PayPal's 2016 Q3 Conference Call Highlights

Being a customer champion means always prioritizing the needs of our customers. It means continually reexamining our business to improve the customer experience on our platform, and to provide real differentiated value to both consumers and merchants. By making customer choice a priority for PayPal, we are creating a significantly better customer experience to accelerate adoption and drive engagement.

In the quarter, we made meaningful progress in offering customer choice in our online and mobile checkout and in our P2P experiences. These have enhanced our customers in the U.S. can send money, shop and pay with PayPal. Our customers are now able to set their preferred funding type in their PayPal Wallet to sources other than their PayPal balance. This gives customers the option to default to their favorite debit card, bank account or credit card, and we’ve seen a corresponding increase in engagement.

The past six months have been historic ones for us. We have embarked on a course that enables us to become a true customer champion. We are partnering across multiple ecosystems from retailers to OEMs to wireless carriers, technology companies and with financial institutions and networks. We strongly believe that this positions us for long-term growth and profitability.

  • PayPal President and CEO Dan Schulman

Everything PayPal does centers around consumer choice. This was never more apparent than the most recent conference call, when CEO Schulman referenced being a “customer champion” several times. For consumers, PayPal wants to be a ubiquitous financial service that is “in the middle of how consumers manage and move money”. For merchants, PayPal wants to grow beyond being “a button on a website”, to a full service payments solution provider.

In this quarter PayPal went through the many ways it expects to meet these ambitious goals not only now but in the years ahead. Highlighted were the partnerships it is making with all types of entities, from financial institutions to credit card companies to technology platforms to deals with individual merchants. Yes, the deals with MasterCard and Visa are getting the lion’s share of attention – and rightfully so! – but there are a lot more deals PayPal has completed and is working on to ensure its place in the payments ecosystem for years to come.

It was hard to not get excited about PayPal’s future as it talked about its goals, meeting or beating its current guidance, and raising it for the future.

…we are increasing our three-year outlook for revenue, the 16% to 17% FX neutral growth, in contrast to the 15% previously guided. We expect our free cash flow to grow in line with our revenue growth. And importantly, we believe our non-GAAP operating margin will be stable to growing.

Let’s go through some other highlights of the call:

• Venmo continues to grow by leaps and bounds. It processed $4.9 billion this past quarter, a 131% increase YOY! The average Venmo user makes more than two transactions per week on the platform. Schulman talked about “introducing the service in more context” than ever before. Two examples he gave for this were that on the new iOS 10, iPhone users can now ask Siri to send money using the service and P2P payments can be made on iPhone’s messaging app.

• Pay with Venmo, the feature that allows users to make payments to retailers using Venmo, is now available to all Venmo users. PayPal is now working on the number of merchants that accept the feature. PayPal’s data shows that users who use Pay with Venmo are 30% more engaged with the app.

• Many new and improved features to Xoom were announced. The international remittance payment platform now has a request feature. This allows remittances to become a two-way interaction between senders and receivers. The feature is available to recipients in 29 different countries. PayPal and Xoom users can now link their accounts, giving Xoom users a source of funds. Xoom continues to be a slight drag on margins and will remain so for the immediate future.

• Braintree integrated several new payment options this quarter including: Apple Pay for the web, China’s UnionPay, MasterPass, PayPal Credit, and Visa Checkout.

• AliExpress, according to Schulman, is Alibaba’s “main marketplace”. PayPal is now an option for customers outside of China who shop on AliExpress. Schulman believes this will drive meaningful crossborder fees.

• American Movil has more than 140 million customers across Mexico and Brazil. It’s digital wallets for those customers, Telcel and Claro, will be powered by PayPal’s platform. That was previously announced but will go live this quarter.

• Finally further clarification was given on the Visa and MasterCard deals. I thought I would just include that segment verbatim:

Since our announced agreement with Visa, we have also entered into a strategic partnership with MasterCard, which offers consumers greater choice and flexibility to manage or move their money. It ensures that MasterCard cardholders can easily identify and choose MasterCard within the PayPal Wallet.

Our joint U.S. customers will be able to use their tokenization services to make in-store purchases at MasterCard’s Contactless enabled merchant locations around the world. And along with our agreement with Visa, the deal with MasterCard exempts PayPal from current or future digital wallet fees and provides cost certainty for years to come.

Thanks to our agreements with Visa and MasterCard, PayPal now has a seamless, quick and simple way to activate PayPal payments at the point of sale. Our agreements with payment networks are opening the doors to deeper and more engaged conversations with a host of financial institutions about how to drive incremental spend for their brands and better more innovative experiences for our mutual customers.

That’s about all I got. I thought it was a strong quarter when I first saw the results Thursday, but after going through the conference call I am even more optimistic about PayPal’s prospects. They know exactly what they want to accomplish and how to accomplish these goals.

I think the market had a similar reaction. PayPal’s shares started Friday 5% up. By the end of the day it finished more than 10% higher.

I would love to hear others’ comments, questions and thoughts.

Many thanks to Seeking Alpha for providing a full transcript to the conference call at…

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