PayPal Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 2, 2023

Key Takeaways

  • PayPal reported Q2 revenue of $7.3 billion, up 8% currency-neutral, non-GAAP EPS of $1.16 (+24%), and non-GAAP operating margin expanded ~230 bps to 21.4%.
  • Branded checkout volumes accelerated to 6.5% in June and over 8% in July—highest post-pandemic—driven by checkout optimizations, passwordless logins, BNPL pre-approvals and ongoing A/B testing.
  • Full-year targets were reiterated: Q3 revenue growth of ~8% (currency-neutral), full-year currency-neutral revenue up 9–10%, non-GAAP EPS ~ $4.95 (+20%) and at least +100 bps in non-GAAP operating margin.
  • Credit performance was weaker in the quarter with business-loan losses doubling expectations; PayPal is migrating €1.9 billion in EU BNPL receivables to held-for-sale under a KKR externalization, impacting reserves.
  • Non-transaction OpEx fell 11% in Q2 and is on track for a 10% full-year decline; early AI tools have boosted developer productivity by 20–40%, underpinning future innovation at lower cost.
AI Generated. May Contain Errors.
Earnings Conference Call
PayPal Q2 2023
00:00 / 00:00

There are 9 speakers on the call.

Operator

Afternoon. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to PayPal Holdings Earnings Conference Call for the Q2 2023. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

To questions. Thank you. I would now like to introduce your host for today's call, Ms. Gabrielle Rabinovich, Senior Vice President and Acting CFO. Please go ahead.

Speaker 1

Thank you, Sarah. Good afternoon, and thank you for joining us. To PayPal's earnings conference call for the Q2 of 2023. Joining me today on the call is Dan Shulman, our President and CEO. To the operator.

Speaker 1

We're providing a slide presentation to accompany our commentary. This conference call is also being webcast and both the presentation to the conference call 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 a reconciliation of these non GAAP measures to the most directly comparable GAAP measures in the presentation accompanying this conference call. To the operator.

Speaker 1

We will make forward looking statements that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. To the operator. These statements include, without limitation, our guidance for the Q3 and full year 2023, our planning assumptions for 2023, to our comments related to anticipated foreign exchange rates, operating margin, impact from our sale of loans to KKR and share repurchase activity.

Speaker 2

To our

Speaker 1

Q and A. 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 ks 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. To the operator.

Speaker 1

All information in this presentation is as of today's date, August 2, 2023. We expressly disclaim any obligation to update this information. To the conference call. With that, let me turn the call over to Dan.

Speaker 2

Thanks, Gabs, and thanks, everyone, for joining us on today's call. To I'm proud of the PayPal team as we delivered another solid quarter. Revenues came in above the top end of our guidance to the conference operator today. At this time, I would like to welcome everyone. And non GAAP EPS grew 24% to $1.16 in line with the midpoint of our guide.

Speaker 2

And we are reiterating our guidance for non GAAP EPS and operating margin expansion for the full year. To Encouragingly, e commerce growth appears to have stabilized in the mid single digits, substantially above our estimates when we enter 2023. Our branded checkout volumes Grew roughly in line with the industry in Q2 and accelerated to nearly 6.5% growth in the month of June. And in July, our branded checkout volume growth accelerated again to over 8%, to our highest monthly growth rate since the end of the pandemic. We expect branded checkout volumes will strengthen throughout the back half of the year, supported by traction from our key strategic initiatives.

Speaker 2

Of course, to We still face a fluid global macroeconomic environment. However, it is quite encouraging to see core inflation rates to continue to come down. As inflation cools, we would expect to see discretionary spending rise, Which we believe will support and possibly accelerate the overall growth of e commerce spending. And as a market leader in digital payments, any uptick in e commerce will accelerate our growth. Revenues in Q2 grew by 8% on a currency neutral basis to approximately $7,300,000,000 It's instructive to note that we are lapping certain items that provided an outsized benefit to us in Q2 and Q3 last year.

Speaker 2

Consequently, those items pressure our revenue growth rate by approximately 1.25 percent in each of those quarters this year. Excluding these items, our growth in Q2 to the conference call. Would have been between 9% 10%. As we mentioned last quarter, we expect our revenue growth in the second half of the year to be roughly the same as and given recent trends, maybe a bit better than the first half. To We expect Q3 revenues to grow approximately 8% on a currency neutral basis.

Speaker 2

To the conference operator. I would highlight that July was a very strong start to the quarter, with currency neutral revenue growth of 9% And TPV growth accelerating into the low teens. And for the year, we anticipate our revenue growth to be between 9% 10% on a currency neutral basis. We continue to exercise good discipline in managing operating to the Q1, non GAAP, non transaction related expenses fell 11% year over year. To.

Speaker 2

As a result, our non GAAP operating margin was 21.4%, up approximately 230 basis points from a year ago. To We expect to increase our non GAAP operating margin for the full year by at least 100 basis points. To As we look ahead to the rest of 2023 and into 2024, we expect to drive meaningful productivity improvements. To Our initial experiences with AI and continuing advances in our processes, infrastructure and product quality to enable us to see a future where we do things better, faster and cheaper. To These overall cost savings come even as we significantly invest against our 3 strategic priorities.

Speaker 2

To We know exactly what we need to do as we look towards 2024. And as you can see in our results, We are beginning to see the fruits of our labor. We understand that over the medium to long term, we need to deliver growth in our transaction margin dollars to ensure we sustainably grow our earnings. And we are beginning to see clear signs that our initiatives will yield notable traction to the next several quarters. As I mentioned, we expect our top line to accelerate to low double digit growth by to Q4.

Speaker 2

We expect transaction margin dollars to increase, while our operating expenses continue to create significant leverage. That in connection with our share buybacks enables us to target low to mid teens EPS growth to the remainder of 2023, even as we begin to lap the increases we enjoyed on our interest income. To I'd like to now turn to our 3 strategic priorities in which we are investing our resources and energy: to Brand at Checkout, our PSC Merchant Solutions and our Digital Wallets. As I've mentioned in the past, to all 3 of these are critical and interrelated. They are essential for us to increase our share of the e commerce market as well as accelerate our margin dollar growth.

Speaker 2

As we discussed in our June Investor Meeting, we are meaningfully accelerating to new product innovations into the market, scaling our AB testing and significantly improving our time to market. We are now consistently delivering against our roadmap on schedule. This is the result of significant investments in our platform to our Q1 results, an enhanced set of measurements and performance indicators, hiring new talent to our early successes using AI in our software development process. We continue to ramp our test velocity with more than 300 to the next question and answer session. Thank you, everyone.

Speaker 2

Thank you, everyone. Thank you, everyone. Thank you, everyone. Thank you, everyone. Thank you, everyone.

Speaker 2

Thank you, to the operator. Leads to incremental customer benefits and the cumulative effect of those changes leads to noticeable improvements in our key metrics, including the gains we are seeing in branded checkout growth. For instance, our buy now, pay later traction to the conference call. As meaningfully accelerated with the introduction of pre approved amounts to our consumers. To our work in onboarding and onboarding new experiences has driven new monthly cohorts with higher engagement and lifetime value.

Speaker 2

In this month, we are expanding the rollout of passkeys in the U. S. And Europe, Which will greatly simplify the branded checkout login experience and drive improved authorization rates that will further extend our lead over our competitors. Our goal is to continually close the gap in our login and checkout to our Q1 and to be equal to or better than any competitor within the next year. We simultaneously aim to drive differentiated wallet experiences across both PayPal and Venmo.

Speaker 2

We believe that only those companies with unique and scaled data sets will be able to fully utilize the power of AI to drive actionable insights and differentiated value propositions for their customers. We are already experimenting internally with an AI driven PayPal assistant. We envision that a version of this will be part of our consumer app and we plan to introduce it later this year. We continue to see impressive traction in our PSP business with our growth rates nearly 30% on a currency neutral basis. Many of the largest tech companies in the world to our operator.

Speaker 2

Are now either using our Braintree capabilities or are in deep strategic negotiations with us to do so. We are in the process of rolling out high margin value added services, expanding internationally in making noticeable progress with in person payments. And we continue to receive exceptional interest in our next generation checkout solution, which will leverage the scale of our network vault, our deep understanding of our 2 sided network and the development of proprietary AI models. To the call. I couldn't be more pleased with the initial rollout of PayPal Complete Payments, our PSP merchant solution for channel partners in the SMB market.

Speaker 2

We are seeing tremendous interest in the platform with a substantial pipeline of to completed sales and a backlog of deals that continues to grow. Importantly, our major channel partners are enthusiastic about its capabilities. We have already implemented PPCP with leading channel partners like Adobe, Lightspeed, to Recurly, Shift4, Shopify, Saks Payments, Ultracart, Wix and WooCommerce with more than 25 additional channel partners scheduled to be live by the end of the year. This not only demonstrates the strength of our platform capabilities, but will also enable a meaningful number of SMB merchants to access to our latest checkout experiences. There is a remarkable sense of energy, excitement and enthusiasm among our leadership teams as we see clear and distinct signs of reinvigorated success in the market.

Speaker 2

We are now able to take advantage of many of the investments we have made over the past years to deliver a best in class experience for our customers, to leveraging a modern infrastructure and our scale in the age of AI. We have successfully recruited a large number of to the company's leadership team. We are now ready to introduce our strategic and strategic team. We are now ready to introduce our strategic and strategic team. In order to build upon our success and maximize our opportunity.

Speaker 2

I'd like to end my remarks talking about our CEO succession to the plan. We are in the very final stages of the process with several outstanding candidates, all of whom are highly qualified and excited to lead PayPal as we go into our next chapter of growth. I'm eager to welcome PayPal's next CEO to work with them on a seamless onboarding and to support them and the amazing PayPal team as I transition to my role on the Board. As you can hopefully tell, to We have a lot of energy and confidence that we are on the right path with good momentum. Many of the headwinds we faced to our next question.

Speaker 2

Are now turning into tailwinds. We are executing with a high degree of excellence. We have a firm handle on our business model and can point to numerous successes already making a real difference in the market, Which will only continue to compound over time. PayPal is in an increasingly strong position and we are poised to deliver for our customers and our shareholders. Thank you.

Speaker 2

And with that, let me turn the call over to Gabs.

Speaker 1

Thanks, Dan. I'd like to start by thanking the entire PayPal team for their continued commitment to serving our customers and executing our priorities. To PayPal delivered another solid quarter in a dynamic environment. We're reporting revenue at the high end of our guidance range to an earnings per share consistent with our expectations. Our results are tracking with the guidance we gave for the full year and reflect steady progress against our long term growth aspirations.

Speaker 1

We continue to invest in our key initiatives, while demonstrating discipline in delivering on our operating expense commitments. In June, we were delighted to share more about our long term strategic plan and product roadmaps at our Investment Community Meeting. Importantly, the product launches we discussed are on track, and we continue to gain conviction in our ability to accelerate our branded checkout volumes and drive greater profitability across our PSP services. To the Q1. During the quarter, we were pleased to announce a multi year agreement to sell both our existing European buy now pay later receivables as well as future originations to KKR.

Speaker 1

During my remarks, I will discuss the impact of this externalization on our financial results. To the operator. We have also included additional details in our investor update presentation. Before discussing our outlook for the remainder of the year, to the Q2 performance. As Dan mentioned, revenue increased 8% on a currency neutral basis and 7% at spot to $7,300,000,000 Transaction revenue grew 5% to $6,600,000,000 driven primarily by Braintree and PayPal Branded Checkout.

Speaker 1

Headwinds to growth in the quarter included the lapping of $75,000,000 to: In contractual compensation from merchants last year, which was de minimis this year, dollars 72,000,000 less in hedge gains relative to Q2 last year and the impact from migrating and consolidating legacy PayPal payment services. Other value added services revenue grew 37% to $731,000,000 This performance was predominantly due to increased interest income on customer store balances and to a lesser extent revenue growth from consumer credit products. In the Q2, U. S. Revenue grew 9% to the operator.

Speaker 1

And international revenue increased 5%. On a currency neutral basis, international revenue increased 7%, to accelerating sequentially and year over year. Transaction take rate declined 11 basis points to 1.74%. To Approximately 2 thirds of this decline was driven by a decline in foreign exchange fees, in part driven by lower currency volatility to a decline in gains from foreign currency hedges, which are recorded as international transaction revenue and the headwind from lapping elevated contractual assessments from merchants last year. While merchant mix continued to pressure our branded checkout take rate, the 2nd quarter was an improvement from Q1.

Speaker 1

To our total take rate declined 6 basis points to 1.94%, affected by the same factors as transaction take rate. To the line of our Q2 results. Transaction expense as a rate of TPV came in at 94 basis points, 4 basis points higher than Q2 last year. To the operator. This increase was primarily driven by growth in Braintree volumes, partially offset by rate benefits in core PayPal and Venmo.

Speaker 1

To the operator. Overall, transaction expense dollars grew 16%. Transaction loss as a rate of TPB was 8 basis points for the quarter, to a 3.6 basis point improvement versus last year. Transaction loss dollars declined 25%. The decrease this year was primarily due to an atypical merchant insolvency last year, which drove a sizable loss in the 2nd quarter with no comparable exposure this year.

Speaker 1

Our ongoing risk mitigation activities and mix of volumes also contributed to this performance. To Credit losses were $112,000,000 or 3 basis points as a rate of TPV. On a dollar basis, to Credit losses increased 65%. Provisions in the quarter were driven by a build of $146,000,000 to the call, partially offset by a $33,000,000 reserve release from the reclassification of our European buy now, pay later portfolio to held for sale from Help for Investment. The operating income benefit from this release of reserves was entirely offset by the fair value discount on the portfolio classified as held for sale.

Speaker 1

The increased provisioning resulted from increased expected losses in our PayPal business loans portfolio as well as growth in our U. S. Pay Later portfolio. Like the broader industry,

Speaker 2

to the operator. We're seeing a normalization of our credit

Speaker 1

portfolio to pre COVID delinquency levels across our consumer and PayPal working capital portfolios. To That said, we have seen some deterioration in our business loans portfolio. This portfolio represents less than 15% of our overall net credit receivables. To the call. And as we discussed last quarter, we have taken remedial actions to address this performance.

Speaker 1

We've to tightened originations and have already seen improvement in new cohorts. We'll be managing the book with similar rigor as we move through the remainder of the year. To the operator. As a result of designating $1,900,000,000 in pay later receivables to assets held for sale, we ended Q2 with $5,500,000,000 to the call today. Thank you, operator.

Speaker 1

Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator.

Speaker 1

Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator. Thank you, operator.

Speaker 1

Thank you, operator. To the line of receivables due to held for sale accounting also contributed to an increase in our reserve coverage ratio. To 13% in Q2 relative to an increase of 30% in the Q2 of 2022. Transaction margin dollars grew 1% to $3,300,000,000 and transaction margin was 45.9%. While our transaction margin declined in the quarter, to the Q1 of 2019.

Speaker 1

The rate of decline slowed considerably from both Q1 and Q2 of last year, and we're executing on our strategy to grow transaction margin dollars. To We're encouraged by the progress we're making against our longer term initiatives that will support improved transaction margin performance over time. To Q2 marked the 3rd quarter in a row that we've delivered meaningful expansion in our operating margin on both a GAAP and non GAAP basis. To the operator. Ongoing discipline in managing our cost structure allowed us to more than offset transaction margin compression with operating expense leverage.

Speaker 1

To On a non GAAP basis, non transaction related operating expenses declined 11%, with reductions across to each of our principal operating expense categories contributing significant leverage. Strong expense performance resulted in 20% growth in non GAAP operating income to $1,600,000,000 This is the highest growth in operating income that we've delivered in more than 2 years. To non GAAP operating margin expanded 228 basis points to 21.4%, which was slightly below the guidance we gave for the quarter. To this is principally attributable to our credit portfolio, where we earn less revenue than expected and increased loss provisions. To the Q2, non GAAP EPS increased 24% to $1.16 which was the midpoint of our guidance range.

Speaker 1

To the operator. We ended the quarter with cash, cash equivalents and investments of $14,400,000,000 The net cash outflows for originations of loans to the company's call. Help for sale reduced cash flows from operations by $1,200,000,000 in the quarter, resulting in free cash flow for the quarter of negative 3 to $50,000,000 Later this year, when the sale of the European BNPL back book closes, to the proceeds will be recognized in cash flows from operations and offset this decline. So while the timing of accounting treatment will affect the quarterly profile of our free cash flow. There is no change to our outlook for the year, and we continue to expect to generate approximately $5,000,000,000 to the Q1 of 2019.

Speaker 1

In the quarter, we completed $1,500,000,000 in share repurchases. For the full year, we now expect to allocate to approximately $5,000,000,000 to our buyback program. Our recently announced credit externalization will help optimize our balance sheet and improve our capital efficiency. To the operator. Given our desire to return capital to shareholders and the confidence we have in our business, we've taken a more aggressive approach to share repurchases.

Speaker 1

To the line of the line. Since the end of 2021, our diluted share count has declined 6%. I would now like to discuss our outlook for the remainder of 2023. To. As Dan shared, based on our results for the first half of the year, we're reaffirming our guidance for the year for non GAAP operating margin expansion and earnings per share.

Speaker 1

To the call. In the aggregate, for the 1st and second quarters of 2023, we've delivered revenue growth of approximately 9% on a currency neutral basis. To the operator. We expect revenue growth in the back half of the year to be in line with this performance, if not slightly ahead, given the momentum we're seeing in the business. To the operator.

Speaker 1

In addition, we're on track to meet our expense guidance for the year and are committed to delivering at least 100 basis points of non GAAP operating margin improvement. To We also continue to expect to deliver non GAAP earnings per share of approximately $4.95 representing 20% growth from 2022. To We're reiterating our full year guidance, while absorbing incremental pressure from our credit portfolio, given strengthening business performance driven by checkout initiatives and our ongoing realization of productivity gains. For the Q3, we expect revenue to grow approximately 8% on both a spot and currency neutral basis to approximately $7,400,000,000 at current spot rates. To the operator.

Speaker 1

In addition, we expect non GAAP earnings per share to be in the range of $1.22 to $1.24 representing growth of approximately 13.5% at the midpoint of the range. In summary, to We're proud of our solid operating results this quarter. PayPal's unique competitive advantages, including our portfolio of differentiated assets And our global scale and ubiquity continue to drive us forward. We're committed to investing in our core strengths and building PayPal for the future, and we're guided by our relentless focus on creating the best possible experiences for our customers. Our revenue momentum and customer engagement trends position us well to achieve our growth objectives this year and beyond.

Speaker 1

Given the uncertainties in the macroeconomic environment, we remain focused on managing the things we can control and allocating capital with discipline to ensure we optimize for long term value creation and resiliency. And with that, Dan and I are happy to take your questions. To Sarah, please go ahead.

Operator

Thank you. Your first question comes from the line of to Tien Tsin Huang of JPMorgan. Your line is open.

Speaker 3

Hey, thanks a lot. I want to ask a question on to E Commerce Health. And Dan, I know you talked about it upfront. We're just getting a lot of questions on the e commerce industry in general. So You mentioned inflation easing should help.

Speaker 3

I'm curious about other trends like shift from services to goods, like our economists are talking about, which I think would also be A tailwind for you versus a headwind previously. Is this something you're seeing or maybe is that changing how you're thinking about the second half versus a quarter ago? Seems like there's some room for upside in your outlook here given the exit growth rate and what you talked about for July. Thanks.

Speaker 2

To Yes. Thanks, Anjan. It's great to hear your voice and thanks for the question. Look, I think the story of the quarter is really to the sort of the shape of the results inside the quarter and then the strong exit as we went into July and seeing July results. To In our view right now, we are beginning to see an inflection point.

Speaker 2

We're seeing our results on a to slightly different trajectory for sure. And as I mentioned in my remarks, we're clearly seeing a lot of headwinds to begin to shift towards tailwinds. E Commerce is definitely one of those. We see e Commerce growth to Accelerating. We think it is at least in the mid single digits right now.

Speaker 2

That's substantially above what we thought when we entered the year where we thought it might be flat year over year. And I would say I've got a slight bias that, that will continue to accelerate. You've got a range out there from low of 0 to high of 10%. To We think it's probably right in the middle of that, and we think it is being driven by a shift from travel and services into goods, into fashion, more to coming into retail pieces of that. And clearly, as inflation cools, We would expect to see more discretionary spend rebound, and that will help drive e commerce.

Speaker 2

So one of the Headwinds we faced was e commerce growth slowing. Now it's accelerating again, and that clearly will be meaningful for us. We're also seeing improvements, as Gabs mentioned in cross border, that's beginning to accelerate again. To It's obviously a very meaningful thing for us because one, our value proposition is perfect for cross border. It's consumers buying from merchants That they don't really know, but they trust PayPal to make sure that, that payment will be protected for them.

Speaker 2

It's obviously extremely high margin to our business for us and that seems to be accelerating nicely right now. PPCP, which was to a really important introduction for us for numerous reasons could not have had a better to the reception in the market. We've got tremendous momentum there. Braintree continues to go from strength to strength, and we're seeing a lot of our value added services now start to take hold. I can talk about some of that later in the call.

Speaker 2

Somebody wants to ask about that. And obviously branded checkout Is accelerating. That 8% is the highest we've seen since the end of the pandemic. And We continue to expect to see that strengthen as we go through the year as many of our initiatives Are really taking hold in the last quarter. We've got another 200 plus experiments that are going to happen in Q3.

Speaker 2

And so that's all adding to momentum. And I guess at the end of the day, what that's adding up to to the operator. When we look at our Net Promoter Score, we're now at a 7 year high in that. And so there's clearly a lot of momentum in the business right now, and we just want to double down on that. So we do obviously feel a lot better today Than we did 90 days ago, but I think that's just going to continue when you ask that same question a quarter from now.

Operator

To Durch, your line is open.

Speaker 4

Hey, thanks guys. Revenue growth was obviously sound, but we still saw transaction to profit dollars, a little less pronounced versus revenue. I think it actually may have decreased a bit year over year. And so, Gabriel, I know you talked about some one time grovers and hedging differences. I'm sure the mix between branded, unbranded continues to have an impact given the growth of GreenTree.

Speaker 4

But if you could just help us understand the moving parts in the quarter and the trends into second half as far as gross profit or transaction profit growth goes, That'd be great. Thanks.

Speaker 1

You bet. You bet, Darren. For the quarter, transaction margin dollars grew 1%, which is essentially in line with Q1. That said, when we look at the underlying performance of our business, we're very encouraged by the stronger results we're seeing.

Speaker 2

To the operator.

Speaker 1

In my prepared remarks, I called out several items that created headwinds to growth in the quarter due to lapping. In addition, we actually had some benefits to the Q1 results that we saw in the quarter as well from the release of reserves from held for sale reclassification as well as from lapping that large merchant exposure last year. And so when we adjust for all these items, both the benefits and the drags on a more normalized basis, we actually see transaction margin dollars in the quarter growing several points faster to the Q1 of 2019. And what we're really encouraged by is the strengthening profile of the business. We're actually starting to see the benefits of our initiatives.

Speaker 1

As we get through some of the noise from lapping. We do expect to see improving transaction profit growth. When we think about the back half, to the Q3, we'll still see some pressure on transaction margin performance. In Q4, we expect to see an improvement. And then over the longer term, to our TM profile in the future will certainly be benefited by the acceleration in branded checkout, by e commerce acceleration, by the improved cross border trends that Dan referred to as well as from the value added services that we're adding on the PSP side.

Speaker 4

That's really helpful. So it sounds like some of these initiatives are to 3rd, 4th quarter events, but they could move the needle starting then.

Speaker 1

We expect to exit the year in a much stronger position from a TM trajectory than where we are right now.

Speaker 2

Okay. Very good. Thanks, guys. You bet.

Operator

Your next question comes from the line of James Faucette with Morgan Stanley. Your line is open.

Speaker 5

To Thank you very much. I wanted to follow-up on Darren's question. I know that unbranded Seems to be a drag or dilutive to margins right now overall, which is a little bit surprising given to Just kind of how margin structure tends to be throughout the industry. I know you've talked a little bit in the past about adding incremental services to Unbranded that could improve that structural margin component in Unbranded. Can you talk a little bit about to what that may look like, timing and if any of those initiatives are will play a role in improving the to transaction margin that you're looking at for the latter part of this year.

Speaker 5

Thanks.

Speaker 2

Yes. I'll take a to Great at that, James. Thanks for the question. Our PSP business does continue to go from to strength. As we talked about our overall TPV was nearly 30% in the quarter.

Speaker 2

And that's despite, as Gabriel mentioned, deprecating some of our older to PSP flows, things that are coming off of our PayPal Pro. We actually migrated to about $5,000,000,000 of TPV from our legacy stacks onto PPCP to the Q1. And so it's a bit of a drag in the quarter, but we're going to be done with that by the end of the year. And we continue to win marquee accounts in the business, whether that be booking.com, meta, Allstate Insurance. To These are big accounts that we are winning because winning PSP is a strategic imperative for us.

Speaker 2

To the conference operator today. It allows us to have our latest checkout experiences with the largest most important merchants in the world to the call today. Across PayPal, Venmo and Buy Now Pay Later, we capture 100% of the data flows, which really is to our AI engines. It's fueling what will be our next generation checkout. And most importantly, it's fueling kind of our ability to have best in class auth to the rates in the industry and the lowest loss rates in the industry.

Speaker 2

In terms of the to higher margin services that we're going to be putting out there. We are seeing a lot of traction on that right now. To For instance, we are moving into in store. That's always been an area to the next question and answer session. We are now fully implemented with 20 marquee merchants in over 1,000 in store locations, over 2,500 POS systems.

Speaker 2

We'll continue to do quite well there and push significantly in that. We're making good progress in selling Things like payouts, risk as a service, disputes, automation, we're seeing our largest customers begin to adopt to That right now, whether it be Shein or Meta or TikTok, really these are some of the bigger clients that we have adopting our value added services. And I'll just give you one example. We just started doing orchestration in 6 additional to LatAm countries with much higher margins and where we're doing that orchestration for our largest customers, we're seeing like 190 basis to this point, off rate improvement. So you're seeing kind of this win win as we're doing this.

Speaker 2

And then of course, PPCP as it goes down market is a much higher margin product for us. Yes, I talked about all of the to channel partners that have already implemented that, or in the middle of implementing. And we've got another 25 more partners by year end in the U. S, another 15 EU partners by year end. So we're seeing a tremendous amount of scaling on that.

Speaker 2

We've also enabled here in the U. S. To 1,200,000 SMB merchants to basically do a one click migration into PPCP. We've already done all the risk assessment for them. They're on the right platforms for us to be able to seamlessly transition them onto that platform.

Speaker 2

So to I think we're going to see a large amount of volume moving into PPCP. That's obviously higher margin. To the Q2 of fiscal 2020. We'll also help and those will develop over time. Clearly, every quarter, they will add to the sum cumulative total we'll start to feel as we kind of exit the year and certainly as we go into 2024 with that.

Speaker 2

I hope that helped. Great.

Speaker 5

No, that's great. Thanks.

Speaker 2

Yes.

Operator

Your next question comes from the line of Ramsey El Assal with Barclays. Your line is open.

Speaker 2

Hi. Thanks for taking my

Speaker 6

question this evening. In terms of operating margin performance, were there any factors besides to credit that had a bigger impact than you expected in Q2. And then separately, can you just talk about the overall health of the credit business? To give us more color on the steps you're taking to maybe manage it a little bit differently. It sounded like that was the plan.

Speaker 1

Absolutely. So to the operator. For the quarter, we expanded our operating margin by about 2 28 basis points to 21.4%. This was a slight miss to our guidance of to the Q1 of 2019. And it was predominantly driven by increased pressure from PayPal Business Loans.

Speaker 1

There's no other item that really contributed to that miss. To overall PayPal Business Loans was about a 90 basis point drag to transaction margin and to operating margin. And this is approximately 2 times what we expected at the beginning of the quarter. So it really was a real impact. As it relates to our broader credit business, We're in a really good position.

Speaker 1

Like the rest of the industry, we're seeing some reversion back to pre COVID levels of performance. But across our diversified portfolio of consumer and merchant credit, we're seeing relatively stable delinquency and charge off trends. To the company. The largest growth area for us continues to be our buy now, pay later solutions, where our performance continues to be very strong. To of course, going forward, given our partnership with KKR, the majority of the originations are going to be funded off balance sheet for us and we'll be able to support the sustained growth of that business.

Speaker 1

To On the PayPal business loan side, this is really the part of our portfolio where we have seen deterioration. This portfolio represents less than to the Q1 of 2019. We've historically seen consistently strong performance in this book. And last year, we widened the credit box to the operator. And the performance has not been within our expected risk appetite.

Speaker 1

We've taken steps to improve performance. We significantly tightened originations. Today. The book is down about 30% in total receivables and we expect this pressure to continue through the back half of the year, but then really to abate as we move into next year. That said, the overall strength of our business and the momentum we're seeing is allowing us to maintain our operating margin and EPS guidance for the year, while we're absorbing this credit pressure.

Speaker 6

Thanks so much. Very helpful. Appreciate it.

Operator

Your next question comes from the line of Jason Kupferberg with Bank of America. Your line is open.

Speaker 2

Thanks, guys. I wanted to

Speaker 7

come back to branded TPV growth. So you had 6.5% in the month of June. You were over 8% in July. You're expecting to further acceleration during the balance of the year. So can you just talk more specifically about the drivers of and the visibility on that to the next question and answer session.

Speaker 7

Like how much of it is better macro? How much is traction with PayPal's own branded checkout initiatives? And which to the Q1. Among those branded checkout initiatives is moving the needle most materially here in 2023. Thanks.

Speaker 2

Yes. I'll take a crack at that, Jason. Thanks for the question. It's an important one. To We are really pleased, obviously, to see branded checkout accelerate like it is.

Speaker 2

And we have to good confidence that the initiatives that we're putting into place are going to continue to drive that growth. To As I think about what is driving that growth, it's hard to delineate exactly what is happening because of macro to In terms of e commerce improving in general, as I mentioned to Tianjin's first question to the conference call. Around e commerce and what is due to our initiatives, but we are clearly putting a lot of to the next question and answer session. And my hats off to that entire checkout team for all that they've done here. I'd say, look, first of all, as e commerce is growing, we're going to grow with it because we are to clearly one of the market leaders, if not the market leader in digital payments around that.

Speaker 2

We do have a scale advantage over anybody in terms of your 30,000,000 plus merchants that we have out there, 80% of the top 1500 Internet to Retailers, we have a performance advantage in checkout, up to 600 basis points better in authorized and the industry average. And we have a trust advantage. When small businesses put to PayPal on their site, they see their online sales go up by almost 44%. So those are things that we are building upon. To But as we mentioned in our Investor Day on June 8, we've the amount of to the acceleration in the amount of innovation we're putting into the market has improved dramatically.

Speaker 2

We did 100 AB tests in the Q1. We did 200 AB tests, an incremental 200 in the second quarter. We're going to do another 200 to the Q3. And in general, about 30% or so of those AB tests that we run actually create positive benefit coming out of them. What that means is we're going to have like 150 or so improvements in checkout in our digital wallets running through our metrics as we go through.

Speaker 2

And some of those are to 1 or 2 basis points difference. Some of those can increase DPA by 10 or 15 basis points. And when you put all of those together. It's extraordinarily powerful, and we are definitely seeing that in our results. We also are beginning to see a lot of our merchants move to our latest integrations.

Speaker 2

We know that when we're native to in app on the mobile that we hold or gain share. We talked like a quarter or 2 ago about 33 of our top 100 merchants had our latest checkout integrations, and we had an aspiration to be at 50 by the end of the year. I'm pleased to report that now 43 of our top 100 merchants are in our latest checkout integration. So we're making really good to progress around that. We're not above doing just like the basics.

Speaker 2

To We are approving availability. Latency is now improved by 45% year over year. Every couple of milliseconds to increases conversion rates on that. And passwordless is really important for us. And the rollout of passkeys, to some other authentication methodologies that we're using.

Speaker 2

Now ex the EU, which has SCA strong customer authentication, We're at about 70% of our checkouts that are passwordless. That's going to continue to go up as we push passkeys, and we're now taking passkeys into the EU, which will be very beneficial because you can actually to take out the friction of SCA in those conversions, as well. And so we're going to push that really hard. And then you see all the other big initiatives that we're doing, to the pre introduction, pre approved mounts for BNPL. By the way, in the U.

Speaker 2

S, we've rolled that out to 60,000,000 of our customers. We are seeing 25% to 30% increase in first time users Buy now, pay later and those are using it 5% to 10% more in terms of the overall TPV to those that didn't have the pre approved amounts. And we're going to roll out another $50,000,000 pre approved into the EU beginning of this quarter. We're taking our rewards up, our rewards and cash back. We saw a 20% increase in the number of people using it from Q1 to Q2.

Speaker 2

We're now up over 10,000,000 people using our rewards. When they use our awards, their TPA goes up by 32%. So these are some of the things that we're doing that are making A big difference. We've got a lot of things planned for Q3, and we're beginning to see it in the results and hope to be able to continue to point that out and continue to highlight to what we hope to be increased growth in branded checkout.

Speaker 7

Thanks for all the thoughts.

Speaker 2

Yes.

Operator

Your next question comes from the line of David Togut with Evercore ISI. Your line is open.

Speaker 2

Thank you. Could you provide an update on your cost takeout plan for 2023, the progress you've made? And do you have any preliminary thoughts to quantifying how OpEx reductions will carry into 2024. Yes. Thanks for that, David.

Speaker 2

I'll start and then probably Kevs will jump in on this. Look, we're going to continue to do surgical discipline in our cost structure. It was down 11% In Q2, for the full year, we still expect that to decline consistent with what we talked about by 10%. And therefore, when we think about our operating margin expansion, coming up by at least 100 basis points And some of that incremental pressure that we're absorbing on the credit side that as Gabs mentioned, will kind of move through our numbers to the next question. By the end of the year, you're obviously seeing growing margin expansion driven by some of the to the top line enhancements we're doing, not just the cost discipline that we've demonstrated.

Speaker 2

I would just say that this is not just about efficiencies, but this is about doing things faster And accelerating the velocity of our innovation. It's not about trade offs. To It's about lower cost but higher performance. And you're seeing that because I look at our NPS being at to 7 year highs. Look at the amount of innovation that we're now pumping through the system right now.

Speaker 2

We're getting more done more efficiently. There's no question that AI is going to to impact every single company and every function just as it will inside of PayPal. And we've been experimenting with a couple of 100 of our developers using tools from both Google, Microsoft, as well as Amazon. And we are seeing 20% to 40% increases in engineering productivity. Just imagine that in terms of how much more product we can get into the market and how efficiently We can do that.

Speaker 2

I think we've always known and anticipated that AI will drive productivity to improvements really for foreseeable future. But I think the exciting more Expected result is that we think it's going to transform our value proposition as well. Things like to Enabling us to look into all of our transactions, look at early fraud to Metrix to be able to feed that back to customers with early fraud alerts that assure them that we are protecting them, enabling him to add more and more financial instruments to us, as well that we can protect is PayPal Assistant. To that's really an AI chatbot. We've been using it internally inside our consumer app.

Speaker 2

It's Pretty amazing what it can do, obviously, our advanced checkout, things like customized rewards. So AI is going to be a thing that not only drives to the Q1 of 2019. Productivity improvements for us, but really importantly, value proposition improvements for us. And so We're surgical in our cost thing. We've been very disciplined in it.

Speaker 2

We're quite pleased with it, and I think we'll see productivity improvements over the years to come.

Speaker 1

Yes. As Dan said, we're on track for a 10% decline in our other OpEx for the year. To the Q1 of 2019. The first half is down kind of low double digits, call it 11.5%, 12%. In the back half of the year, of course, we begin to lap some of the cost savings to take out last year, and so the decline in other OpEx declined a bit, and so we'll be in sort of the high single digits to building on what Dan said just around delivering better experiences to our customers and the productivity gains, it's also coming from the platform migration and consolidation work to the Q1 of 2019.

Speaker 1

And that too allows us to scale more efficiently over time. And so you should expect to see us continue to look for ways to deliver better to our customers and scale them efficiently on our platform.

Speaker 2

Thank you.

Operator

Your next question comes from the line sorry, we have time for one last question, and it comes from the line of Bryan Keane with Deutsche Bank. Your line is open.

Speaker 2

Hey, guys. Thanks for

Speaker 8

how How are you doing, Dan? Thanks for letting me ask a question here. I wanted to ask about the consumer value prop and a big piece of that to the Wallet and the enhancements of the Wallet, including offers. Can you just talk about some of the initiatives you're doing there that's going to improve to the digital wallet going forward.

Speaker 2

Yes, sure. Thanks for the question. I mean, obviously, increasing the number of consumers who use our digital wallet, to It's one of our most important initiatives because we feel it's going to drive both engagement, ARPA, monthly active users. To the app user today, the typical app user has a 35% greater ARPU, to 60% greater TPV and 25% less churn. And so the more we can put on that, the better.

Speaker 2

And about to the operator. 55% of our base today uses the app, just to give you an idea of that. And the app, to your point, to It's designed to enable the full shopping experience from Discovery, Which is like the deals and offers that you just mentioned to flexible payments, the widest array of funding choices, to things like buy now, pay later, split tender that enables you to utilize 2 different to our post purchase, which includes package tracking and to returns management refunds directly into your PayPal wallet. Yes, I won't go in again to all the experimentation we're doing, but you can see kind of the tremendous amount of velocity there. The new features that are coming into the wallet include this early fraud alert.

Speaker 2

To We've scaled that now to 10%. That's really designed to protect our customers. We can see fraudulent to Signals well before others. We can let a consumer know that their card has been compromised. We can to simultaneous let the FI know so that, that card can be reissued instantaneously.

Speaker 2

And so we're seeing to early, but really positive response to consumers from this and it causes them to the call. There are some alerts that come and causes them to open the app. The more they open the app, the more they do with us. I think I mentioned on the rewards cash back, that will be something to the operator. And that we'll be putting some resource into because we're seeing a tremendous interest in it.

Speaker 2

To our these users are up 20% quarter over quarter and the TPA is gigantic improvement, as I mentioned, about 32 to the company. Package tracking, we're now 100% ramped across iOS and Android. It scrapes basically your Gmail account to look for any of your e commerce orders. They don't even to the call to be through PayPal. We consolidate them all into one place into our PayPal app.

Speaker 2

We're seeing a 20% app engagement uplift to those who signed up for that, a 10% improvement in TPA. Things like savings, that's now at a 4.3% to the interest rate. When somebody does that, their ARPA goes up $26 and their login to the app goes up to 16 times those who don't have a savings account with us. I mentioned buy now, pay later preapproval, to the conference operator. That's $50,000,000 more to come this quarter in the EU.

Speaker 2

And we'll start to Things like our advanced AI checkout with our first clients later this year and our PayPal assistant using AI technology as to Well, those are just some of the things to come. There's a lot of innovation. And as I mentioned, my hats off to the team because I think they're just doing a great job hitting their schedule, to doing constant experimentation and really making our experiences much improved and moving towards best in class. So thanks, everyone for your great questions. I really appreciate it.

Speaker 2

I want to thank everybody for your time, and we look forward to speaking to all of you later. So take care. Thank you.

Operator

This concludes today's conference call. Thank you for joining. You may now disconnect your

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