PayPal Holdings Inc (PYPL) — Q1 2023 Earnings Call Transcript

Thank you, Sarah. Good afternoon, and thank you for joining us. Welcome to PayPal's earnings conference call for the first quarter of 2023. 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'll 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. We 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 2023, our planning assumptions for 2023 and our comments related to anticipated foreign exchange rates, operating margins 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 the 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 statements. All information in this presentation is as of today's date, May 8, 2023. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

Thanks, Gabs, and thanks, everyone, for joining us today. We had a good start to the year with stronger than expected growth across our key financial metrics. And I'm particularly pleased to see the TPV from our branded checkout meaningfully accelerate to 6.5% growth FXN, up 200 basis points from Q4, while our unbranded TPV growth also accelerated from Q4 to post year-over-year growth of 30% FXN. Even with the strong start, there remain many challenging issues to navigate as we look forward. Both the macroeconomic and geopolitical environments are complex and difficult to predict. In these times, the strong message I'm giving the PayPal team is to focus on the things we can control. We know that job number one is to invest and innovate to improve our value proposition to our merchants and consumers. Since we honed our strategic priorities last year, we have consistently executed and delivered against our roadmap. And this work is beginning to reflect in our results. Of course, we still have room to improve in multiple areas, but we are making large strides in upgrading our merchant and consumer experiences, which are both significantly strengthened from a year ago. We are focused on executing in the most cost-effective and efficient way possible. As you can tell from our non-transaction-related OpEx performance, we are more than delivering against our plan. As encouraging as these early results are, I would point out that we are just at the beginning as a multiyear efficiency journey. For several years, we've been at the forefront of advanced forms of machine learning and AI to combat fraud and implement our sophisticated risk management programs. With the new advances of generative AI, we will also be able to accelerate our productivity initiatives. We expect AI will enable us to meaningfully lower our costs for years to come. Furthermore, we believe that AI, combined with our unique scale and sets of data, will drive not only efficiencies, but will also drive a differentiated and unique set of value propositions for our merchants and consumers. So despite the fact that today's macro environment is difficult to forecast, we believe we are well positioned to deliver a strong year and enter next year poised to reap additional revenue streams from the investments we are making in our products while continuing to drive efficiencies and reduce our overall cost structure. Let me now turn to our Q1 results. As I said, we were quite pleased with the quarter. Our revenues grew by 10.4% FXN to $7.04 billion in Q1, nearly 1.5 points better than our guidance. Consequently, we anticipate our full year revenues to be stronger than we expected, with the back half of the year being roughly similar in growth to the front half. We processed $355 billion of TPV, an acceleration of nearly 300 basis points sequentially from Q4 to 12% FXN driven by 5.8 billion transactions in the quarter. With our branded checkout growing by 6.5%, we believe we improved our global share of checkout and gained share in unbranded processing. We saw our monthly active base slightly increase in line with our expectations, while TPA grew by 13% year-over-year. Importantly, our core PayPal consumer transactions per user improved throughout the quarter and, in March, was 400 basis points higher than in March of last year. In addition, we saw a consistent improvement in the quality of new cohorts in Q1 versus last year. For instance, our March cohort of new accounts had 24% higher TPA and 40% higher ARPA than in March of last year. These results strongly reinforce our decision to focus our resources on engagement and driving high-value accounts. Driven by continued discipline and execution, our non-GAAP EPS for Q1 grew by 33% to $1.17, exceeding the high end of our guidance by $0.07. As a result, we are increasing our non-GAAP EPS guidance for the year to $4.95, up 20%. Our three strategic priorities remain consistent: improve our core checkout proposition, grow our unbranded processing and drive adoption of our digital wallets. We are making good and steady progress on each of these interrelated goals. I'd like to highlight our unbranded suite of services, including Braintree and our newest platform for SMBs and channel partners, PayPal Complete Payments. Within the highly fragmented processing ecosystem, our PSP offering across unbranded and other merchant services is growing faster than the market, and we are taking share. We believe that in an apples-to-apples comparison, our volumes in these areas are now roughly equal to that of Android and Stripe. There are four points I want to make regarding our unbranded momentum. First, unbranded processing is a strategic imperative for us. Enabling our merchants with our unbranded service helps ensure that we have a deep relationship with our most important merchants. It enables us to bring our latest and most technologically sophisticated checkout integration across PayPal and Venmo and our Buy Now, Pay Later service to our merchant base. Going forward, we will primarily focus on enabling unbranded processing and our latest branded checkout experiences through Braintree and PayPal Complete Payments. Based on our early observations, our share of branded checkout stabilizes or grows when our latest checkout integrations are in place. Second, we will continue to invest to help ensure our unbranded platforms are best-in-class, enabling our merchants to reduce fraud and increase their sales conversion rates. We will do this while providing a comprehensive orchestration layer that enables our merchants to have a single point of contact and integration in a multi-PSP environment. Our platform reliability is now amongst the best-in-class, and our integrated servicing capabilities are increasingly differentiated. Third, we are focused on substantially improving the margin structure of our unbranded business. Our PayPal Complete Payments platform opens a new $750 billion TAM in the small and midsized business market, with a significantly enhanced margin structure compared with our largest enterprise customers. Our Braintree and PayPal Complete Payments platforms are also expanding overseas where we can drive higher margins. And we are adding value-added services to our platform like Risk-as-a-Service, full omnichannel capabilities, payouts and FX-as-a-Service to both enhance functionality and add incremental margins. And finally, enabling merchants with our unbranded services will provide a constant stream of incremental data to feed our AI engines and fuel our next-generation checkout platform. We believe no other company will be able to replicate the unique nature and scale of our data set. And in the future, our AI engines will use that data to drive differentiated capabilities to improve the entire checkout experience for our merchants. We anticipate that this combination of initiatives will enable our unbranded services to become a clear market leader, drive additional growth in our branded checkout, enable our next generation of checkout and provide new sources of margin growth. And I would add that we continue to win and expand services with new marquee customers like Live Nation, Booking.com and Adobe. Our focused efforts in improving our branded checkout are clearly making a difference in the market and in our results. Our product and engineering teams have driven substantial improvements in availability, latency and passwordless login. We also expect that our in-app native checkout solution via our APIs and SDKs, along with the deployment of our PayPal Complete Payments platform to our largest channel partners, should begin to bear significant fruit in bringing our legacy base to our latest integrations. Buy Now, Pay Later continues to provide meaningful value to both our consumers and merchants. Over 32 million consumers have used our Buy Now, Pay Later since inception at nearly 3 million merchants. We are now one of the most popular Buy Now, Pay Later services in the world with $6 billion of TPV in Q1, growing at 70% on a currency-neutral basis. Consumers spend 30% more on our branded checkout when using Buy Now, Pay Later, and we believe we have amongst the highest authorization rates and lowest loss rates in the industry. Venmo continues to grow its revenues by double digits, and we were pleased to see its TPV accelerate 550 basis points from Q4 to $63 billion. We're continually working to improve the Venmo P2P experience. This quarter, we launched an easier, more intuitive way to split P2P payments across multiple people, and we also increased the ad funds limit for Venmo to $10,000. We recently added the ability for Venmo customers to transfer crypto to other users and external wallets, bringing it on par with the experience on PayPal. Later this year, we will add the ability for a Venmo user to pay a PayPal user and vice versa, bringing more utility to both customer bases. We are currently piloting the upcoming launch of Venmo teen accounts, which have been requested by both parents and teens for some time. Our Amazon and Starbucks experiences continue to grow nicely, and we recently launched PayPal and Venmo with McDonald's and just signed a deal with Microsoft to launch both Pay with Venmo and Buy Now, Pay Later for Microsoft's Xbox store. Finally, I'd like to briefly touch on the search for my successor. The Board has formed a subcommittee, and we are working with a leading search firm. We have detailed a sense of criteria and skill sets to access both internal and external candidates. We still plan to announce my replacement before year-end, and the process is well underway. One of the most important criteria influencing my decision to retire was that I felt that PayPal was on the right path to emerge from this economic climate in not only strong financial health, but also as a clear market leader in payments. Our results this quarter are another solid proof point that we are on that path. I'd like to thank all of our employees for their hard work and excellent execution. We still have a lot to accomplish and prove, but our customers are responding to our efforts, and that is and will always be our North Star. And with that, I'll turn the call over to Gabs.

Thanks, Dan. I'd like to start off by thanking our customers, partners and global team for helping us to deliver a great quarter. Our results demonstrate the relevance, diversification and strength of our payments platform. We are reporting healthy volume and revenue growth. This solid top line performance, in conjunction with expense management and efficiency gains, resulted in outstanding earnings growth. Notably, we accelerated our revenue and earnings growth on both a year-over-year and sequential basis. Relative to the first quarter targets we shared with you in February, both our revenue and EPS outperformed. The foundation we established last year for cost discipline and to realize productivity gains allowed us to expand operating margins and deliver profitable growth. Before discussing our outlook for the second quarter, I'd like to review our first quarter results. As Dan mentioned, revenue increased 10% on a currency-neutral basis and 9% at spot to $7.04 billion. This represents a three-year revenue CAGR of 15% and 20%, excluding eBay. Transaction revenue grew 6% to $6.4 billion driven primarily by our unbranded processing volume. Other value-added services revenue grew 39% to $676 million, predominantly due to higher interest income on customer store balances and, to a lesser extent, solid performance from consumer and merchant credit. In the first quarter, U.S. revenue grew 13%. International revenue grew 3% at spot and 7% on a currency-neutral basis, accelerating both year-over-year and sequentially. Transaction expense as a rate of TPV came in at 93 basis points, 5 basis points higher than Q1 last year. This increase was primarily driven by 30% growth in our unbranded processing volumes. These volumes grew approximately 3 times faster than our overall TPV growth. As a result, transaction expense dollars grew 17%. Transaction loss as a rate of TPV was 8 basis points for the quarter, a 2 basis point improvement versus last year. Transaction loss dollars declined 7%. Our ongoing risk mitigation activities and our mix of volumes drove this improved performance. Credit losses were $142 million or 4 basis points as a rate of TPV. We ended Q1 with $7.5 billion in net receivables, flat sequentially. Originations were primarily driven by the strength of our Buy Now, Pay Later franchise. As we have discussed, later this year, we plan to externalize a significant portion of this portfolio, reducing our balance sheet exposure and securing a long-term partner to support sustainable and healthy growth. Our reserve coverage ratio increased sequentially to 7.8% in Q1 from 7.4%, reflecting growth in the consumer receivables portfolio and some deterioration in our PayPal business loans portfolio. Relative to Q1 2022, our reserve coverage ratio improved 50 basis points. Similar to the broader industry overall, we're seeing a normalization of our credit portfolio to pre-COVID delinquency levels. We continue to be pleased with the quality and diversification of our credit portfolio and are closely monitoring the macroeconomic environment while making appropriate adjustments to ensure we continue to perform within our internal risk appetite. Continuing the trend from 2022, growth of unbranded processing volume outpaced growth in branded volume, resulting in slower transaction margin dollar growth. Volume-based expenses in the aggregate increased 17%, and transaction margin dollars grew 1% to $3.3 billion. Transaction margin declined to 47.1% from 50.9% in Q1 last year. While we do anticipate ongoing mix shift, we believe that this performance will improve as we execute against the strategies that Dan outlined to drive increased profitability across our unbranded processing volume and accelerated growth of our branded franchise. Strong discipline across non-transaction-related operating expenses more than offset the contraction in transaction margin. On a non-GAAP basis, non-transaction-related operating expenses declined more than 12%, with reductions in sales and marketing, technology and development, and customer support and operations expenses contributing significant leverage. This expense performance resulted in 19% growth in non-GAAP operating income to $1.6 billion. This is the highest growth in operating income that we have experienced in eight quarters. Non-GAAP operating margin reached 22.7%, expanding 201 basis points from the first quarter of 2022. In addition, we're pleased to report $1.17 in non-GAAP earnings per share for Q1, representing 33% growth year-over-year. We continue to be in a very strong position from a balance sheet and liquidity perspective, ending the quarter with cash, cash equivalents and investments of $15.3 billion. During the quarter, we generated $1 billion in free cash flow. Cash taxes related to the intra-group transfer of intellectual property reduced operating cash flow by approximately $430 million. In Q1, we allocated $1.4 billion to share repurchases. For the full year, we continue to expect to generate approximately $5 billion in free cash flow and to repurchase roughly $4 billion of our shares. I'd now like to discuss our guidance for the second quarter and update our outlook for the full year. For the second quarter, we expect revenue to grow approximately 7.5% to 8% on a currency-neutral basis and 6.5% to 7% at spot. In addition, we expect non-GAAP earnings per share to be in the range of $1.15 to $1.17, representing growth of approximately 25% at the midpoint of the range. For the full year, given our earnings outperformance in the first quarter, we are raising our outlook. We now expect non-GAAP earnings per share to grow 20% to approximately $4.95, an increase of 2 points of growth from the guidance we shared in February. At the start of the year, we indicated that our framework for 18% non-GAAP EPS growth in 2023 contemplated revenue growth coming in as low as mid-single digits. We also shared that our objective was to deliver revenue performance that exceeded this baseline. Our first quarter performance and the guidance for the second quarter are meaningful steps towards achieving this objective. As Dan indicated, assuming that current macro conditions continue, we now expect our back half revenue growth to be roughly in line with our performance in the first half of the year. Additionally, based on the expected contribution of unbranded processing volumes to our growth, we now expect at least 100 basis points of operating margin expansion in 2023. We are encouraged by our start to the year, and at the same time, mindful that the environment remains dynamic. We're focused on execution and will be agile and responsive to how the macroeconomic environment is playing out. And we plan to continue to guide revenue one quarter at a time. To wrap up, we entered the year as a more focused business with strong fundamentals. We're off to a great start in 2023 and believe we're well positioned to deliver revenue and earnings growth, expand margins and generate strong free cash flow. We're continuing to invest to accelerate our growth and capture the meaningful opportunity ahead of us. In addition, our expansive scale enables us to realize additional efficiencies and productivity gains. We believe our digital payments platform is unrivaled in breadth and depth, which creates a powerful competitive advantage for us. And we have conviction that our strategy to accelerate our branded checkout franchise, improve the margin profile of our unbranded processing platform and strengthen our digital wallet will result in significant and enduring value creation for our shareholders. We look forward to continuing to share our progress with you. With that, I'll turn it over to the operator for questions.

Hi, thanks a lot. Nice performance here on revenue. I have one question. It appears that Q1 clearly showed results consistent with your discussion about the second quarter revenue growth aligning with our model, albeit three points lower than the recent report. Additionally, you're expecting the second half to match the first half, which exceeds our forecasts and your earlier statements. My question is how much of this change is related to macroeconomic factors versus the momentum from the new products and integrations that Dan mentioned. I'm also interested in your perspective on share gains and whether your thoughts on that have shifted. We've also been wondering if you've noticed any benefits from the trend towards quality in light of the current banking stress, as various analyses suggest. I would love to hear your thoughts on this. Thanks.

Sure. To start, we had a very strong beginning to the year, exceeding our expectations, but we achieved 10.4% in foreign exchange-neutral revenue growth, just shy of our 11% target. This still puts us 150 basis points ahead of our initial forecasts. One of the most encouraging aspects is that every segment of our business showed acceleration. Total Payment Volume increased 300 basis points sequentially from Q4 to 12%. Branded products grew by 200 basis points to 6.5%, while unbranded growth has been robust at 30%. Venmo also saw an improvement of nearly 600 basis points. Moreover, our Net Promoter Score, which measures customer satisfaction, reached a five-year high this quarter, indicating that many elements are aligning with our expectations. Looking ahead to the second half of the year, we are one-third of the way through, and we’ve identified two key trends. Our market initiatives are gaining traction; there isn't a single solution, but rather several smaller improvements, such as a 40% reduction in latency over the past year, with a target of 50% by year-end. Our availability is at an all-time high, operating close to 5.9s almost constantly. We're addressing bugs and reducing friction, leading to fewer service calls about unbranded products, where our investments are starting to pay off. We have high hopes for what our Partner Channel Program can achieve in small and midsized markets, as we're witnessing new cohorts showing significant strength, outperforming cohorts from previous periods. Nonetheless, we recognize there’s still a significant amount to accomplish. With our scale, even minor improvements can have a substantial impact, creating a flywheel effect that we're excited about. We began the year with conservative expectations regarding global e-commerce growth, estimating it to be flat, possibly ranging from negative to positive 2%. However, we experienced a rebound in the first quarter and now anticipate low single digits, potentially reaching mid-single digits. It's clear that consumers are increasingly shifting their spending to e-commerce, which aligns with many expectations. If these trends continue, we now believe that growth in the second half will match what we've experienced in the first half, marking a notable improvement in our outlook. Gabs, do you have anything to add?

No.

Thanks so much.

Yes. You bet.

Thank you for taking my question and for the detailed explanation of the unbranded strategy. I have a couple of follow-up questions for you, Dan. First, could you explain what's contributing to the 30% growth in unbranded TPV and how sustainable you believe it is? Is this driven by a few large clients who may eventually plateau, or is it due to broader growth? Secondly, could you provide more insight into PayPal Complete Payments' competitive positioning in the lower market and where you expect it to succeed, as well as how quickly that success will materialize? Thank you.

Braintree is continuing to perform exceptionally well. We're not only acquiring more clients but also increasing our share of the overall payment service provider volume among our largest clients. We anticipated that Braintree's growth might slow down as we compare it to some significant deals from last year, but we are also working on major deals this year and have strong momentum. Its success is unique, stemming from an open architecture that allows us to seamlessly integrate transactions with third-party services and other payment service providers. Our integrated services and availability are now among the best in the industry. We have some of the lowest fraud loss rates, outperforming competitors by as much as 390 basis points. We're also expanding our value-added services, including alternative payment methods and real-time card updates for payouts, which are high-margin offerings like FX-as-a-Service. The audience results show that many of their profits derive from FX-as-a-Service, illustrating our eagerness to enhance this service. On the PayPal Complete Payments side, there are clear advantages in targeting the small and midsized market, where we enjoy a higher margin than with large enterprises. This is evident in how well the PayPal button performs. It's easy to integrate, fully featured, and includes all alternative payment methods like Apple Pay, along with advanced features such as vaulting and real-time account updates. We've integrated it with Zettle for omnichannel capabilities and are actively engaging with major channel partners. If these partners offer hosted services, transitioning them to our latest checkout solutions will quickly involve their merchant base. We are fully operational with PayPal Complete Payments in the U.S. and plan to expand to Europe and Australia next quarter. Additionally, our unbranded services have strong relationships with key clients and contribute a significant amount of data to our machine learning and AI systems, which is why we maintain low loss rates and instances of fraud, along with high conversion rates. These factors underscore why unbranded services are a strategic priority for us. Concerns about our transaction margin amid the growth of unbranded services represent a high-quality challenge for us. We're gaining traction in this market faster than we expected, and we have a strategic plan in place to enhance margins in this segment, which we are already starting to see results from. Thank you for the question, Lisa; it's an important one.

Thank you.

You bet.

Hi guys, thanks. Braintree growth and mix obviously were a factor on the take rate in margins. But if you could just help us understand the dynamics of margins in the second half. I know you're lowering incremental margin guidance by 25 bps to 100 basis points despite with obviously very strong expense management results? Maybe you could just help us understand how much of that is related to either the Braintree mix versus, any other variables in the second half we have to keep in mind. And just as a quick add-on to that, when would we expect the strength of the Braintree volume, we're seeing to actually translate to some higher-margin offerings at a faster pace? Thanks again guys.

Yes, you bet. I'll start. You're right. So, we have some margin dynamics that are worth calling out, as it relates to first half versus second half performance, specifically as it relates to operating margin. Our Q1 operating margin performance was very, very strong with about 200 basis points operating margin expansion. In Q2, our expectation is actually that it would be ahead of that from an expansion standpoint. And so, we're really delivering the vast majority of the margin expansion on the year from an operating margin standpoint in the first half of the year. The back half, we actually have some lapping dynamics and some nuances that will result in much more modest operating margin expansion for 2H overall. Within that, I'd say it's worth highlighting that Q3, I'd expect to see some pressure on operating margin, maybe some slight pressure. And then in Q4, we'll see expansion again, but more modest expansion than you're seeing in the first half of the year, and really sort of what the drivers of that are, and Dan highlighted a few of them. We do have some lapping dynamics in the back half of the year. In Q3, specifically, there were some benefits on the TE side. We're also beginning to really lap the benefit from increased interest rates. And the increased revenue that we earn on customer store balances really starts in Q3 continued in Q4. So as we lap that, don't expect to see as much operating margin expansion in the back half. In addition, we began to really lap a lot of the cost savings work that started in the back half of last year. And so, while we do expect to see a meaningful decline in non-transaction-related operating expenses in both Q3 and Q4, from a percentage decline standpoint, it will not be as great as what we're seeing in Q1 and Q2. And so, all that taken together will result in that differential between the first half and the back half op margin expansion for the full year. Again, we do expect to see at least 100 basis points of op margin expansion. That change that you called out between the 125 and at least 100, that is predominantly driven by the fact that when we're talking about our revenue being slightly ahead. A lot of the benefit that we're seeing is coming from the Braintree business and having a lot more visibility in that pipeline, and that's contributing to our top line, but also having some margin impact. Dan, do you want to talk a little bit about the strategies in unbranded?

Yes, I think maybe I'll take a step back for a second. I mean I think, look, our strategy on average and over time is to deliver double-digit EPS growth year-after-year-after-year. And we've had a good track record in general of doing that. We've got a well thought through strategy and a set of actions that's going to deliver increased transaction margin dollars, along with OpEx reductions, to make sure that we do that. We've talked a lot about the initiatives that we're focused on, and we've been focused on the same thing for over a year now. Its drive branded checkout that's our #1 priority. All of our initiatives are linked to that. It's our highest margin service. It's our bread and butter, and we're absolutely determined to have that be best-in-class. We want to drive unbranded, because of all the things I talked about in my remarks. It helps us on branded share of checkout. It helps us in our data collection and all of the things we can do with those, unique sense of data. In unbranded will be a new source of margin generation for us, without question. We are beginning to put those services already into place. Many of them will go into place by the fourth quarter, and I expect to see the majority of those things start to take effect in 2024. And then clearly, we're managing our OpEx extremely well. And I can talk with more detail on that if anyone has a question on it. But we've said - we thought it would be, negative high single-digits this year. It's likely to be 10%, negative 10% plus. And if anybody thought costs were going up, they'll go down again next year as well. I can talk more about that. But we've got a real set of initiatives and strategies focused on this. We're executing against it, I'm confident that we'll be able to deliver on what we set out to do.

It's really helpful guys. Thank you both.

You bet.

Thanks guys. Good to see the improved revenue outlook here. I actually wanted to switch over to the branded side of TPV growth. As you mentioned, you had a couple of points of acceleration there. Wanted to understand which countries or verticals or other drivers, what was behind that? Would you attribute any material amount of the improvement through the rollout of advanced checkout? And then just any directional comments on how branded checkout TPV growth may trend during the balance of the year in support of the revenue outlook you talked about? Thanks.

Thank you, Jason. I'll take that one. To give some context, we are the market leader in online checkout, serving 35 million merchants, including 80% of the top 1,500 online retailers in the U.S. No other wallet is even close to matching that. Generally, our authorization rates are about 600 basis points above the industry average, which means that for every 100 purchases, we approve six more transactions. We have strong consumer and brand trust, and when smaller to mid-sized merchants add PayPal to their websites, they typically see a 44% increase in conversion rates. These are significant advantages that we will continue to leverage. There is still a lot to do; we are optimizing how we present our offerings and ensuring our top-tier integrations are available, whether through our branded checkout or the new SDKs and APIs we offer. With these best-in-class integrations, we maintain stable or growing checkout market share. Our service availability is improving, nearing five nines of latency, which has been enhanced by 40% and could improve even further by 50%, positively impacting conversion rates. Last year, our passwordless login improved by ten full points, and we plan to enhance that further this year using pass keys and other biometric methods. We're also capturing more market share with our Buy Now, Pay Later services, where we believe our authorization rates are higher than our competitors'. With over 90% of the customers using Buy Now, Pay Later already being PayPal customers, we also enjoy the lowest loss rates. There's been a notable flight to quality, as more people turn to PayPal and our Buy Now, Pay Later offerings. We are focused on targeting large merchants, especially as our competitors' contracts come up for renewal, and we are poised to capture market share and spend through our Buy Now, Pay Later options in checkout flows. We have launched full general availability for our mobile checkout using our SDKs and APIs, and we are starting to experiment with AI-powered checkout, which evaluates the entire checkout experience for our merchants. We have various projects underway in branded checkout, and I must say the team is executing exceptionally well. They consistently follow through on their commitments, and their roadmap is being implemented effectively. What they anticipate is unfolding in the market, giving me great confidence that our branded share of checkout will remain strong. We've also seen growth in the U.S., U.K., Germany, France, and several EU markets, along with Australia. While there is no single uniform measure of market share, any way you assess it, a sequential growth in branded share or overall growth of 200 basis points is a significant sign of momentum.

Thanks Dan.

Yes you bet.

How are you thinking about the opportunity for cost savings and OpEx reduction beyond 2023? And in particular, if you could maybe weigh that against potential transaction margin dynamics as well to the extent those will continue next year based on the trend we saw in Q1.

Yes. I'll start off, and then Gabs can attack the last part of your question. First of all, obviously, we had good solid progress against what we said we're going to do, negative 12% in Q1. I think our OpEx for the full year could decline as much as negative 10%, which is a bit higher than we expected. And as I said in my remarks, we're just beginning on this efficiency journey. I think you're going to see our costs continue to come down year-over-year-over-year. And this is not just about efficiencies. By the way, it's not about cost reduction. It's about doing things better. There's no question that AI is going to impact almost every function inside of PayPal, whether it be our front office, back office, marketing, legal, engineering, you name it. AI will have an impact and allow us to not just lower cost, but have higher performance and do things that is not about trade-offs. It's about doing both in there. The other thing that the teams are doing and doing extremely well is they're improving processes. Right now, they're removing friction with a much simpler onboarding process, first transaction resolution. We're seeing better engagement as a result, fewer calls, as I mentioned, higher NPS. You're seeing that in our newest cohorts coming in with significantly higher TPA and ARPA. And so, I think this is going to be a cost journey that we'll be on for a long time to come. And I think at the same time, we'll just be doing things better than we've ever been doing them before as well.

Yes.

Understood. Yes.

Oh please go ahead, David.

Yes. No. Just the second piece of that as well, Dan, which is, is there an inflection point you see coming in terms of transaction margin dollar growth accelerating at some point later this year or in early 2024?

Do you want to take that?

Yes. So I really think about it as a multiyear journey that we're on to continue to transition the business and really drive more profitable volumes through the unbranded processing side, while at the same time accelerating the growth in branded. We're off to a really good start. Q1, we saw acceleration in the branded business. It was very broad-based in terms of what we were seeing. And we continue to see very strong growth on the unbranded side of the platform. Sequential acceleration on unbranded given its size and scale is very impressive. Given the beta business that we run, it will take some time to see what I would see an inflection point in the overall sort of TM dynamics. I would say Q1 did have some nuances to it, which included about 130 basis impact just from normalizing our credit provisions. So that's not specifically related to unbranded, branded mix. It really was sort of credit loss provisioning that impacted the TM rate as well. But to your point, as we move through the year, we do continue to expect to see a continuation of the TM dynamic that's put out in Q1. There are some exciting trends that we're seeing in the business, however. So I'd say what we saw in cross-border in Q1 and the growth in that business is quite encouraging. It was the strongest quarter we had for cross-border really since Q4 of 2021. That, of course, has a higher yield to it overall. So as we start to see some of those pieces of the business pick up, that will also help. And then just from a TM standpoint, we did see some pressure as well in Q1 specifically on the unbranded side for PayPal. And this is not Brain business. This is the transitioning of our unbranded processing on the PayPal side to PPCP has created some pressure in the quarter, which we don't to be sort of ongoing as we think about how we exit the year given what our expectations are for PPCP. So we're continuing to be disciplined about the growth of the business. We do expect all these strategies to start to play out and start to help turn the overall TM profile, but I would expect it's going to take a number of quarters before we see what we would call an inflection point.

Thank you.

You bet.

Hi, good afternoon, Dan and Gabrielle, thanks a lot of time this afternoon. I wanted to follow-up on one of the comments or topics you've mentioned quite a bit on this call, Dan, that's around engagement. I wonder if you can give some update. You've mentioned that there's been some improvement in engagement, but I'm wondering if you can give an update on those initiatives, more specifically, how that's helping engagement and conversion, especially things like advanced checkout, et cetera? And what kind of lift you're getting from that? And maybe give a little more detail of how we should think about the tie into some of the unbranded initiatives and if we think there can be further at least improvement in those engagement levels or uptake by merchants, et cetera? Thanks.

Sure. So first of all, as I mentioned, kind of we've got these three initiatives, they all tie together, and they all lead to driving more share and volume of branded checkout. So as we do more and more on our unbranded, we put out our latest integrations into the market. And when we put out our latest integrations in the market, we take away friction, we take away latency, and we see more engagement, and a lot more checkout go through our latest integrations. But one of the initiatives that we haven't really spent time talking about point is what we're doing on our digital wallets. So those are the three, right, drive engagement and monthly active users and ARPA through our digital wallets, drive our checkout, drive our own brand, and they're all linked together and then keep a tight envelope on our cost structure. Those are the four things that we're focused on. In the wallet, we're making good solid progress, whether that be on our Venmo wallet on the PayPal side of it. Look, the PayPal app is already one of the largest commerce and payments apps in the world. It's used by about 55% of our base right now. That's up about 600 basis points year-over-year. And our app users are predominantly our monthly active users and our power users. They've got 35% more ARPU. They've got 58% greater transactions for active on it. And their churn is at least 25% less than the rest of the base. And the thing that I'm really pleased to see what John Kim and his team are doing is that the velocity of experimentation in our wallets now is like nothing that we've seen in quite some time. We have constant champion challenger, hypotheses going out, replacing challengers that have been overcome by the champion, and that just starts to lead to more and more engagement going through. As I mentioned on the consumer side, we saw consumer transactions per user increase every single month in the quarter. In March, they are 400 basis points better than March a year ago. And the whole idea of the apps right now are three specific areas. One, upfront prepurchase, call that shopping, where it's really about discovery, saving and rewards. We introduced rewards recently. We have over 6 million monthly active users in our rewards right now. Those that are using it have an increase in the 6 million of 45% in their transactions per active. I mean these are huge numbers. We obviously need to go from 6 million to 10 million to 25 million, but that will happen over time. Then we have purchase, which is all about being the most flexible, easy way to purchase. Buy Now, Pay Later really plays into that. And there, we're clearly taking share. We clearly intend to drive that. And then we have post purchase, which is like things like how do I track my packages? How do I get refunds easily? How do I put that right into my wallet? And there, I talked about this in the last earnings call, on package tracking, we're now 100% ramped in iOS. We do all the package scraping now off of Gmail. So in one place, you can see all of your PayPal purchases and non-PayPal purchases. So you can track all of that in one place. And again, for those users that have started to do that, their app engagement is up 32%, and their transactions are up 20%. And so all of these things, James, when you think about what we're doing on just being better in checkout, driving unbranded so that we can drive better integrations going forward and what we're doing in the wallet, they all link together to really drive our MAUs, which are our most valuable customers by far and away, and they went up slightly in Q1. They are 20x, 30x more valuable than just an active user out there and to drive transactions and ARPA. So this is a flywheel. As you have said, it takes time to drive it. But a lot of the things we're seeing right now, the reason we are taking up our expectations for what we think our revenue growth will be, taking up kind of our EPS as well is because we're seeing distinct improvements take place in the market.

That's all I have. Thanks for that Dan.

Yes, you bet. My pleasure.

Hi, thanks for taking the question. I wanted to ask about credit. Are you managing to book any different on credit given the macro and exposure to BNPL and merchants and just thinking about maybe the impact of provisions for credit losses for the rest of fiscal year '23 maybe as a result of managing the book any different. Thanks.

Thank you, Bryan. In the upcoming quarterly report, which will be submitted tomorrow, we have increased the provisions for our PayPal business loans portfolio, which represents about 17% of our total receivables. We expanded our credit criteria in the middle of last year, but we have encountered some performance issues that are currently being addressed. As a result, we decided to increase provisions. We're beginning to see overall improvements in this segment, and we anticipate that delinquencies will rise through the second quarter, peak this quarter, and then improve for the remainder of the year based on our origination strategy. Nevertheless, this segment remains a small part of our overall portfolio. More significantly, we are experiencing strong growth in the Buy Now, Pay Later portfolio, which has shown broad strength and is crucial to our strategy. It enhances the performance of our branded business, and we are enthusiastic about the continued growth in this area. We also noted in our prepared remarks that we plan to externalize part of that portfolio this year and collaborate with a partner for sustained growth support. Overall, we are very satisfied with our credit portfolio, which is performing well across the board. We are witnessing some normalization, as we expected, as we move past the COVID period and revert to historical performance levels. In terms of reserve coverage, when comparing our current reserve coverage to the levels at the onset of CECL in the first quarter of 2020, we are actually performing a few hundred basis points better. Therefore, the portfolio remains quite healthy.

Got it. Thanks so much.

You bet.

All right. Well, I think we're at the top of the hour. So I just want to thank everybody for your great questions. Thank you for your time, and we look forward to speaking with all of you again soon. So thanks, everybody. Take care. Bye-bye.