PayPal Holdings Inc (PYPL) — Q1 2024 Earnings Call Transcript

Good morning. Thank you for joining PayPal's First Quarter 2024 Earnings Conference Call. Joining me today is Alex Chriss, our President and CEO; and Jamie Miller, our CFO. We're providing a slide presentation to accompany our commentary. This conference call is also being webcast. 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. Our remarks today will include forward-looking statements that are based on our current expectations, forecasts, and assumptions and involve risks and uncertainties. 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 website. All information in this presentation is as of today's date. We expressly disclaim any obligation to update this information. And with that, let me turn the call over to Alex.

Thank you, Ryan, and thank you to everyone for joining us this morning. This quarter, we delivered a solid set of results, and the year is off to a good start. Our new leadership team is operating well together, and we are really starting to get our arms around the business. You will see in our numbers and the read-through that our efforts are beginning to make a difference. We also see substantial need for continued retooling of the company, how we work with our customers, and how we execute. We are encouraged by the progress to date but remain realistic that we still have a lot of work to do and a lot of opportunity to drive profitable growth ahead of us. What we said at the start of the year still holds. This is a transition year where we are focused on execution and making critical choices that will set the business up for long-term success. We have a plan that will return this company to where it needs to be and remain focused on execution to get there. We see clear opportunities for operational improvements across our large enterprise, small business, and consumer businesses, including Venmo, and in driving more efficiency across the organization. But it will take time to prudently drive a meaningful and sustainable transformation. In the first quarter, we delivered 10% revenue growth on a currency-neutral basis on $404 billion in total payment volume. Transaction margin dollar performance grew 4%, which was better than expected, thanks in part to actions we took. Our non-GAAP earnings per share increased 27% year-over-year. Our results are stronger than we expected earlier in the year, and they require some unpacking to put them in the context of the full year. What I want you to understand is what we are focused on, namely, making surgical changes to the way we are running the company. Some of these will have an immediate impact, and others will take longer to bear fruit. As such, we need to maintain flexibility throughout this year to make important decisions to drive the long-term growth of the business. This includes decisions about where we prioritize and reinvest, how we go to market, and actions that can be taken to sharpen our value proposition for consumers and merchants. With that in mind, we do now expect full year EPS to grow mid- to high single digits, which is partially driven by our better-than-expected start to the year. Jamie will take you through our Q1 results, contours of the year, and updated guidance in just a few moments. Let me first spend some time providing an update on our execution against our customer strategies and investment priorities and detail progress on our efforts to operate more efficiently. Turning to our 3 customer groups. We continue to make steady progress on strengthening our strategic positioning and product portfolio. For large enterprises, we continue to focus on accelerating growth in branded checkout and driving the profitability of our business. We are executing to get upgrades to our core branded checkout experiences to the market. We continue to make good progress in our early testing of Fastlane by PayPal with a focused group of merchants. Data from those alpha merchants show that returning Fastlane users are converting at nearly 80%. We are just getting started and already creating a low double-digit lift in guest checkout conversion for participating merchants. The results so far are encouraging as incremental conversion improves our merchants' growth and profits. Demand for this product is promising, and we expect to make Fastlane generally available in the U.S. in the second half of the year. Additionally, we are continuing to focus on making it even easier to pay with PayPal by removing friction from the checkout process. In the coming months, we will continue to move to more passwordless authentication processes, like biometrics, and launch a redesigned mobile checkout experience, which we believe will result in higher conversion rates. We've begun active discussions with our largest enterprise customers to focus on commercial outcomes that reflect the true value of our payments processing platform and the services we provide. As we speak, many of our top merchants are gathered in California for our annual Commerce 360 Customer Conference, where our teams will go deep on the innovations we plan to bring to market this year and the value they can provide. We are also in the early stages of evaluating the overall dynamics and pipeline of our top 10,000 merchant accounts. As we evaluate our programs, we see clear opportunities to price to value, not only with our PSP processing but especially with our value-added services that we already provide, services such as payouts, fraud prevention, and processing orchestration. This process will take time, but we have a focused game plan, and we are already having fruitful conversations that are helping merchants understand the additional value they can unlock by strengthening their relationship with us, including through our value-added services. For example, DraftKings recently went live with our fraud management solution, Fraud Protection Advanced, which combines our intelligence with advanced machine learning and analytics to help businesses protect themselves from ever-evolving fraud threats. This is an example of a best-in-class offering and a key differentiator against our competitors. It also showcases our ability to leverage AI to drive customer benefit and is an area where we can price to the value we provide. For small- and medium-sized businesses, the launch of our PayPal Complete Payments Platform has been gaining momentum over the past couple of quarters. We've made good progress in expanding PPCP's geographic reach to now more than 34 countries. In the first quarter, we expanded the platform to Canada, the U.K., and more than 20 European markets. We also added new features to PPCP in Australia, Germany, and the U.S. in recent months. Additionally, we are seeing a positive response to our new low- and no-code tools for merchants and developers to integrate PPCP, which we launched in March. As of the end of the first quarter, approximately 7% of our SMB volume is already on PayPal Complete Payments, with our team focused on distribution through partners that can accelerate adoption to the largest number of customers. Our efforts here are important because PPCP ensures merchants have our latest branded checkout integration, which will include Fastlane, so that consumers have a best-in-class checkout experience wherever they shop, and merchants will benefit from higher conversion. On average, merchants who adopt PPCP use approximately 4 PayPal products, which deepens the relationship and reduces churn. This translates to an average revenue per account for our PPCP full-stack merchant that is nearly 2x that of an SMB on a legacy integration. As you all know, I have a deep passion for helping small businesses succeed. Frankly, this is an area where PayPal took its eye off the ball. Over the years, we've deprecated products and made pricing decisions that negatively affected our market positioning. Despite that, we still have the largest population of SMBs anywhere, who are using our products and eager for us to do more for them. This is an area where we are investing to correct our course. We are here to serve and win the small business market. On the consumer front, the PayPal app is at the center of our strategy to leverage the power of our data to create more value for our customers and unlock new sources of revenue and margin expansion opportunities. In the first quarter, we revamped the PayPal app with a new look and feel and introduced enhancements to our rewards program to enable shoppers to get the most out of their money while increasing conversion for merchants. Additionally, we began testing a comprehensive rewards-focused life cycle marketing program. When tested with approximately 20% of our PayPal app users, we saw it drive a nearly 7% increase in weekly app logins and a 4% increase in transaction margin per user. Introducing consumers to new products, like our debit card that can help maximize the value they receive from PayPal, is a major focus. The enhancements our team made to our onboarding flow enabled a 38% increase in debit card first-time users during the first quarter. On average, a customer who adopts the PayPal debit card is more engaged, generating a 2x lift to transaction activity and a nearly 20% increase to average revenue per account compared to users who primarily use checkout. Approximately 4% of our active PayPal consumer accounts in the U.S. have a debit card. So while we have a lot more to do, this work is meaningful to the economics of our business. In the quarter, we onboarded BigCommerce and WooCommerce to our package tracking solution. In the 12 months since launch, we've had approximately 7 million active accounts use package tracking. This is a key pillar in our post-purchase strategy. Package tracking not only allows consumers to track their shipments within the PayPal app, but will also enable us to make personalized purchase recommendations and present relevant offers through the app and our AI-powered Smart Receipts. We believe these innovations will drive engagement with the PayPal app and incentivize future branded checkout activity. For Venmo, we are focused on giving our customers more ways to immediately use their Venmo debit card in person with Apple Pay and Google Pay, which you will see in the market in the coming months. In the first quarter, we saw a 21% year-over-year increase in consumers using our Venmo debit card. Remember, Venmo debit cardholders are among the most engaged accounts and on average drive 6x the incremental revenue than that of a P2P-only customer. Simultaneously, we are making it easier for consumers to use their Venmo balance when making payments or sending money to friends. In the first quarter, balance-funded P2P senders grew by 17%, which contributed to our overall transaction margin dollar growth in the quarter. Our leadership team is continuing to go through our business from top to bottom, understanding where we can operate more efficiently and invest in the innovation that will offer the greatest impact for our customers and PayPal. This is a mindset shift we are driving throughout the entire organization. Investing for durable growth backed by a clear payback path and time horizon remains a top priority. Investing in branded checkout and better serving our small business customers are 2 focus areas you heard me talk about today. We are also actively evaluating and greenlighting new investments to accelerate future growth that support and strengthen our strategic priorities. A good example of this is our remittance business, Xoom, which has stagnated while similar services have gained share. This business has been on a negative revenue trajectory due to a lack of prioritization and clarity about its value proposition. That is now changing. We are executing the right product refinements bundled with an enhanced and more customizable pricing model intended to promote growth over the long run. We plan to reduce the cost of cross-border transfers and provide consumers the option to eliminate transaction fees altogether when funding with our PYUSD stablecoin. We are activating those plans, and we expect to see tangible progress throughout 2024 and beyond. The key takeaway here is that we are in the process of assessing a handful of areas of investment where we believe there are compelling unit economics and market upside. These may mean that we will make decisions to invest in 2024 where we believe these investments will ultimately contribute to the sustainable and profitable growth of the company. At the same time, we must maintain our focus. We are continuing to evaluate the markets we operate in and the products we offer. Where we see areas to improve focus and prioritization, we will take action and update you accordingly. Finally, a few words on our continued efforts to drive operational efficiency and productivity across PayPal. We are instilling a rigorous cost/benefit discipline throughout the company and leaving no stone unturned when it comes to reducing unproductive costs. We are also investing in automation that will help answer our customers' frequently asked questions, simplify the integration process for our merchants, and enable our team to deploy solutions more quickly. As mentioned on the last earnings call, we have started reporting stock-based compensation as part of our non-GAAP metrics beginning this quarter. In addition to our annual incentive plan, shifting to cash payment from stock, we have also better aligned our incentive programs to performance, particularly focusing on transaction margin and non-GAAP operating income growth. We will continue to focus on a pay-for-performance culture that appropriately aligns pay with results. I'll conclude by thanking the PayPal team for continuing to innovate and serve our customers. While we are still in the early stages of driving a meaningful and comprehensive transformation of PayPal to deliver the sustainable and high-quality growth we are aiming for, our first quarter results are an encouraging indication of what our team's renewed strategic focus and persistent execution can achieve. We will continue to update you on our execution throughout the year and be transparent about our progress. I am confident that we are taking the right steps to build long-term profitable growth.

Thanks, Alex. Good morning, everyone. We had a solid start to the year with first-quarter results that were above our expectations. As Alex mentioned, it's still early in the company's transformation. We are getting deeper in understanding both our challenges and our opportunities with much greater clarity. Our goal for 2024 is to foundationally set up the business for the future by making key decisions and aligning our investment path for growth. And to do so, we are laser-focused on strategic analysis and decision-making, driving innovation back into the business and executing with excellence. While it will take time for our efforts to sustainably flow through results, the speed at which the team is moving is encouraging, and we are making steady progress. Let me start with a summary of our financial performance. As a reminder, our non-GAAP results now include the impact of stock-based compensation expense and related payroll taxes. This change is intended to enhance transparency, operating discipline, and align our performance measures to how many investors already evaluate our business. Now moving to our results. As Alex mentioned, in the first quarter, revenue increased 9% at spot and 10% on a currency-neutral basis. Transaction margin dollars grew 4% year-over-year, improving in growth by more than 400 basis points from the fourth quarter. I'll walk through the drivers of that growth in a few minutes and provide context on the shape of the year, including tailwinds that we expect to be more pronounced in the first half compared to the second half. Under our updated non-GAAP methodology, earnings per share were $1.08, representing 27% year-over-year growth. Under the company's prior non-GAAP methodology, which excluded the impact of stock-based compensation, earnings per share would have increased approximately 20% to $1.40, above our guidance for mid-single-digit growth on a comparable basis. Relative to our outlook, higher earnings per share were driven by a combination of factors, including better-than-expected transaction margin dollars, ongoing expense discipline, the timing of certain investments in marketing spend, and interest income. Now I'll walk through some key operating metrics that support those results. We ended the first quarter with 427 million total active accounts and 220 million monthly active accounts. Total active accounts increased by nearly 2 million from the fourth quarter and included growth in PayPal merchant and consumer accounts in addition to other products. We were encouraged to see total active accounts inflect positively in the quarter, and we remain focused on driving deeper relationships and more activity across our customer base. Monthly active accounts continued to show steady progress, up 2% year-over-year to 220 million with contribution from both PayPal and Venmo. Transactions per active account, which is a trailing 12-month number, was 60 in the first quarter, up 13%. Excluding PSP processing, which is primarily Braintree, transactions per active account grew 7%. Moving to volume growth. In the first quarter, TPV grew 14% on a spot and currency-neutral basis to $403.9 billion. U.S. TPV grew 12%. International TPV grew 17% on a currency-neutral basis primarily driven by strength in Continental Europe and improvement in Asia. Global branded checkout growth accelerated to 7% on a currency-neutral basis from 5% in the fourth quarter. The first quarter included about a 1-point benefit from leap day as well as ongoing benefits from the growth of global marketplaces. Within branded checkout, large enterprise and international markets were the biggest contributors to growth. We remain laser-focused on driving deeper adoption of our best-in-class solutions with small- and medium-sized businesses and improving mobile experience, which are critical, particularly in markets like the U.S. and the U.K. PSP processing volume grew 26% in the quarter driven by continued momentum from Braintree compared to 29% in the fourth quarter. Conversations with merchants have been encouraging as we shift our focus to a more disciplined go-to-market and renewal process that emphasizes profitable growth. Merchants recognize the product and performance improvements we have already started to make and are excited about the pipeline of upcoming innovation. As I noted earlier, revenue in the first quarter increased 9% at spot and 10% on a currency-neutral basis to $7.7 billion. Transaction revenue grew 11% on a spot basis to $7 billion driven by Braintree and branded checkout. Other value-added services revenue in the quarter declined 2% on a spot basis to $665 million. Within other value-added services, interest on customer balances continued to be a meaningful tailwind. Our credit business performed relatively in line with our expectations with revenue lower because of 2 main factors. First, we are carrying lower merchant receivables after tightening originations last year. Second, we have had lower revenue share on our off-balance-sheet U.S. consumer revolving credit portfolio due to ongoing normalization of loss rates. Transaction take rate declined 5 basis points to 1.74% driven primarily by lower foreign exchange fees and lower gains from foreign currency hedges. In addition, mix shift to large merchants continued to impact our branded checkout take rate. Transaction margin dollars increased 4% in the first quarter. Higher interest on customer balances, branded checkout, better transaction loss performance, and lower credit losses were the largest contributors to growth. While the performance of the core business has been relatively consistent, we expect that a few of these tailwinds are likely to be less meaningful as we move through the year. Specifically, we expect to see lower year-over-year benefit from interest on customer balances and lower year-over-year improvement on transaction and loan loss performance. Non-transaction-related operating expenses declined 2% as we continue to actively manage our cost structure while reinvesting into key strategic initiatives. Part of the decline in operating expenses is a result of certain corporate and marketing investments deferred to the second half as well as lower stock-based compensation. Non-GAAP operating income grew 15% in the quarter to $1.4 billion, and non-GAAP operating margin expanded 84 basis points to 18.2%. PayPal generated $1.8 billion in free cash flow in the first quarter or $1.9 billion, excluding the impact of held-for-sale accounting related to our European Buy Now, Pay Later externalization. In the quarter, we completed $1.5 billion in share repurchases, bringing share repurchases over the past 12 months to approximately $5.1 billion. We ended the quarter with cash, cash equivalents, and investments of $17.7 billion and debt of $11 billion. I'll now move to our second quarter and 2024 guidance. Consistent with the approach we shared in February, we will continue to provide revenue guidance 1 quarter at a time. For the second quarter, we expect revenue to increase approximately 6.5% at spot and 7% on a currency-neutral basis. In addition, we expect non-GAAP earnings per share to increase by a low double-digit percentage. For the full year, we continue to plan for a relatively consistent macroeconomic and consumer spending environment. With respect to earnings per share, we now expect 2024 non-GAAP EPS to grow by a mid- to high single-digit percentage. As Alex said earlier, we are in a transition year, and we do not expect that our quarterly progression will be linear. To help bridge this outlook compared to our prior guidance for approximately flat non-GAAP EPS, there are 2 main factors I would point you to. First, our inclusion of stock-based compensation expense within non-GAAP results is expected to benefit EPS growth by approximately 3 percentage points this year. Second, we saw meaningful outperformance in the first quarter relative to our plans. We intend to reinvest a portion of this performance back into the business. We expect earnings growth to be more muted in the second half of the year due primarily to less benefit from interest income on customer balances, normalization in transaction and loan loss performance as we progress through the year, and the expected timing of investment actions. Underpinning our outlook, we now expect transaction margin dollars to be slightly positive for the full year. We expect non-transaction operating expenses to increase slightly. Embedded within this outlook is the flexibility to make key strategic decisions to invest and reinvigorate profitable growth within components of the portfolio and accelerate go-to-market efforts. For the full year, we expect other value-added services revenue to be roughly flat year-over-year. This excludes any potential impact from the CFPB late fee regulation, given pending litigation across the banking industry and uncertainty on both timing and implementation. As a company, we have already taken steps to mitigate the future impact, though these take time to fully take hold. Consistent with the approach we shared last quarter, our guidance includes minimal impact from the new innovations rolling out this year. Our focus is on execution as we begin moving from test and pilot phases into launch. We continue to expect free cash flow for 2024 to be approximately $5 billion and for at least $5 billion in share buybacks. In closing, 2024 is off to a solid start as we drive significant change across the company. We have clear opportunities to lean in further. We are doing the hard work now to position PayPal for profitable growth in the years ahead, and it has been incredibly energizing to see the team's commitment to this goal.

Just I wanted to ask on transaction margin dollars, if you don't mind, the acceleration there. Maybe can you give us a little bit more detail on the growth across the main businesses, branded checkout, unbranded and what we've been calling other? And of course, on the other side, love to hear if there's any change in thinking there on the strategy to reclaim growth or even divest some of those assets.

Yes. Thank you, Tien-Tsin. Let me hand it over to Jamie to walk you through transaction margin, and then I'll take the more strategic piece on other and how we think about the year.

I'll just walk you through the drivers for transaction margin growth during the quarter. We were happy with the positive growth progression. I mentioned in my prepared remarks, we've got a lot underway to really position the company for positive TM growth over time. In the quarter, just to walk it a little bit, interest income on customer balances was the highest contributor. Branded checkout continued to grow profitably and was a nice contributor to our growth this quarter. We did benefit from leap day, but we also benefited from strength in large enterprise and international. We've been very focused this year on PSP profitability, and that will ramp over time, but it wasn't a meaningful contributor this quarter. And we just had small but I'd say steady ongoing product improvements in Venmo and P2P. So we saw some shifting there and better transaction and credit loss performance. And then lastly, to the last point of your question, we did see a smaller drag from the other smaller parts of the portfolio.

Yes. Let me just sort of take a step back, Tien-Tsin, and talk about how we've been thinking about the year. You've heard us talk about this as a transition year. The way we've really been focusing the team is on sort of 3 different components to make sure that we're set up well for profitable growth into the future. The first is accelerating innovation and ensuring that we've got best-in-class innovation, whether that's on the consumer side ensuring that our customers have a frictionless, incredible experience in checkout; to an unbranded side where we allow our merchants to have, again, best processing available. So really accelerating the velocity of our innovation. The second is adoption and ensuring that once that innovation is actually in the market, that our consumers are using it, that our merchants are onboarding to our latest and greatest integrations. I'll give you an example. We talked about in the last call the opportunity for debit card engagement. We changed the onboarding flow inside of the PayPal app this past quarter and saw a 69% higher debit card engagement just by changing that flow. So a big focus on the team on not just delivering our innovation but actually delivering the adoption. And then lastly, as you mentioned, cleaning up some of our underperforming services. I mentioned Xoom on the call. That is a business that we looked at very hard. It's been underperforming for a couple of years now. And we wanted to make a decision on, is this an asset that's strategic to the business that should be a profitable grower for us, or not? And when we looked at it, we realized that there were just opportunities where we had priced ourselves out of the market in a number of different corridors that we could make strategic decisions on and actually make this a profitable, growing business. And so that's just an example. We're going top to bottom throughout the organization. And there will be some businesses or markets that don't meet that cut, and we'll let you know when we make those decisions. And there will be other ones that, with focus and execution, we'll turn around.

I think it would be helpful to revisit some of the initiatives around unbranded products, including your conviction and the timing of their impact on transaction margins. Additionally, have you had discussions with Braintree merchants about pricing? I recall you touched on this in your prepared remarks, but how are those conversations about pricing to value progressing? Also, Alex, when we consider the appreciation of value-added services and differentiators for PayPal's two-sided network, how has that been resonating in the market lately?

Thank you, Darrin. To give you an overview of the unbranded segment, it's a significant area for us, both for enterprise and small businesses. We're focusing on getting the fundamentals right. Our customers expect high authorization rates, consistent uptime, strong availability, and reliable service, and we are delivering on these expectations. Over the past few years, whether through Braintree or our current efforts with PPCP, we have been investing in and establishing a presence in this market. Additionally, we've been developing value-added services, although we haven't effectively communicated their value or engaged our customers in comprehensive strategic discussions. This is now changing. We are having productive discussions with both enterprise and small business merchants about our comprehensive solutions and the value-added services we can provide, leading to more strategic dialogues around our two-sided network, involving both unbranded and branded aspects, as well as our new marketing and advertising platform. We are engaging in meaningful conversations with our merchants that are critical for them and help realize the value of the services we offer. I am optimistic about these discussions, but it's important to note that it will take time, particularly for larger merchants to implement and adopt our offerings. Our teams are currently in Los Angeles for our Customer 360 conference, showcasing innovations and having positive conversations. While I'm excited about the progress, we know it will take time throughout the year.

I wanted to discuss two parts, one regarding the mechanics and the other concerning the uplift. On the mechanics, there might be two approaches. One approach is to include it in your unbranded offering, which could involve adjustments in pricing negotiations or a separate fee. In this scenario, if Fastlane is used, then Braintree would handle the processing. The alternative would be to offer it as a service that is processor-agnostic. I'd like to know which options you might consider, or if both are possible. Lastly, regarding the uplift, considering the range of net take rates with unbranded at one end and branded at the other, where do you see Fastlane fitting on that spectrum?

Yes. Thanks, Tim. Let me take the first part and see if Jamie wants to add anything in. We are really excited about Fastlane as it now gets to market. We are live with a handful of early partners, and the results just continue to impress. And just as a reminder, we're now enabling an 80% conversion rate for returning users through our guest checkout flow. What's even more exciting is that we've now been able to start to see with these early merchants, is that we're actually seeing unrecognized users, so these are non-PayPal users, opting in to Fastlane at a 40% rate. That just shows the power of our brand, and it shows the power of what PayPal can be. And it goes a little bit to your question around how we think about pricing it and how we think about go-to-market because it's even beyond just an unbranded processing element. I don't want to unveil exactly how our go-to-market will work. But that data point shows that this is not just within a PayPal ecosystem. This is allowing us to actually take the brand that we've established over 25 years and leverage that for our merchants to deliver incredible checkout conversion rate for the 60% of the market that continues to go through a guest checkout experience. So we're really encouraged by the early signs there. In terms of rollout and how we think about it, obviously, on the PPCP side, as we continue to deliver Fastlane to that platform through many of our platform partners, it becomes easy for our small businesses to, one click, turn that on. So that will be a big part of our rollout. And then having good merchant conversations as well on the large enterprise side. And again, those are kicking off really in earnest this week at our C360 conference. So again, the last thing I'd say just on pricing, and then Jamie, see if you want to add anything, is because we've focused this year on a transition year, we may get very aggressive on the pricing side when it comes to Fastlane for 2024 because we want to drive adoption. We think this is the best in the market innovation that all merchants should have access to. And as they think about winning this shopping season, our encouragement is to improve the onboarding for them, create low-code, no-code opportunities for them to get up and running as fast as possible so that they can win this season and really prove to themselves that conversion improvement. And rest assured, we'll be pricing to value over time to ensure that we get the right value from that.

No, I think you've said it all. I really think Fastlane reinforces our holistic value prop, both for branded and for unbranded. And the focus on merchant checkout conversion, and that being at our core, I think drives a strong value prop, and it will support strong pricing over time.

The key point I want to make is about the conversion rate with Fastlane. What excites me is not just the 40% from new users, but also the 80% conversion rate from guest checkouts by returning users. We're still in the early stages with just a few merchants, and this is about building a network effect. As we attract more users who turn into repeat customers, those rates should improve. Currently, our performance is significantly better than anything else in the market, and with the network effect and our scale, we expect further enhancements.

Alex, could you comment on the European Commission ruling to open up the iPhone NFC hardware on the handset, and whether you see that as a competitive opening for PayPal in Europe? I know there's some rumblings in the U.S. as well about that type of a move. I mean, how ready from a product perspective are you to take advantage of a more open NFC environment?

Thank you for the question, Ramsey. To provide some context, we need to operate in an omnichannel world. We have established ourselves as a market leader online, and our customers appreciate and use our services globally for online checkout. However, they are also looking for offline options and an omnichannel experience. As we enhance our security, flexibility, and improve our rewards platform, we aim to provide a PayPal service accessible to customers everywhere at any time for every purchase. We will participate in an omnichannel environment. Where NFC is available, it presents an easy opportunity for us to offer a wallet on Android or iPhone devices, and we are prepared for that. In cases where NFC is not available, we will still function in an omnichannel capacity.

I just had a 2-part question. The first, just following up on the transaction profit dollar growth. I know you're now expecting slightly positive for the year. I guess that would seem to imply maybe a little bit of deceleration from the Q1 levels, even though the second half comps are a little easier. So just wanted to get a sense of whether that's conservatism or just some normalization of things like transaction and loan loss that helped you in Q1. And then the second part is just is there any change in your full-year expectations for branded payment volume growth?

Let me outline the dynamics of transaction margin dollars between the first and second halves of the year. As previously mentioned, Q1 particularly benefited from several favorable factors, although we anticipate these will become less significant as the year progresses. The main contributor was the growth in our interest income from customer balances. However, we are facing tougher comparisons later in the year as rates rose in the latter half of last year. Additionally, we saw improvements in transaction and credit losses in the first quarter, but transaction losses may not be as substantial as we move forward. We also noted a significant reduction in loan losses in Q1, which we do not expect to persist. These are some of the factors at play. Furthermore, the initiatives and innovations discussed will require time to develop. Our focus remains on execution, and we want to maintain realistic expectations until we see consistent results from our efforts.

To emphasize Jamie's point, we have not included significant upside in the innovation we've discussed in these expectations. Our focus is on maintaining flexibility and ensuring we take the appropriate time to do right by our customers, while also building for the long term. However, these aspects are not factored into the remainder of the year.

Yes. And you asked about branded as well. And when we look at that, we had a nice quarter in terms of TPV and revenue. It was a healthy contributor to our transaction margin dollars. We did have some benefit this quarter from leap day. But by and large, we expect branded revenue trends to be pretty consistent with last year as we look at that. And I guess the other comment I might make is that, when you think about take rate for us, we saw a decent drop last year. We do expect take rate will come down again this year, but not nearly to the same extent. And a little bit of that as it comes through on the branded trend line is just that we're seeing a little bit of mixing towards large enterprise from SMB. And that's impacting the take rate side.

I have two questions. First, could you elaborate on the challenges related to the smaller part of the portfolio and transaction margin dollars? When do you anticipate that these issues will resolve? Second, regarding transaction margin dollar growth, you mentioned that balance-funded Venmo transactions contributed to growth this quarter. Can you provide more details on that? Do you expect it to scale over the next few years, and what opportunities do you see for increasing card attachment for Venmo users?

Great. On the smaller parts of the portfolio, I guess what I'd say at a macro level, we had seen a pretty significant drag on that last year. It is coming through this year at a smaller rate. I mean, part of these are products we've deprecated. Some of these are, frankly, acquisitions that we just haven't invested in. And as Alex mentioned, we're going through a process of really looking hard at these. Candidly, some are just in decline, but the declines are smaller. And some, we're investing in or making decisions to really put in more in maintenance mode, which is really shifting the profile going forward. But it will be smaller this year, and it will take a few years for that to burn off.

Yes. Let me discuss Venmo and the opportunities it presents. We have the leading peer-to-peer platform with an impressive customer base that has disposable income 22% above the U.S. average, 60 million monthly active users, and 90 million active users over the past year. This makes it an incredible platform for us. As I mentioned in previous calls, I am not satisfied with how we have approached monetizing the platform and delivering the customer experiences they desire. Venmo users are seeking alternatives to traditional methods for handling money, wanting to use Venmo for all their expenses. To put this into perspective, $18 billion in new funds flows into Venmo every month, and 80% of that money is leaving within 10 days, which is unacceptable. We need to provide the products and services our customers require when those funds arrive, whether that means enhancing debit card use—where we've already seen significant improvements in some onboarding processes—or offering more options for depositing or withdrawing funds and access to capital for Venmo users. This presents a clear opportunity and focus for us.

We're improving our risk models and utilizing AI more effectively. There are many discussions about AI in the market, and I believe we are among the leaders in using our data at scale to reduce transaction losses, enhance customer service for our clients, and gradually increase our transaction margins.

Solid first quarter results here. My question is just still more on the big picture. The naysayers on PayPal would say the company is structurally challenged with the rise of payment methods like Apple Pay. Alex, I know you've been at PayPal now for a little over 6 months. What do you think the naysayers are missing on the competitive advantages PayPal still has in the market? In particular to grow branded?

Thank you, Bryan. Thanks for the question. So a couple of thoughts here that I think people are maybe not appreciating enough. The first is 60% of the market is still what I would consider to be non-consumption. 60% of the market still does not use any mark. So that's what we're playing for. We have the best brand. We have the best products and services and the best ability to be able to deliver. And with products like Fastlane not only delivering a reboarding opportunity for our customers, but that stat that I put in earlier, around 40% of unrecognized customers coming through and taking a Fastlane experience, now gives us an opportunity to be able to remarket to them and turn them into PayPal customers. So step one, 60% of the market is non-consumption, and I think we've got a leading opportunity there. On the other 40%, we're still the leading player. And to be, again, transparent and I've said this before, we have not delivered the innovation and the experience that I would expect and that our customers expect. We are doing that now. Improvement in the app, an improvement in the branded experience, reducing latency by 50%. Investing in passwordless opportunities and passkeys will improve the conversion rate and improve the experience. And then creating value-added opportunities and an increased value proposition for our consumers with rewards. I think we're the only player out there at the scale that we have to provide that end-to-end experience. And again, we provide everything for our customers. It's rewards. It's Buy Now, Pay Later. It's the debit experience. And back to what I mentioned earlier on the call, with an omnichannel play now, PayPal can be the solution that you can use anytime, anywhere.

That's great. And just had one follow-up. We are getting a few questions on the pending CFPB regulation on late fees. Any impact on PayPal from CFPB caps on late fees?

While PayPal is not directly affected by the regulation, we are indirectly influenced through our revenue share with our consumer credit partner. There is significant uncertainty regarding both the timing and implementation of that regulation. As I noted earlier, our guidance does not account for that uncertainty. The industry anticipates that if implemented, the effects would eventually be largely mitigated. We are actively working on strategies to reduce the impact. However, it will take time for those mitigations to take effect. Currently, the date under discussion is the May 14 implementation date. If this were to be enacted, it would result in about a 3 percentage point reduction in EPS growth for the year before any mitigation efforts. By 2025, we expect to offset roughly half of that impact, with further reductions over time.

I wanted to revisit Fastlane. Alex, you mentioned making Fastlane available to all merchants so that they can benefit from it. How should we consider what needs to be done and the timeline for that progression? It seems that you're planning to expand beyond the initial merchants currently using it. I'm trying to understand how this could ultimately involve most of the merchants served by Braintree, and eventually, those served by PayPal more broadly.

Thank you, James. To summarize, our priority is to ensure we have the best innovation in the market. It was crucial for us to onboard early customers and gather their feedback. The data continues to show positive results, and our merchants are very pleased. In this interconnected environment, our merchants are becoming enthusiastic supporters of the improved checkout conversion rates they are experiencing with Fastlane, which serves as strong evidence as we begin to scale this initiative and assess the price-to-value ratio. The next step involves confirming the effectiveness of our solution, particularly for some of the world’s largest merchants, before we roll it out more widely. The stakes are high, so we are proceeding cautiously. We are focused on proving its success in the first half of the year. The discussions happening at our C360 conference and with our PPCP platforms aim to determine how we can equip merchants for success during the upcoming shopping and holiday seasons in the latter half of the year. Merchant interest is promising. With our product enhancing conversion rates and achieving significant lifts in guest checkout conversion, demand is high. We aim to provide a smooth and effortless onboarding process, ensuring that upgrades to new integrations are straightforward for our clients. The objective is to onboard as many merchants as possible before the holiday season, though some may not be ready until 2025. Eventually, we anticipate reaching a tipping point where most of our merchants will be using the latest integration, including Fastlane. At that point, we will phase out older integrations. This shift is a significant milestone for us as we consolidate 15 years of legacy systems into a modern stack, enabling us to continue innovating and enhancing the experiences for both merchants and customers while achieving better transaction margins for the company. Yes, it’s a combination. I would say we’re seeing Pay with Venmo really starting to take off. In the U.S., it’s an incredibly popular brand. When people see that button, it’s an opportunity for them to use the funds in their account. That’s an exciting development online. The offline aspect, which I’m somewhat dissatisfied with yet optimistic about for the future, also comes into play. When I talk about omnichannel, it applies to both PayPal and Venmo. We have to continue providing our customers with opportunities to engage, whether through increased debit card usage or other innovations that allow them to tap, pay, and check out. All of this will contribute to improving transaction margins. Additionally, we’re enhancing our risk models and utilizing AI. There are many discussions about AI in the market, and I believe we are among the leaders in using our data effectively at scale to reduce transaction losses, enhance customer service, and improve our transaction margins over time.

Fantastic. Thank you, Sarah. And thanks, everyone, for joining us today. As you can tell from our results and the comments today, we're making steady progress on our transformation efforts. We had a good first quarter, and we are deep in execution mode. And with time, we will return this company to profitable growth that I know we can deliver. So thank you all.