PayPal - Q1 2023

Transcript

Operator (participant)

Good afternoon. My name is Sarah, and I will be your conference operator for today. At this time, I would like to welcome everyone to PayPal Holdings for the first quarter, 2023. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by 1 on your telephone keypad. If you would like to withdraw your question, please press star 1 again. Thank you. I would now like to introduce your host for today's call, Ms. Gabrielle Rabinovitch, Senior Vice President and Acting CFO. Please go ahead.

Gabrielle Rabinovitch (SVP and Acting CFO)

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 8th, 2023. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

Dan Schulman (President and CEO)

Thanks, Gabs, and thanks everyone for joining us today. We're at a good start to the year with stronger than expected growth across our key financial metrics. 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 this 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 of a multi-year efficiency journey. For several years, we've been at the forefront of advanced forms of machine learning and AI to combat fraud and to 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. 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. 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 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 Adyen 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 mid-sized 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. We are adding value-added services to our platform, like risk as a service, full omni-channel capabilities, payouts, and FX as a service to both enhance functionality and add incremental margins. 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.

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. 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 service 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 add 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 sets of criteria and skill sets to assess 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 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. With that, I'll turn the call over to Gab.

Gabrielle Rabinovitch (SVP and Acting CFO)

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 strong 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 margin 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 stored 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 three times faster than our overall TPV growth. As a result, transaction expense dollars grew 17%. Transaction loss as a rate of TPV was eight basis points for the quarter, a two 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 four 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 volumes outpaced growth in branded volumes, resulting in slower transaction margin dollar growth. Volume-based expenses in the aggregate increased 17%. 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 volumes and accelerate 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 be reporting $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 equivalents, and investments of $15.3 billion. During the quarter, we generated $1 billion in free cash flow. Cash taxes related to the intragroup 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%-8% on a currency neutral basis and 6.5%-7% at spot. In addition, we expect non-GAAP earnings per share to be in the range of $1.15-$1.17, representing growth of approximately 25% at the midpoint of the range. For the full year, given our earnings gap performance 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 two 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. We plan to continue to guide revenue one quarter at a time.

Dan Schulman (President and CEO)

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. We have conviction that our strategies 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. Sarah, please go ahead.

Operator (participant)

Thank you. At this time, I would like to remind everyone in order to ask a question, press star then 1 on your telephone keypad. We request that you limit yourself to one question, please, and if needed, return to the queue. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Tien-Tsin Huang of J.P. Morgan. Please go ahead.

Tien-Tsin Huang (Managing Director and Senior Equity Analyst)

Hey, thanks a lot. Nice performance here on revenue. I'll ask my one question there. Looks like Q1 clearly ahead, like you talk about. The second quarter revenue growth is in line with what we have in the model. It's three points lower than what was just reported here, and then you're calling for second half to be in line with the first half, which is better than what we modeled and better than what you guys talked about before. My question is, how much of this change is macro-related versus maybe some momentum with some of the new products and integrations that, Dan, you were talking about? As well as curious on share gains, if your thinking is different there.

We've been curious if you've seen any sort of benefit from flight to quality with all the stresses in the banking system. Some of our survey work suggests that. Love to hear your thoughts on all that, if you don't mind. Thanks.

Dan Schulman (President and CEO)

Sure. That was one question?

Tien-Tsin Huang (Managing Director and Senior Equity Analyst)

Yeah. No, it's worth it. It's a lot. Sorry.

Dan Schulman (President and CEO)

Yeah. Let me, let me start with that and then Gabs can, come in. First of all, obviously we had a real strong start to the year. It was stronger than our expectations. Look, we just missed around 11% FX and revenue growth, you know, at 10.4%. It's still 150 basis points better than our expectations on that. I think what really pleased us on that is all parts of the business accelerated. You know, you had TPV going up 300 basis points sequentially from Q4 to 12%. You know, branded grew by 200 basis points to 6.5% growth. Unbranded, you know, just continues to fire on all cylinders at 30%. Even Venmo was up almost 600 basis points.

You know, it's a good, strong start. The other thing, you know, that we didn't mention is our Net Promoter Score, which is kind of a, you know, how do our customers feel about us, is at a 5-year high this quarter. Obviously a lot of things are, you know, going the way that we hoped they would be. I think, you know, if you look at second quarter coming down, third quarter and then fourth quarter, we're lapping some one-time events in Q2 and Q3 that put pressure of about one percentage point to 1.5 percentage points on our growth. Normalized, you'd have, you know, Q2 off of those one-time things, growing, you know, 8.5%-9% or so. That's kind of the normalized growth in the quarter.

As we look out to the rest of the year in the back half, you know, what's changed in our outlook? You know, first of all, we're a third of the way through the year as opposed to just coming into the year. You know, there are two things that we think are happening right now. First of all, our initiatives are taking hold in the market. You know, there's no silver bullet on any one thing that comes in. These are a number of small things, whether it be improving latency, you know, 40% in the last, you know, year. You know, our goal is to improve it by 50% by the end of this year. Our availability being at an all-time high. You know, we are pretty much at five nines almost all the time. You know, we're fixing bugs all over.

We're reducing friction. There are less calls coming into service. unbranded, you know, we put a lot of investment in that, and it is taking off. We have very high expectations for what PPCP can do in the small and midsize market and with our channel partners as well. We're seeing things like new cohort strength, as I mentioned in my remark, that are significantly higher than cohorts we've seen in quite some time. We know we still have a lot to go do there. When you have scale like ours, and then, you know, and you start making small incremental improvements, it has a flywheel effect. So we're pretty pleased with what we're seeing there. The other thing is, look, we came into the yearWith really muted expectations around e-commerce, global e-commerce growth.

You know, we thought it could be anywhere from like negative 2% to maybe positive 2%. Call it flat in general. We saw that pick up in first quarter. We think it could be low single digits, maybe mid, as high as mid single digits. Clearly, consumers are turning more of their spend to e-commerce than I think many of us expected. As long as we continue to see those trends, you know, we think now, which is very different than what we thought coming in, that the back half growth is gonna be equal to our front half growth. It's a much improved outlook than we had before. Jackson, can you add to that?

Operator (participant)

No.

Dan Schulman (President and CEO)

No.

Tien-Tsin Huang (Managing Director and Senior Equity Analyst)

Thanks so much.

Dan Schulman (President and CEO)

Yep, you betcha.

Operator (participant)

Your next question comes from the line of Lisa Ellis with MoffettNathanson. Please go ahead.

Lisa Ellis (Partner and Senior Research Analyst)

Terrific. Thanks for taking my question, and thanks for all the detail on the unbranded strategy. Just a couple of follow-up questions there, Dan, for you. One, can you elaborate a little bit on what's driving the 30% growth in unbranded TPV and how sustainable that is? Meaning like, is it a couple of large clients that'll eventually lap, or is this, you know, more broad-based growth? Second, can you just talk a little bit more about PayPal Complete Payments, competitive positioning down market and, you know, where exactly you think that's going to win and do you know how quickly that will ramp? Thank you.

Dan Schulman (President and CEO)

Yeah. Braintree continues to do extraordinarily well, and it's not just winning incremental clients, but we are growing, you know, our share of the overall PSP volume and our largest clients as well. Look, you know, we did expect Braintree, and we do expect Braintree to moderate its growth, lapping some big deals last year. Honestly, we're working on some big deals this year too. We've got a lot of momentum in Braintree. I think its success is it's differentiated. It's driven by an open architecture where we are perfectly willing to orchestrate transactions to third-party services and other PSPs. You know, we've got an integrated servicing. We've got our availability, I think now is amongst best in class.

I think we've got the lowest loss rates fraud in the industry, some of the highest auth rates, maybe up to 390 basis points better than others. We've got a number of great value-added services, you know, that others have, but we're expanding too, whether they be APMs or vaulting or real-time card updaters or payouts. We're adding more and more that are really valuable to clients and also are very high margin, like FX as a service. If you look at, you know, Adyen's results and you see how much their profits come from FX-as-a-service, you can see why we're eager to add that. On the PPCP side of it, there are obviously some benefits as you move into the small and midsize market.

First of all, you obviously have a higher margin structure than you do with your large enterprises. We clearly see that even in the PayPal button dynamics that we have. It's a really flexible, simple integration. It's fully featured as well. It's got all the APMs, including Apple Pay. It's got vaulting IC++, real-time account updater. It's got all of our latest integrations in it. It's integrated with Adyen for omni-channel capabilities. It also is targeted at channel partners. That's a really important thing, and we're making some really good progress in our initial conversations with lots of our major channel partners. If those channel partners are hosted, they run their services as a hosted service.

Once we upgrade them to PPCP, our latest checkout integrations very quickly move into that merchant base that's part of those channel partners, and it's a way of moving our long tail of merchants onto our latest checkout integrations. We're now fully live with PPCP here in the US. We'll expand to EU and to Australia next quarter. The other really important thing about our unbranded services, besides the fact that it's got a deep relationship with our most important clients, is they drive a ton of data into our machine learning and AI engines. It's why we have amongst the lowest loss rates in the industry, the lowest instances of fraud, the highest conversion rates.

When I look at all that together, it's why I really spent time calling out, you know, why unbranded is a strategic imperative for us. You know, people have asked us about our transaction margin, what's happening with that, looking at our growth of unbranded. To me, that is a high-class problem for us to have. We are winning in that market faster than we anticipated. We have a very well-thought-through strategy and set of actions to drive margin in that business, and we're very focused on making that happen, and we're seeing the beginnings of that already happening. I appreciate the question. I just think it's a really important one.

Darrin Peller (Managing Director, Senior Analyst)

Thank you.

Dan Schulman (President and CEO)

You bet.

Operator (participant)

Your next question comes from the line of Darrin Peller with Wolfe Research. Please go ahead.

Darrin Peller (Managing Director, Senior Analyst)

Hey, guys. Thanks. Braintree growth and mix obviously were a factor on the take rate in margins. If you could just help us understand the dynamics of margins in the second half. I know I think you're lowering margin guidance by 25 basis points 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. Just as a quick add-on to that, you know, 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.

Gabrielle Rabinovitch (SVP and Acting CFO)

Yeah, you bet. I'll start. You're right. 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. You know, our Q1 operating margin performance is 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. 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 would say it's worth highlighting that Q3, I'd expect to see some pressure on operating margin, maybe some slight pressure. In Q4, we'll see expansion again, but more modest expansion than you're seeing in the first half of the year. 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 benefits from increased interest rates and the increased revenue that we earn on customer store balances that really starts in Q3, continues in Q4. As we lap that, we don't expect to see as much operating margin expansion in the back half.

In addition, we begin to really lap a lot of the cost savings work that started in the back half of last year. While we do expect to see meaningful declines in non-transaction related operating expenses in both Q3 and Q4.

Darrin Peller (Managing Director, Senior Analyst)

Yeah

Gabrielle Rabinovitch (SVP and Acting CFO)

... from a % decline standpoint, it will not be as great as what we're seeing in Q1 and Q2. All of 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 contributing to our top line, but also having some margin impact.

Dan, do you want to talk a little bit about the strategy then on branded?

Dan Schulman (President and CEO)

Yeah. I think maybe I'll just like take a step back for a second. I mean, I think, look, our strategy on average and over time is to deliver, you know, double-digit EPS growth year after year after year. We've had a good track record in general of doing that. You know, we've got a well-thought-through strategy and a set of actions that's gonna deliver increased transaction margin dollars along with OpEx reductions to make sure that we do that. You know.

Darrin Peller (Managing Director, Senior Analyst)

Mm-hmm

Dan Schulman (President and CEO)

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. It's drive branded checkout. That's our number one priority. You know, all of our initiatives have 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. You know, we want to drive unbranded because of all the things I talked about in my remarks. It helps us on branded checkout. It helps us in our data collection and all of the things we can do with those unique sets of data. Unbranded will be a new source of margin generation for us without question.

Darrin Peller (Managing Director, Senior Analyst)

Mm-hmm

Dan Schulman (President and CEO)

... put those services already into place. Many of them will go into place by the fourth quarter. Then clearly, we're managing our OpEx extremely well. I mean, I can talk in more detail on that if anyone has a question on it. We said we thought it would be negative high single digits this year. It's likely to be 10%, negative 10% plus. You know, if anybody thought costs were gonna be going up, they'll go down again next year as well. I can talk more about that. 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.

Tien-Tsin Huang (Managing Director and Senior Equity Analyst)

That's really helpful, guys. Thank you both.

Dan Schulman (President and CEO)

You bet.

Operator (participant)

Your next question comes from the line of Jason Kupferberg with Bank of America. Please go ahead.

Jason Kupferberg (Senior Equity Research Analyst)

Thanks, guys. It's 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, you know, what was behind that? Would you attribute any material amount of the improvement to the rollout of advanced checkout? 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.

Dan Schulman (President and CEO)

Yeah. Thanks for that, Jason. I think, maybe I'll grab that one. If I just take, like, a step back for a second, like, we're the market leader in online checkout, right? We've got 35 million merchants who accept us. 80% of the top 1,500 online retailers in the U.S. accept us. There's no other digital wallet that comes close to that acceptance. You know, in general, our auth rates are about 600 basis points better than the industry average. That means every time 100 things that a consumer does to buy from a merchant, we approve six more of them. You know, we've got consumer trust and brand trust in that when a small or mid-sized merchant puts PayPal on their website, they see a 44% conversion lift by doing that.

These are really strong advantages that we're going to leverage going forward. Obviously, there's a ton of stuff we can still do. Like, we're optimizing presentment. We're making sure that our best-in-class integrations are out there, whether that comes through our branded checkout, whether that comes through, you know, the new SDKs and APIs that we have, whether that comes through PPCP going into channel partners. 'Cause we know when we have our best-in-class integrations, we either have stable share or growing share of checkout. You know, our availability, as I mentioned, is closing in on five nines. Our latency improved it by 40%. We'll improve it up to 50% better. Makes a giant difference in conversion rates. Our passwordless login improved by 10 full points last year.

We intend to grow that again, this year, whether that be through passkeys or tethered ID or forms of biometrics. Buy Now, Pay Later. We're taking share there, and we are intending to continue to take share there. Our auth rates are higher, we think, than anyone else's because we know the customers coming in. Over 90% of the customers coming in to Buy Now, Pay Later are already PayPal customers. It's why we think we also have the lowest loss rates. We know, somebody mentioned flight to quality, that people are coming to PayPal and our Buy Now, Pay Later services, and we are targeting all of the largest merchants.

We know when our competitors' contracts are up, and we are going after that business because we see a clear shift in market share as well as spend when we have Buy Now, Pay Later in our checkout flows. Obviously, you know, we're now full GA on our mobile checkout with our SDKs and APIs. We are now beginning to experiment with the first generation of what we call AI-powered checkout, which looks at the full checkout experience, not just the PayPal checkout experience, but the full checkout experience for our merchants. We have a lot of things underway in our branded checkout. I will just say this, the team is executing extremely well here. When they say they're gonna get something done, they do.

They have a roadmap that they are consistently executing, and what they think will happen is happening in the market. I've got a lot of confidence that we'll continue to see branded share of checkout be strong. We saw, by the way, in US, UK, Germany, France, Italy, Spain, most of the EU markets, Australia, an improvement in our share position. Of course, there's not one uniform measure of market share. Any way you look at it, when your branded share or your growth goes up sequentially by 200 basis points, that's a lot of momentum.

Lisa Ellis (Partner and Senior Research Analyst)

Thanks, Dan.

Dan Schulman (President and CEO)

Yeah, you bet.

Operator (participant)

Your next question comes from the line of David Togut with Evercore ISI. Please go ahead.

David Togut (Senior Managing Director, Equity Research)

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

Dan Schulman (President and CEO)

Yeah. I'll start off, then Gabs can attack the last part of your question. First of all, obviously, we had good, solid progress against what we said we were going to do, you know, -12% in Q1. I think our OpEx for the full year could decline as much as -10%, which is a bit higher than we expected. As I said in my remarks, we're just beginning on this efficiency journey. I think you're gonna see our costs continue to come down year-over-year over year. This is not just about efficiencies, by the way. It's not about just cost reduction. This is about doing things better.

I think, you know, there's no question that AI is gonna 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 costs, but have higher performance and do things better. This 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. We've got 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.

I think, this is gonna be a cost journey that we'll be on for a long time to come. I think at the same time, we'll just be doing things better than we've ever been doing them before as well.

Gabrielle Rabinovitch (SVP and Acting CFO)

Yeah.

David Togut (Senior Managing Director, Equity Research)

Understood. Yeah.

Gabrielle Rabinovitch (SVP and Acting CFO)

Oh, please go ahead, David.

David Togut (Senior Managing Director, Equity Research)

Yeah, no, just the, just the second piece of that as well, Dan, which 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?

Gabrielle Rabinovitch (SVP and Acting CFO)

I'll take that, Gabs. Yeah. I really think about it as a multi-year 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. You know, sequential acceleration in unbranded, given its size and scale, is very impressive. Given the base of business that we run, it will take some time to see what I would deem an inflection point in the overall sort of TM dynamic.

I would say Q1, you know, did have some nuances to it, which included about 170 basis points of impact just from normalizing our credit provision. That's not specifically related to unbranded, branded mix. It really was sort of credit loss provisioning that impacted the TM rate as well. To your point, as we move through the year, we do continue to expect to see a continuation of the TM dynamic that played out in Q1. There are some exciting trends that we're seeing in the business, however. 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.

As we start to see some of those pieces of the business pick up, that will also help. Just from a TM standpoint, we did see some pressure as well in Q1, specifically, on the unbranded side for PayPal. This is not Braintree business. This is the transitioning of our unbranded processing on the PayPal side to PPCP has created some pressure on the quarter, which we don't expect to be sort of ongoing as we think about how we exit the year, given what our expectations are for PPCP. 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 gonna take a number of quarters before we see what we would call an inflection point.

David Togut (Senior Managing Director, Equity Research)

Thank you.

Gabrielle Rabinovitch (SVP and Acting CFO)

Sure.

Dan Schulman (President and CEO)

Your next question comes from the line of James Faucette with Morgan Stanley. Please go ahead.

James Faucette (Managing Director, Senior Equity Research Analyst)

Hey, good afternoon, Dan, Gabrielle. Thanks a lot for time this afternoon. I wanted to follow up on one of the comments or topics you've mentioned quite a bit in this call, Dan, and 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 wonder if you can give some update on those initiatives more specifically, you know, how that's helping engagement and conversion, especially things like advanced checkout, et cetera, and what kind of lifts you're getting from that. Maybe give a little more detail of how we should think about the tie-in to some of the unbranded initiatives, and if we think there can be further at least improvement in those engagement levels or update by merchants, et cetera. Thanks.

Dan Schulman (President and CEO)

Sure. 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. As we do more and more on our unbranded, we put out our latest integrations into the market. 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. You know, one of the initiatives that we haven't really spent time talking about is what we're doing on our digital wallets. Those are the three, right?

Drive engagement, monthly active users and ARPA through our digital wallets, drive our checkout, drive our on-brand, and they're all linked together, keep a tight envelope on our cost structure. Those are the four things that we're focused on. In the wallet, you know, we're making good, solid progress, whether that be on our Venmo wallet or 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. Our app users are predominantly our monthly active users, and they're our power users. They've got 35% more ARPU. They've got 58% greater transactions per active on it.

Their churn is at least 25% less than the rest of the base. You know, 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, you know, challengers that have been overcome by the champion. That just starts to lead to more and more engagement going through. As I mentioned on the consumer side, you know, we saw consumer transactions per user increase every single month in the quarter. In March, they were 400 basis points better than March a year ago. The whole idea of the apps right now are three specific areas.

One, you know, upfront pre-purchase, 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 those 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 billion to 25 million, but that will happen over time. You know, 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. 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? I talked about this last earnings call, you know, on package tracking, we're now 100% ramped in iOS. We do all the package scraping now off of Gmail. You can see all of your PayPal purchases and non-PayPal purchases. You can track all that in one place. For those users that have started to do that, their app engagement is up 32% and their transactions are up 20%.

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. You know, they're like 20, 30 times more valuable than just an active user out there. To drive, you know, transactions and ARPA. This is a flywheel. As Gab said, it takes time to drive it.

A lot of the things we're seeing right now, the reason, you know, we are taking up our expectations for what we think our revenue growth will be, taking up kind of our, our EPS as well, is because we're seeing distinct improvements take place in the market.

Bryan Keane (Managing Director, Senior Equity Analyst)

That's awesome. Thanks for that, Dan.

Dan Schulman (President and CEO)

Yeah, you bet. My pleasure.

Operator (participant)

We have time for one last question from the line of Bryan Keane of Deutsche Bank. Please go ahead.

Bryan Keane (Managing Director, Senior Equity Analyst)

Hi. Thanks for taking the question. I wanted to ask about credit. Are you managing the book any different on credit given the macro and exposure to BNPL and merchants? Just thinking about maybe the impact, the provisions for credit losses for the rest of fiscal year 2023, maybe as a result of managing the book any different. Thanks.

Gabrielle Rabinovitch (SVP and Acting CFO)

Yeah, you bet. Thanks, Bryan. You'll see in the Q, which will be filed tomorrow, we did increase the provisions on the PPBL portfolio, which is the PayPal Business Loans portfolio. Overall, that portfolio is about 17% of our overall receivables, so sort of a sliver of our overall book. We did widen our credit box in the middle of last year. We have seen some performance that was less strong than we would have liked, that is working its way through our system. We increased the provisions. We've already started to see an improvement overall. We tightened the box. That's something that will just work its way through our systems.

We'd expect delinquencies to worsen through Q2, peak in this quarter, and then improve throughout the remainder of the year based upon the origination strategy. Really, that piece of the book is a very small component of the overall portfolio. I'd say more importantly, the area where we're really growing, where the originations are quite strong, continues to be the Buy Now, Pay Later portfolio. There we've seen very broad-based strength. That's a really important part of our strategy. It supports the improved checkout performance in our business on the branded side, and we're excited about the continued growth of that business overall.

We did mention in the prepared remarks that our expectation is to externalize part of that portfolio during this year, and work with a partner to really provide sort of longer-term sustained support for growth in that portfolio. I'd say overall, we continue to be very pleased with our credit portfolio. We've seen very good performance, in the, you know, across the book. We are seeing some normalization, which we expected to see as it relates to just sort of post, kind of normalization post-COVID, and really getting back to what we've historically seen in terms of performance.

In terms of reserve coverage, when we take a look at reserve coverage today versus, when CECL started, which was the first quarter of 2020, we're actually, you know, a few hundred points, a few hundred basis points better overall. The book itself continues to be quite healthy.

Bryan Keane (Managing Director, Senior Equity Analyst)

Got it. Thanks so much.

Gabrielle Rabinovitch (SVP and Acting CFO)

You bet.

Dan Schulman (President and CEO)

All right. Well, I think we're at the top of the hour. 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. Thanks, everybody. Take care. Bye-bye.

Operator (participant)

This concludes today's conference call. You may now disconnect your line.