's open it up for questions.

Lots to digest here, and Gabs, congrats on the elevated role of Treasurer. I think for Dan just to kick it off, the Q&A, I wanted to hear how you're prioritizing executing the strategy you mentioned with lots going on here, right, with filling some key roles, you've got Elliott. As you just mentioned, you've got cost-cutting plans, capital allocation considerations. So what part of the strategy, as we've heard it, do you think of as non-negotiable, right, in the short and the long term? That was the key question I had, but also what moves down in priority? I didn't hear about things like in-store and others. So would you mind commenting on that?

Yes, it's a great question. We are executing on the game plan that we started laying out at the beginning of the year. We knew we had a lot to get done. And we knew we had to, one, narrow our focus on growth opportunities in which we had high conviction of their ability to make an impact. Make no mistake, we are in the business of strengthening our value proposition, growing going forward and gaining share. That is our number one priority. We know the three things that we really need to invest in there, and there's no debate around that whatsoever. It is Checkout because that is the bread and butter of our business. We have a lot of advantages there. We continue to gain share, but there are a lot of places where we can make incremental improvements and, in some cases, some pretty radical improvements to improve our value proposition and competitive position. Number two is in our digital wallets. Both Venmo and PayPal, we are seeing very encouraging green shoots. We've talked about some of those. I'll probably talk about more of it in future questions, I'm sure. But that is the future. Digital wallets are the future, a combination of both payments and commerce and financial services coming together. We are seeing some really quite a bit of adoption, quite a bit of churn reduction for those who come in. So we'll continue to invest there. Finally, Braintree. My hat goes off to that Braintree team. They have done some Herculean tasks this year. We have tremendous momentum in our full-stack processing in the marketplace. As I mentioned, there is a flight to quality in the market. We are clearly seeing that. That platform, we're just going to continue to invest in, both pay-in and payout side on things like orchestration and a multi-Payment Service Provider environment. Those are the three areas that we are going to double down on, and they're non-negotiable. We are, by the way, pulling back on other areas like you mentioned because if you're going to narrow your focus by definition, there are places where you're pulling back. For instance, we were going to focus on things like stock trading and that kind of thing. We're not going to do that. We have reallocated those headcount into checkout. We've also been able to reduce headcount. We don't have the same regulatory footprint that we thought we might have. In-store, we're really moving into cards versus a focus exclusively on QR. That is kind of where the market is right now. It is much more impactful for us and much less expensive as we go into card being offline tied fully into the app in a fully integrated way. You've got certain things long-tail international that we're just going to have cross-border come on that. We're not going to go into those domestically because they've got high beta and cost a lot, and it just takes a lot of time and effort to go and do those things. We are focused on the things we think will make the largest impact. We see the impact of that already. I'm quite pleased with our ability to consistently take share. We saw that, I think, accelerate in this quarter and do all of that while being efficient and productive. These are things that we started quite a bit. We're making good progress and they are beginning to show up in our results. I think as Gab mentioned and I mentioned, by the time we get to the fourth quarter, we'll start to see operating margin expansion.

Look, we had expected some cost savings, and it makes sense, just given the growth of expense lines over the last couple of years. But the magnitude you're talking about is definitely more than we anticipated. So if you can just touch on how we should think about the sources of the expense savings. Maybe, if any, will be reinvested into areas versus pass-through to the bottom line, and really what we can expect in terms of investment levels into the wallet and Checkout and kind of operating leverage this would be to.

Yes, I'll start and then maybe Gab will jump in. First of all, we are a growth business. For us to continue to improve our value proposition, we need to invest and we need to invest in those areas that I've just mentioned in the last question. It's in checkout and our digital wallets and our Braintree platform. We are making increased investments this year around that. But we're doing that while being quite aggressive and focused on where do we have costs and how can we start to take those out. One is focus, as I mentioned. We're not doing 100 things. We're now doing three or four things extremely well. There are some things, obviously, but we are really focused. All those other things are being applied to those key focus areas. Number two, we have tremendous scale coming out of the pandemic. We're going to do somewhere around $1.4 trillion of total payment volume this year. Our transactions are at $5.5 billion in the quarter, up 16%, up 20% excluding eBay. The amount of volume we have in the business has now been leveraged across all of our suppliers. The more volume, the better your unit costs are. We've renegotiated our contracts across many of our suppliers, and that is giving us both OpEx savings and transaction unit cost savings in our transaction expenses as well. Then, of course, you can always drive more productivity. We put on quite a number of headcounts. As Gab mentioned a year ago, our OpEx grew by 27%. We have plenty of heads. We can be more productive. In fact, our headcount is lower than when we started the year, both in our contingent workforce and our full-time workforce. We are doing that by reallocating resources, investing in some places, taking away from others. We are driving a better product experience so we have fewer calls coming into servicing. Therefore, we need fewer people. Those are the good ways of achieving productivity. Of course, we're looking at low-cost geographies to do incremental hiring and rationalizing things like our footprint, looking at our consulting spend. We're cutting all of that back as we focus. We feel really comfortable with the investments that we're putting in. It's really important that we continue to invest in the business. At the same time, we can take out a tremendous amount of cost to be quite efficient.

Yes. Maybe I would just add, in terms of the $900 million of identified savings this year and the $1.3 billion next year, nearly 50% of that really comes from transaction-related expenses. As Dan mentioned, really sort of benefiting from the scale we have and the ecosystem. I wouldn't think about that as cuts to the way we do business, more really benefiting from the scale that we have and the large platform we have. In addition, I'd say even with those savings, we expect transaction expenses to grow next year. That's really just from the strong growth of Braintree that continues to impact our mix. And so we don't expect year-on-year for transaction expenses to come down. The other point I would mention is some of the savings relate to headcount. We've recalibrated our headcount plans to be balanced with our growth plans this year. Some of our expectations around the top line have come in. The way we thought about growing has really adjusted. That's an important driver of the savings as well.

Well, I don't think we'd be seeing the incremental revenue growth. I mean, we've gone from 7% in April to north of 14% in July revenue growth. A piece of that has been the eBay lapping for sure. A part of it is just taking share of the sales pipeline from our Braintree, implementing that live to site and slow-but-sure incremental improvements in checkout. That has to happen, and needs to be a balance between cost-cutting and investment.

Terrific. A follow-up on Darrin's question related to the expense and margin side of things. Just maybe taking a longer-term view, how should investors think about the margin trajectory of PayPal, given that you've got Braintree growing so well, but the implication being it's mixing in as a lower gross margin business. So just looking out kind of beyond this immediate $900 million, $1.3 billion, but sort of more conceptually or structurally over the long term, how do you think about navigating that kind of mix-related gross margin pressure and then operating margin potential for the business?

Absolutely. Thanks, Lisa. So I think as a starting point, I mentioned, sure, on the Braintree side, yes, mix is important. Certainly, there is a different profitability dynamic to Braintree. At the same time, I would mention that, that really is limited to the larger enterprise side of Braintree. To the extent that we continue to grow our Braintree franchise in the SMB space, and to the extent we continue to grow it in Europe, the profitability characteristics are quite attractive and will continue to support the business. In addition to that, we do have a long track record of profitable growth. As both Dan and I have mentioned, we expect to begin showing operating margin expansion in the fourth quarter. If we think about next year, it's a little early right now to provide full guidance on the year. But to start right now, we're targeting at least 50 basis points of operating margin expansion. Importantly, initiatives that Dan has mentioned and the efficiencies we're realizing will allow us to grow profitably and sustainably improve the margin profile over time.

I wanted to ask a little bit about Venmo. I saw the overall volume there grew 6%. I think it slowed a bit against an easier comparison. So just curious how it came in versus your expectations. Maybe what we should expect for the second half there? It sounds like the Venmo revenue growth was robust again, so I'm assuming you're still on track for the 50% revenue growth in Venmo for this year. But just curious to get your take on what's happening with volume growth.

Jason, thanks for the question. There's a lot to be excited about at Venmo right now. It's closing in on 90 million active accounts, and it's going to do something like $0.25 trillion of total payment volume this year. When you have that kind of scale, clearly things begin to slow down a little bit. As you mentioned, revenue is up 54% in the first half. We are doing $100 million revenue months now. There are a host of initiatives we are working on. But on the total payment volume side specifically, it's still tough comps. I mean, we grew 58% total payment volume in Q2 of last year. I wouldn't say that's easing comps. It is still pretty tough comps. So on top of, obviously, you have the end of the stimulus, reopening, macroeconomic conditions, etc. There are a lot of things that we can do to improve the value proposition around P2P and around increasing total payment volume. The team is working on that, including a complete refresh of the app, which focuses on search improvements, syncing up with contacts, and adding persistent send and receive buttons no matter where you are in the app. There are things we can do, I think, to help improve the accessibility and ease of use of P2P in Venmo, but it's still going well from strength to strength. It's commerce volumes, which really Pay with Venmo goods and services and business profiles, as I mentioned, grew more than 250% year-over-year. The team is working on a debit card reboot, which will be a metal form factor, fully app integrated with rewards integration. We are also introducing teen accounts, which opens up the addressable market by 20 million to 30 million with that. We have charities starting to come onboard to their profiles, which will encourage giving before the holiday season. A lot to think about and a lot to look forward to, including Pay with Venmo on Amazon. So more to come, but the team is working on a ton of things right now.

Congratulations, Gabrielle. Good to see the accelerating 12% growth in transaction per account in Q2, which is actually your highest in at least the last six quarters. So what do you see as the key proof points that this higher growth rate in customer engagement is sustainable? Are you on track to increase ARPA this year enough to support your new 2022 revenue guidance?

Yes. First of all, regarding the revenue guidance, as Gab mentioned in her remarks, our normalized guidance for Q3 is approximately 14% when excluding the one-time PPP sale we did last year. This quarter, we expect a flat transition into the fourth quarter to meet the guidance we provided. July's performance exceeded 14%, so we feel optimistic given the unpredictable environment. We're really confident about the revenue guidance we've set. Concerning engagement and TPA, we anticipate continued growth in TPA as the year progresses, and you can hold me to that for next quarter. A clear indication is that over 50% of our user base is now utilizing our digital wallet, which has a twofold higher ARPA compared to those who are not using it. These users also complete 25% more transactions. We’ve improved churn reduction, now seeing a 33% decrease instead of the 25% we estimated last quarter, which is a positive trend. They perform twice as many transactions per active account compared to non-wallet users. As we increase the number of people using the digital wallet, we will drive further engagement and TPA growth. Additionally, we have significant potential for overall PayPal usage improvement. According to the Federal Reserve, the average consumer conducts over 800 financial transactions annually, with about 25% of those being online, which equates to around 200 online transactions. Currently, we capture about 25% of that volume. There is a vast opportunity as transactions shift online and we enhance our digital wallet's offerings. We recently introduced a high-yield savings account with an interest rate of 1.65%, considerably above the national average. We are bringing in thousands of users daily. We see substantial opportunities ahead, and by enhancing the digital wallet with appealing services, we will foster TPA and ARPA growth, which we expect to materialize as the year progresses.

Congratulations, Gabrielle. You have a very unique strategy in Buy Now, Pay Later, so I just want to dig into that. If you can discuss the progress of Pay in 4 and Pay in 3 and how it may evolve if we were to enter a global downturn. And secondly, have you been able to get better placement as a result of your BNPL strategy?

I guess maybe I'll start. Gab, you can jump in. Obviously, we do have a unique approach to Buy Now, Pay Later, Rayna, as you mentioned. We don't charge any merchant fees or late fees to consumers. We make our money not off of Buy Now, Pay Later but from the halo effect, which is about a 21% uplift when someone uses Buy Now, Pay Later. We aren't dependent on those revenue streams and the profit pool for us in Buy Now, Pay Later is not inherent within Buy Now, Pay Later but in checkout and our take rates. This gives us tremendous advantages as we look at different credit cycles — we can tighten up where we need to on that front. We know that 90% of the people who apply for Buy Now, Pay Later. That is a tremendous advantage for us. We have high approval rates among the industry and low loss rates as well. We have been in this credit business for about 15 years, and we've gone through cycles. We have people who understand this well. We're continuing to leverage this. Your last question was about whether we're seeing incremental share gain with Buy Now, Pay Later. We have, with our 200,000 merchants now displaying our Pay Now, Pay Later on their product pages. That is tremendous share gain for us, often capturing consumers right off the product pages. We continue to see momentum, particularly with a flight to quality in the market. Our robust value proposition has allowed us to gain additional merchant placements upstream in their checkout processes.

I'd also just add that we're continuing to see better upstream presentment in part because of how we're continuing to grow the product capabilities. By introducing longer payment durations and providing more options, we give merchants more ways to enable their consumers to spend. That helps drive our strong performance with low loss rates.

You saw that it has now been used over 100 million times by 22 million consumers. This shows the value consumers see in it.

I'd also add that as we think about potentially an environment where we can see some contraction in the economy, our unique fee structure is exceptionally consumer-friendly. We don't charge transaction fees for consumers on Pay in 4, Pay in 3, no interest fees, no late fees. So overall, it's an incredibly attractive product for our customers.

It was encouraging to hear about the share gains within Branded Checkout. I was wondering if you could just explore that a little bit more and talk about where you see e-commerce industry growth right now and how core PayPal is performing relative to that. And Dan, you teased some potential radical improvements at Checkout. I was just wondering if you could talk a little bit about that and initiatives that the core PayPal branded checkout is pursuing to improve or maintain share.

Yes, sure. First of all, regarding e-commerce growth rates, it’s tricky as people have different opinions. As best we can tell, in the second quarter, e-commerce growth was relatively flat. If you take out travel, it might have been slightly down. When considering our Branded Checkout, which is sort of ex eBay, P2P and Venmo, we had positive growth and we likely gained some market share. We want to continue improving on that. In July, we're beginning to see that Branded Checkout is showing growth again. For the full year, people were projecting about 10% early on; this has now dropped to about 8% for the full year, but we expect to accelerate in the back half. However, it’s a bit hazy to understand what normalized e-commerce will look like. We clearly did not see the boost of five years that many saw during the pandemic. We're along the traditional historic e-commerce penetration rates and expect that trend to continue, and we anticipate growing significantly faster than the rate of e-commerce overall, both branded and unbranded. Quickly on the Checkout side, we mentioned on our last call that we want to modernize the merchant experience. Checkout and payments matter significantly to merchants. Scale matters, trust matters, reliability is crucial, and conversion rates are key. The average conversion rate for a merchant outside of PayPal is between 50% and 60%, whereas for us, it ranges between 80% and 90%. We have big advantages but there is still a lot we can do better. Latency is one. Our aim is to reduce it to three seconds. We've already cut five seconds off our latency this year. That's critical since every second counts. We're focused on removing clicks and scrolls; currently, too often, when you click on PayPal, you jump to a pop-up window, taking you out of context and back to the merchant app. We are rolling out a beta on a new mobile SDK and API that offers a consistent user experience across form factors and gives full control to a merchant of their native app. This eliminates friction, increases speed, and makes it fast and simple. Consumers can sign up, log in, stay vaulted, and manage rewards all within the merchant app, all native. For merchants, it's a minimal integration and improves conversions and reduces card abandonment. We're deploying this beta now into our small business segment, working with larger businesses later this year. We have a lot of legacy checkout systems. Simplifying integration, eliminating redirects, and providing a seamless experience can be extremely powerful, and we're starting to deliver on that right now. Okay. I'm glad, Mike. Well, operator, that's going to be the end of the call. Thank you all for the great questions and for your time. We look forward to speaking to all of you again soon. Thanks again. Bye-bye.