eBay Inc (NASDAQ:EBAY) Morgan Stanley Technology, Media & Telecom Conference March 4, 2015 12:30 PM ET
Executives
Dan Schulman - President and CEO Designee of PayPal
Analysts
Smitti Srethapramote - Morgan Stanley
Smitti Srethapramote
Right. Good morning, everyone. My name is Smitti Srethapramote, I am the payments and processing analyst at Morgan Stanley. Today I have the pleasure of introducing Dan Schulman, who is the new CEO of PayPal. This is the first time that Dan is having an opportunity to present in front of an investor base since he took over PayPal couple of months ago. So we are very excited about this.
Before I begin I just wanted to note that all important disclosures including personal holding disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at morganstanley.com/researchdisclosures or at the registration desk.
With that, I am going to turn it over to Dan. Dan?
Dan Schulman
Thanks for that extensive introduction. Smitti, I appreciate it. So about a week ago, I was worried about the content of my presentation and then two days ago I came down with a cold and yesterday I actually couldn't speak at all. So today my objective is to get through the presentation, hopefully with some good content involved as well. So I apologize for my voice in advance.
So as some of you may know, for the last decade or so I spent my professional life in the wireless industry and in the financial services industry, both good places and good experiences for me to take the reins at PayPal. I spent about five or six years as the founding CEO of Virgin Mobile. I want everyone to know we were be Uncarrier before there was an Uncarrier and then I spent the last four years at American Express where I was brought in to really think about where was the financial services industry going as it went through a process of digitization. And it was there that I got to know PayPal quite well. And so when John Donahoe approached me to run PayPal, I knew quite a bit about it already.
I knew that PayPal has the number one most trusted brand in digital wallets across the world. It stands for trust and security and that are two of the most important attributes, if you are in the financial services industry, serving both consumers and merchants. We are in 200 countries, in 100 currencies. I say that only because I tried to build a software platform at American Express and I know just how hard it is to do the payment stack in just a couple of countries, much less 200 countries and do currency conversions in over 100 different currencies. Extraordinarily difficult, easy to throw away those words, extraordinarily difficult to accomplish.
You know about the scale of PayPal. We have 160 million plus consumers, 7 million plus merchants. One out of every three adults in the U.S. is an active PayPal user. We did four billion transactions last year, four billion. One billion of them were mobile, growing at 68%. And we have obviously have a great business model. Our revenues last year were $8 billion. We exited Q4 in 18% revenue growth rate and our cash flow last year was $1.7 billion. But I will tell you what especially attracted me to PayPal was not what it is doing right now, but its potential going forward.
Money is a personal thing. For all of us in this room and throughout the world, money is what fuels our dreams, it fuels our ambitions, its what entrepreneurs need to start new businesses, its what parents need to send their kids to college to get an education of some sort. And with the digitization of money, I believe that PayPal has the potential to make a profound impact in the world ahead. And so I felt this was a once-in-a-lifetime opportunity to join a great team and I am really proud to be a part of the PayPal team.
Can we go to the next slide, please? Thank you. So as I mentioned, money is digitizing. Someone once said, software is beginning to eat the world and the financial services industry is going through this change right now. I firmly believe that in the next three to five years, we are going to see more change in the financial services industry than we have seen in the last 20 to 30 years. The system is literally ripe for disruption right now. Physical money, whether that be check, cash, credit card, it is all digitizing in front of us. 40% of the money passing through your consumers' wallet today is in the form of either checks or cash. By the end of 2017, that's predicted to go down to 25%. A couple of years ago it was at near 50%. So we are starting to see a trend line that's very obvious right now as physical money begins to digitize.
And mobile is driving this change. And PayPal is at the forefront of mobile payments. As I mentioned, we did a billion mobile transactions last year off of our various platforms. Our v.zero platform that we acquired from our acquisition of Braintree, our just announced acquisition of Paydiant yesterday, positions PayPal at the very forefront and with the leading mobile platforms. We did about $46 billion of mobile transactions last year. That's up 68% year-over-year. And as I mentioned that's one billion different transaction.
But this emerging world of digitization of financial services is going to demand new skill sets. One of the biggest skill sets that it will demand is the data analytics and risk analytics, along with that. Security is going to one of the biggest concerns on the minds of consumers and new age financial services companies as software is prone to being attacked by the bad guys. The average American business today is attacked over seven million times a year by malicious software and you can be sure that financial services companies, critical infrastructure players, are attacked in multiples and multiples of that. And having great risk analytics and security is crucial in this new world ahead and I will talk more about that.
Regulatory know-how is another very important thing in compliance. Things are changing very quickly around the world. I just had breakfast with a soon to be leader of the European Union and we were talking a lot about the regulatory landscape, how quickly its trying to adapt and yet how much faster technology is moving in this space and having that know-how, having those relationships across the world with regulators, having that compliance is a crucial element in the digital world. And obviously as the world shrinks and money become digitized, new ways of thinking about how do you manage and move money in innovative simple, easy, inexpensive ways is coming to the forefront and I believe that PayPal is perfectly poised to be a leader in this emerging paradigm.
This digitization of money, software eating the financial services industry is opening up a tremendous and large addressable market for PayPal to play in. E-commerce, which is what our sweet spot is today, is still at its earliest stages. It's about 10% of all commerce. It's about $2.5 trillion commerce overall. It's about $24 trillion in size. But what I think about e-commerce and if you look at other industries, it's that 10% of the overall market. Most people think that's going to be 20% in the next several years. That's obviously a very large growth. E-commerce is growing somewhere around 17% a year. But we believe that it's poised to inflect somewhere around 15% market share. If you look at other industries that had digitized at about 15%, that growth rate actually starts to take off at a much faster rate. And so the market that we are in is large and it's growing quickly.
And in that market, we process $1 out of every $6 through the world online. But offline and online are blurring and they are blurring through mobile. And as a result, we believe that the offline marketplace is a ripe opportunity for PayPal to penetrate. PayPal and Braintree have platforms that are being implemented by thousands and thousands and thousands of merchants across the world right now in order to get ready for the mobile revolution that's occurring. We have one-touch capabilities that make it simple and easy for a consumer using their mobile phone to checkout and to experience the commerce journey in an entirely different way.
Our platforms are technology and payment agnostic. We actually don't care if it's an NFC reader out there, a QR code reader, HCE, Beacon. Well, our platforms need to be technology and POS agnostic and they also have to be agnostic to the payment type coming in. And I will explain that in a little more detail.
We also believe there is a huge secular shift going on right now in the consumer marketplace as money becomes more and more mobile. There is something like five billion cellular phones in the world. And as the bill of material drops substantially on smartphones, think about over the next five to ten years, most of those phones being smartphones. We have tried to do the calculation. We are not probably exactly right.
But there is probably something under a billion bank accounts out there and these mobile phones are slowly but surely going to have all the power of the bank branch in them in the palm of your hand. And thinking about ways of managing and moving money in innovative ways for consumers, whether that be differentiated types of lending, P2P types of transfers, different ways of savings, all of that plays to the brand that we have and the platform capabilities that we have.
We think that the world is moving towards what we do best. And as I do my best estimate of the market share we have in our addressable market, I think it's somewhere between 0.4% and 0.5% of 1% of our addressable market. We have enormous runway and opportunity in front of us.
As you can tell from these metrics, we are either the leader or amongst the leaders in digital payments. But these metrics don't really tell the story. These are how our business is doing. The growth rates of our relative business and they are all growing quite nicely right now and I will talk about them in the context of the market in just a second.
But the important thing to understand is what drives these results. Because what drives the results are the assets that we have that we believe are difficult to replicate and position us well as we go into the future. I talked about our brand but you shouldn't underestimate the impact of having a brand that consumers trust and rely on. When we talk about financial services, consumers want to look towards a brand that they know, that have been there and that they trust. We have 8,000 people in our company that do customer service.
Customer service is extraordinarily important in financial services. If I send a tweet and you don't get it, it's actually okay, I will just resend it. Hopefully, it will get there. However if you do a transaction and it doesn't show up, you want to know exactly what happened with that transaction. You shouldn't have to call somebody and say no, it's somebody else's issue, go call them. People want to make sure that their financial transactions are safe, secure, that they got there and they understand them.
I get a lot of emails from a lot of customers and most of those emails when they are talking about their concerns are for under $100 in terms of some transaction they didn't come through. Some can be as low as $18 that they escalate to me, because those $18 actually really matter to them. And so I wouldn't underestimate how crucial customer service is and PayPal has NPF scores that are the rival of any in the industry.
For a financial services platform to be successful, it has to somehow miraculously be a two-sided network. You have to go into both merchants and to consumers at scale. If you have a lot of merchants with very few consumers, nobody wants to use the platform and vice versa as well. A global two-sided platform is crucial and very difficult to replicate in financial services. And as all of you know, we have 160 million, 162 million active consumers, over seven million active merchants on our platform and global, throughout the world. Over 50% of our revenues come from outside of North America and growing faster than North America.
We have a tremendous risk and data analytics team. We have been doing this for 15 years, it is part of our secret sauce. I am going to talk about that in a little bit, but don't think about risk as just how do we drive down losses, think about risk and fraud and data analytics about how do you keep losses low but create an outstanding customer experience. As I can make my losses zero, that's easy to do, I will just transact nothing. That's not what people want. What you want is are low losses and a great experience and I will talk about that.
Obviously regulatory compliance is a crucial element and we have been doing that and doing that quite well. We work with regulatory authorities across the world. We meet with them constantly. And we get high marks for what we do and the controls and compliance that we have in place.
And finally but not least, digital payments is the only thing that we do at PayPal. This is not a sideline for us. This is not a part of our business in order to drive other parts of our business. This is the only thing we do. We have 16,000 people that focus on digital payments. We have thousands upon thousands of engineers focused just on improving our product and our technology platform. It gives us a tremendous advantage as we focus on where the future is going.
And as a result of that focus, in every market we compete in, we are taking share, whether it be the domestic e-commerce market, whether it be the international e-commerce market or the mobile commerce market, we are taking share and off of eBay, our growth rate is double that of worldwide e-commerce growth rate. These markets, as I mentioned, in and of themselves are set to grow dramatically. And I believe inflect at a faster growth rate as they approach about the 15% market share mark.
But as I mentioned, the opportunities outside of our sweet spot that are now digitizing and moving to mobile are playing right into our strengths. Our vision for PayPal is to be the world's leading open digital payments platform. What that means is that we want to enable consumers and merchants to come together in the emerging world of digital commerce. We want to allow the ecosystem to build on top of our platform capabilities, any technology they wish, any payment form that they wish, rewards, offers, loyalty, all of that on top of our platform.
For merchants, which are one of our key customer segments, we have just organized around consumers and merchants and our developers. For merchants, our internal motto is that we want to be the operating system for digital commerce. We believe that point-of-sale is going to be fundamentally rewired over the next three to five years, that mobile is going to drive that and that merchants want to engage with their customers in innovative and new ways throughout commerce experience and the checkout experience and we want to be the platform that they build on. I will talk about that in a little more detail in a second.
And for consumers, for a wide swath of the population across the world, we want to democratize the movement in management of money. We want to use our platform capabilities to trust across the world that consumers have for our brand and deliver new services, new products that make their lives simpler, easier and more affordable.
Let me talk about each of these segments in a little more detail. We have a very strong consumer franchise. 160 million active accounts on average transacting with us 25 times a year and that number has been growing for the past three years. But I believe that as there is a shift towards digitization, the shift towards using your mobile phone as the center of your financial life and a shift towards new services being developed in innovative ways that PayPal has the opportunity to go from a consumer using us a couple times a month to a couple of times a week and our ultimate vision is to be an integral part of a consumer's financial life and for them to use our application every day.
Obviously, it is going to take quite some time to get to that. But we believe that is our vision, to move from being a transactional relationship with consumers to having a full engaged model with them where they work with us, day in and day out, to manage and move their money. We believe that our platform can be at the center of that, that we should allow any currency to come into our platform, whether that be cash coming in, paychecks coming in, credit card, private label cards, reward points, all of that come into our platform that consumers ought to be able to manage that money once it's on our platform in innovative ways and then take that money off of our platform to do whatever they want to do, both online and offline.
We want to make all of those services simple, easy and inexpensive for them. We believe that the world is looking for a consumer champion in financial services or a large swath of the world looking for that and PayPal is positioned to be exactly that. But not only do we want to drive engagement with our consumers, but we want to drive scale. We are just scratching the surface. I know it sounds like we have a lot of people with 162 million but we are just scratching the surface there. Just last year, we went into 10 new countries that gave us access to 80 million incremental Internet users.
With our Braintree acquisition, we acquired Venmo. Venmo is the go to application for the millennials in order to manage and move their money. That grew six-fold last year and it's continuing on its torrid pace. This year, we intend to take the Venmo population and more fully integrate them into the PayPal ecosystem so that Venmo users can do more than just see the fee transfers to pay their bills that can actually work on the PayPal network to buy and transact with merchants.
And then there are countries like India, Indonesia, China and a whole wide array of the world where we do not have a consumer franchise and where we are looking at the best way to enter, either organically or through a partnership and we are in numerous discussions to think about how do we significantly expand our consumer franchise.
Commerce is going to fundamentally change with the advent of mobile. Every one of the merchants that we talk to and I talk to merchant CEOs on a regular basis, they are all thinking about how is mobile and the blurring of offline and online going to change commerce experience, how is it going to change the checkout experience, how are they going to engage with their consumers in ways that they never imagined before. They have full teams working on this all the time and what they have said is that they are looking for a partner who respects that their data is their data, who can provide all the very difficult underlying plumbing that has do with the payments infrastructure, rewards infrastructure, offers, all of that, that is open APIs, SDKs, that they can build their apps on top of and where you can fundamentally have a platform that enables them to enter into the digital commerce world.
And we believe that we are a neutral third party that enables merchants to take advantage of digital commerce. As we say and as I said, we want to be the operating system for digital commerce going forward. What that means for us is we want to be so much more than a button on a merchant site. We want to move from being a payments provider, one of many, to being a full solution payments partner to merchants.
We now have the platforms with the acquisitions that we have made and the re-architecting of our platform inside of PayPal that I will talk about in a second. To be able to not just put a button and take a percent of checkout, but be able to work with merchants and provide 100% share of their checkout. We will do all the processing for the merchants. We will allow and encourage them to accept any payment form that they want it. If they want to integrate Apple Pay, if they want to integrate Android Pay, if they want to put in digital currencies, Visa, MasterCard, American Express, we will enable that in a very simple integration to go forward.
So what we find is when we do 100% share of checkout and we have PayPal, because obviously they all want the PayPal button to be there as well, because we have, in the U.S., one of every three adults use PayPal, what we find is that the use of the PayPal button increases by double-digit percentages. So not only do we get a share of all of the checkout but actually our PayPal button also goes up because a lot of the implementations of our PayPal button are suboptimal. And so when we have that 100% share of checkout, not only are we partners with our merchants, but we see our PayPal usage go up as well.
We do a lot of things with merchants. We are doing things like PayPal Working Capital. We are not in the credit business for credit. We are in the credit business to help consumers and to help merchants grow their business. Every time we extend PayPal Working Capital to small or midsize merchants, their TPV processing volume with us goes up. Their churn rate goes down and their net promoter score goes up. It is a win-win for both merchants and for us. And the key word here, for us, is that we want to become a partner with merchants, not a provider of payments.
I am very pleased with this next slide because we are making significant strides at the developer community in terms of their working with PayPal. Over 50,000 developers across the world are now working with PayPal. Our APIs are accessed millions upon millions of times a day. We have SDKs in over 30 countries, software development kits in over 30 countries. But what's really exciting to me about this and one of the things when I came into PayPal that I expected would be that we would have an antiquated platform that would be difficult to innovate on and do things rapidly. And over the last couple of years, the PayPal team has been spending a lot of time creating a service-oriented architecture where we separate out our capabilities from kind of the payment stack underneath. The payment stack underneath is a very complicated thing.
We are in 200 different companies, that plumbing is complicated. But if you can separate out your capabilities on top of that, have separate API calls on each of those, what you can do is, you can rapidly iterate on the capabilities and just have those connected into sort of the messy payment stack below, not have them tightly coupled together. And that's what we have been doing and we are quite a bit through that journey already. I will give you one example. It used to take us, on average, 74 days to go from code concept to live to site. In many cases now, that takes us one day to do.
So as we go into the next generation of iterations and have innovations coming up, we can do things rapidly and quickly and probably the proof point of that is almost all of the next generation application, whether that be Uber, Airbnb, Houzz, Dropbox use our v.zero platform to process their payments. And when Tim Cook announced Apple Pay several months ago, actually I think it was the same day that I joined PayPal, over 50% of those partners that he had on the screen behind him are integrated through PayPal, through our processing.
As I mentioned, scale really matters in payments, because the more scale you have, the more data you have and the more data you have the more accurate your algorithms are. And the reason that it's so important is that data and risk analytics work hand-in-hand. We are constantly looking at bad guys who are figuring out different ways of doing account takeover, different fraud, money laundering. It's a constant cat and mouse game the goes on. You probably have seen recent articles on how difficult it is to really provide fraud and security.
I estimate, it's actually not that hard to do fraud and security. You can just tighten down your standards and keep tightening them and you can get your losses very low. The problem with that is, it's a terrible consumer and merchant experience. Consumers want to have the ability to manage and move their money as freely as they possibly can. They expect you to protect them. They don't want you to lay the blame on anyone else. They want to come in and talk to you, if there is a problem.
What we have been able to do, because of our risk and fraud analytics team, is not just provide very low loss levels, but provide some of the best customer experiences in the industry. As a result of our risk team, we have the strongest buyer and seller protections in the entire financial services industry. Without those capabilities, we couldn't offer those guarantees to our consumers and to our merchants. And so with analytics, data scale really matters here and you combine that with customer service and I can't tell you just how important this is as a competitive advantage for PayPal, especially as we start to move more and more offline and go outside of the online world into everyday transactions.
Here you can see some of the key metrics for PayPal over the past three years. We filed on Form 10, as most of you have seen a couple of days ago. I think that was a first good step in our separation from eBay. Look, there is a lot of information in that Form 10. There will be a lot more information to come. There will be a lot more information on our operating agreements. John, Bob Swan, Devin and I are all working our way through that and working our way through all those quite nicely and I feel good about where we stand from a PayPal perspective. But there are a lot of metrics in the Form 10.
There are really three that I think you should focus in on. The first is, are we growing our active base? As I mentioned, there is a tremendous opportunity for PayPal to grow with scale, with consumers and with merchants and we have been putting on about 20 million new active accounts a year. And I would like see us keep that and grow that moving forward.
Second is, are we increasing our engagement. What you have seen is not only have we increased our transactions per user over the last three years, but we have increased our dollar amount per event over the past three years as well. So not only are we growing, but we are growing our engagement. This engagement number, no doubt, will bounce around if we are very successful bringing in a lot of new customers through our new market entry or a deal that we do of some sort. This may dip and then come back up, but it's one of the key metric that I look at in terms of measuring the performance of our business.
And the final measure that I look and look at very carefully is cash flow. I think at the end of the day, cash flow is what we want to deliver to you. Obviously it's driven predominantly from our operating income that you can see here. But our cash flow last year was $1.7 billion. We are focused in on how do we maximize our cash flow. I will say, there are obviously a tremendous number of areas for us to invest in. There are huge addressable pieces of the market and we want to invest to grow in those places, but we want to do that in a very disciplined fashion.
Part of the reason why when I came in, we did a headcount reduction is that we had grown too fast at PayPal. Our operating expenses aggressive have grown too fast. We have put on too many people. Our decision-making was dispersed. We were working on things that weren't going to have the biggest impact. And although it was a difficult decision for me, as any layoff is, because growth covers a lot of sins, what I want to do is grow without the sins on there. I want to make sure that we have the right number of people focused on the right initiatives for us that we are looking at every dollar we spend on OpEx with a sharp eye, our margins have remained relatively consistent at about 21% all-in for the last three years. And we want to make sure that we continue to maintain our margins but do a very disciplined job on investing for growth to make sure that we can grow our cash flows.
I look at take rate. I look at transaction costs. The take rate is not -- what I look at take rate is, what's its composition? Is our take rate coming down because we are going into products like unbranded full stack processing, which is a lower margin, but those are all incremental operating income dollars for us. As we go into larger merchants, they obviously have a lower take rate. Or is the take rate being pressured by competition. So I look at the decomposition of take rate, but in many ways part of our strategy is to move forward with a full stack, 100% processing and then because what we see is it allows us partner much closer with merchants, reduce the churn rate that we have with them, increase the TPV we get, total with them and increase our share of PayPal. So all of that together may mean lower take rates that come in but substantially more operating income dollars and substantially more cash flow and those are the things that we look at.
Let me end here on this slide. We have a lot to execute over the course of the next several years. We are going to be very disciplined in the way that we invest in the areas that we go after. And it's not going to happen overnight but the markets that we are in are substantial and growing fast and as you saw before we take share in those markets.
We also have very capable competitors who I respect tremendously that are looking for entering into this business. It's a fascinating chessboard right now. I am personally, professional acquaintances, sometimes friends, with most of the CEOs across the world who are in the financial business, in the OEM business, in the wireless business, the technology community and we are in constant conversations about how is that chessboard unfolding and if the enemy of my enemy my friend and what happens if that enemy actually turns into my friend, then what happens to that partnership. Because are in very early innings of this game still and there are lot of various allies and partnership and a lot of people talking with us as a natural ally for them as they think about the digital world ahead. It's a large part of what I think about and what we are working through as we go and become an independent company going forward.
I like how we are positioned. I like our position for three reasons. One, we are already in a fast-growing market. It's poised to inflect. Adjacencies are opening that are very large for us to go after and we have an infinitesimally small share position in our markets. We are a clear leader in digital payments and we have a set of assets and capabilities that are very difficult to replicate and provide a defensible moat. It doesn't mean that we don't have to continue and constantly innovate because we do. But I like our set of assets that we have and we have a very strong business model that allows us to invest in growth opportunities, to make acquisitions where they make sense for us to go and do so. And I like the position that we are in, in that state.
And finally, we will be fully focused on digital payments once the spin is done. There have been certain partners that have been loathe to work with us because we were part of eBay and they considered eBay to be a competitor. We also now will have a very strong balance sheet with no debt. Our ability to think about how to use that capital in constructive ways, we are thinking through right now. But we have 16,000 people. We are a neutral third party to merchants and we believe that we are extremely well positioned and very focused as we look at this digital payments future.
And finally, I think we have an opportunity to make a real difference in the world ahead and we are very focused on making that happen. So thank you very much for your time.
Question-and-Answer Session
End of Q&A
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