PayPal Holdings Inc (PYPL) 2020 Q3 法說會逐字稿

Good afternoon. My name is Gabriel. I will be your conference operator today. At this time, I would like to welcome everyone to PayPal's Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Thank you. Ms. Gabrielle Rabinovitch, you may begin.

Thank you, Gabriel. Good afternoon, and thank you for joining us. Welcome to PayPal's earnings conference call for the third quarter of 2020. Joining me today on the call are Dan Schulman, our President and CEO; and John Rainey, our Chief Financial Officer and EVP, Global Customer Operations. 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 the Investor Relations section of our 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.

Management 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 fourth quarter and full year, the impact of our acquisitions and our outlook for 2021. Our actual results may differ materially from these statements. You can find more information about risks, uncertainties and other factors that could affect our results in our most recent annual report on Form 10-K and quarterly report on Form 10-Q filed with the SEC and available on the Investor Relations section of our website. You should not place undue reliance on any forward-looking statements. All information in this presentation is as of today's date, November 2, 2020. We expressly disclaim any obligation to update this information.

With that, let me turn the call over to Dan.

Thanks, Gabrielle, and thanks, everyone, for joining us on today's call. I hope that all of you are safe and well.

I'm pleased to say that PayPal had a very strong quarter across all of our key operating and financial metrics. Our performance is particularly noteworthy given the macro environment. We are battling a pandemic that shows no signs of slowing down. Economies around the world are still quite fragile, and the next 6 to 12 months will be defined by the timing and amount of additional fiscal stimulus and progress towards a widespread and effective vaccine. And obviously, we sit here on the eve of one of the most important elections in our country's history, and I hope that all of you who are U.S. citizens have already voted or will tomorrow.

This is the landscape we face as we go into the last quarter of 2020. At the same time, PayPal is at an exciting and meaningful inflection point in our history. Our mission has never been more important. The pandemic has brought focus to the stark reality that billions of people across the world are struggling to get by. In fact, in the past 9 months, over 100 million incremental adults moved into extreme poverty. The current financial system is just not working for most people. It's inefficient and expensive for the underserved.

Today's environment demands new ways of thinking about our economic system. Emerging technologies, combined with mobile phones and financial platforms like PayPal, can drive a future of inclusion and financial health. PayPal is in a strong position to help shape a future where everyone, not just the affluent, can participate in the new digital economy.

As the use of cash continues to decline, new and innovative financial technologies are rising. For example, central banks around the world are seriously exploring or even trialing forms of retail digital currencies that they issue directly. And it's also clear that digital wallets are a natural complement to all forms of digital currencies. These trends create an opportunity for us to work with central banks and regulators to shape a modern and inclusive financial system built on more efficient digital infrastructure designed for the future.

The digitization of the global economy, combined with the rise of digital wallets, will drive our growth over the next decade. Our scale, 2-sided network, trusted brand, our strong relationships with regulators around the world and our AI and data modeling capabilities can all be leveraged to ensure our PayPal and Venmo apps are essential parts of our customers' daily lives. We still have a lot to do to achieve that vision, but let me be clear. We are investing to create one of the most compelling and expansive digital wallets in the world, and you can see this beginning to play out in our strong Q3 results.

In Q3, our total payment volume grew by a record 36% on an FX-neutral basis to $247 billion, an annual run rate just shy of $1 trillion. Even more impressive is the growth of our volumes, excluding eBay, which grew 38%, eclipsing any previous record. And in early October, we hit our all-time highest TPV day, outperforming any previous day in our history. These record results are happening even as eBay moves their base to their managed payments platform. eBay is now just 7% of our total volumes and will likely be between 5% to 6% by the end of the year.

Our transactions in the quarter were just over 4 billion, growing 30% year-over-year. This is the first time we have processed over 4 billion transactions in a quarter. And it's worth noting that our core PayPal daily active accounts increased 32% versus a year ago, consistent with last quarter. We added 15.2 million net new actives in Q3, our second highest quarter for organic customer acquisitions after last quarter's 21.3 million NNAs. We added over 1.5 million new merchants in the quarter, over 2x our pre-COVID rate, and we now have 28 million merchants on our platform. We ended Q3 with 361 million active accounts, and we remain on track to end the year with a record 70 million NNAs.

This influx of new customers and record transactions drove strong financial results. Our revenues grew by 25.4% on an FXN basis to $5.46 billion. We grew our non-GAAP EPS by 41% to $1.07 even with incremental investments into our sales, marketing, product and engineering teams. In the quarter, our operating margin grew by 377 basis points from a year ago.

I'd like to detail some of our investments and how we see them shaping our future. And let me start with Venmo. Venmo had a very strong Q3 with 65 million users, driving $44.3 billion in TPV, up 61% year-over-year. Venmo's growth continues to exceed our expectations, and we are forecasting revenue for Venmo to approach $900 million in 2021, driven by investments in new capabilities. As Venmo's revenue base diversifies and scales, its transaction margin continues to improve, and we now expect Venmo to also make a positive contribution to our transaction margin dollars in 2021. By Q1, the Venmo Checkout experience will mirror the ease and simplicity of a PayPal-branded transaction. We anticipate a meaningful increase in merchant transactions with some of the world's largest retailers and marketplaces incorporating Venmo as a payment option at checkout, both online and offline as our QR codes are integrated into physical retail.

The Venmo credit card will be fully rolled out in Q1. I think it is the best credit card in the market. It is a true extension of the Venmo app and fully linked into its capabilities. It is the first to have a personalized QR code embossed on the card as well as contactless chip so that transactions can be split right at the table and reflect instantaneously on your Venmo feed. Our cash back rewards are amongst the most generous in the industry and automatically calculate your top spend categories every month to apply the appropriate cash back percentages. I would encourage all of you to try it as soon as you can because it is truly a best-in-class experience.

Over the next year, both the Venmo and PayPal apps will undergo a fundamental transformation intended to dramatically increase their functionality and drive engagement. Our goal is to provide our customers with a comprehensive set of services and tools to manage their financial lives as well as enhance their ability to shop both online and offline. This expanded suite of services will include enhanced direct deposit and check cashing; budget and savings tools; bill pay; investment alternatives including crypto; subscription management; buy now, pay later optionality; and all of Honey's shopping tools from wish lists, price monitoring, deals, coupons and rewards.

An important enabler of engagement is our comprehensive push into the physical world. Our consumers, merchants and regulators all believe that PayPal plays a crucial role in allowing safe, digital and contactless payments. Our goal is to be the most ubiquitous payment capability in the offline market, through a combination of QR codes, contactless cards, NFC inside our mobile apps as well as our embedded PayPal Wallet experiences inside Google Pay and Samsung Pay among others.

As I mentioned, Honey's shopping tools, coupons and rewards will be integrated into our omni checkout solutions, assuring the best deals for our consumers wherever they shop. And we will also enable merchants of all sizes to access anonymous demand data so that they can drive incremental sales and increase customer engagement across their multiple channels.

Our move into physical retail will no doubt be a multiyear journey, but we are already seeing strong early adoption of our QR code solution. We have 10 major retailers signed including CVS, Nike, Tumi, Bed Bath & Beyond and Samsonite, and we are in meaningful discussions with well over 100 large retailers. We have also signed 20 channel partners and point-of-sale providers from Verifone to Adyen, who are in the process of integrating our QR codes, with an additional 70 channel partners in deep negotiations. Just the signed deals alone enable our QR capabilities at millions of merchant locations. We anticipate ending the year with over 500,000 small and micro merchants accepting our QR codes.

Finally, I'd like to discuss our recent announcement to increase the utility of cryptocurrencies as well as embrace new forms of central bank digital currencies. We are entering a new era of financial services where our wallets and all the services around them are moving from physical to digital. These include identity management, new forms of commerce and fully digital payments and financial services. As such, we recently announced that PayPal will allow account holders to buy, sell and hold cryptocurrencies, first, in the U.S. and then expanding to international markets and the Venmo platform in the first half of next year.

Importantly, we are doing this in close partnership with regulators. As you saw, the New York Department of Financial Services granted PayPal a first-of-its-kind conditional bit license. With this foundation in place, we will rapidly move at the beginning of next year and allow consumers to use cryptocurrencies as a funding instrument to shop across all 28 million of our merchants. This solution will not involve any additional integrations, volatility risk or incremental transaction fees for either consumers or merchants and will fundamentally bolster the utility of cryptocurrencies. This is just the beginning of the opportunities we see as we work hand in hand with regulators to accept new forms of digital currencies.

We are at a moment in our history where all of our past efforts, our scale, brand reputation and regulatory relationships position us to play an expansive role in our customers' lives. There's obviously plenty in the near-term macroeconomic environment that makes us cautious as we look ahead to Q4 and 2021. At the same time, we see multiple tailwinds from the permanent shift towards a digital economy. Our revenue and EPS forecast for the years ahead are substantially higher than those we had developed just a year ago. And I've never been more enthusiastic about PayPal's role in shaping a new future.

I'd like to close by thanking our employees who continue to give so much time and energy to supporting our customers while doing their best to balance a blurring work and home life. Their dedication and commitment to PayPal and our customers is inspiring. And with that, I'll turn the call over to John. John?

Thanks, Dan. I'd like to start by also thanking the entire PayPal team for their efforts to serve our customers and execute on our priorities. PayPal's third quarter was one of the strongest in our history. The sustained momentum in our business allowed us to outperform. Our results demonstrate the strength of our diversified platform, our global reach, the scalability of our business and our sustainable earnings power. Notably, we delivered these outstanding results against the backdrop of eBay's managed payments transition, continued weakness in the travel and events verticals and a decline in other value-added services revenue.

Relative to our expectations going into the third quarter, eBay's payments intermediation proceeded faster than we had anticipated. In addition, the recovery in travel volumes was slower than our forecast. Travel and events volumes, which represented slightly more than 10% of our TPV last year, were down 40% year-over-year. While this is an improvement from the decline in the second quarter, it makes our overall volume growth even more remarkable.

Now I'll discuss more details of our financial performance for the third quarter. Revenue in the third quarter increased 25% on a currency-neutral basis to $5.46 billion. Transaction revenue grew 29% on a currency-neutral basis, representing 11 points of acceleration from the third quarter last year. This growth was primarily driven by strength across our core PayPal business, including strong cross-border growth. Notably, transaction revenue, excluding revenue from eBay, grew 31% in the third quarter, accelerating approximately 4 points from Q2 and approximately 7 points from Q3 last year. Other value-added services revenue declined 10% on a currency-neutral basis. Reduced interest income on customer balances from lower interest rates and less credit revenue contributed to this decline.

Honey contributed approximately 1.5 points of growth to total revenue, which only partially offset the headwinds to other value-added services revenue. In the third quarter, transaction take rate was 2.06%, and total take rate was 2.21%. The 15 basis point decline in transaction take rate was driven ratably by the impact of 47% growth in P2P volumes; merchant volume mix, which includes incremental bill payment volumes; and a reduction of $87 million in international transaction revenue from foreign currency hedges. The 24 basis point decline in total take rate resulted from each of these factors as well as lower other value-added services revenue.

Transaction expenses had a record low rate of 82 basis points, driven by both funding mix and volume mix in the quarter. Transaction losses were 13 basis points as a rate of TPV, 1 basis point better than Q3 last year. We continue to improve our loss performance through the ongoing advancement of our risk mitigation strategies and enhancement of our risk models. Credit losses were 1 basis point as a rate of TPV. Fewer originations, in conjunction with a consistent macro outlook and no meaningful change in credit quality relative to the second quarter, contributed to this lower rate. As you'll see in our 10-Q, our loan loss reserve coverage ratio increased from 22% to 24%, which is primarily driven by the contraction of our merchant receivables portfolio.

Moving to our nontransaction-related expenses. Consistent with our remarks when we reported second quarter results, we are increasing our organic investment spend in the back half of the year. This environment has created a unique opportunity for us to advance our leadership in payments and extend our competitive advantages and emerge from this period stronger and better positioned to increase our relevance. While this incremental investment is more heavily weighted to Q4, we began deploying these funds in Q3.

Nontransaction-related expenses increased by 23% from Q3 last year, reflecting this increased level of investment. While sales and marketing spend was higher as a percentage of revenue, this was more than offset by leverage across each of our other nontransaction-related expense line items. Overall, we realized leverage of 50 basis points on nontransaction-related expenses.

Operating margin for the quarter was 27.2%. This is the strongest performance we've reported for any third quarter and represents a 377 basis point improvement from last year. We continue to be focused on delivering operating efficiencies while investing in our strategic priorities.

Non-GAAP other income declined by $57 million relative to last year, driven by increased interest expense from a higher debt balance and reduced interest income on corporate cash from lower interest rates. From a modeling standpoint, we expect this line item to continue to be a net expense in the near term. For the third quarter, non-GAAP EPS increased 41% to $1.07. The timing of our incremental investment spend, which is weighted more towards the fourth quarter, contributed to this strong performance.

We ended the quarter with cash, cash equivalents and investments of $17.6 billion. In addition, we generated $479 million in free cash flow. Lower free cash flow in the quarter resulted primarily from higher cash taxes. The core cash generation of the business remains extremely strong. On average, in 2020, we generated approximately $1.3 billion in free cash flow each quarter. And for the full year, we continue to expect to generate more than $5 billion in free cash flow.

I now want to shift to our expectations for the rest of 2020 and 2021. In reinstating guidance in July, we were providing our best estimate of performance for the back half of the year. The degree of difficulty inherent in providing an outlook was and continues to be significant. We are an important part of the foundation of global commerce and do not operate in isolation. COVID rates, quarantine measures, stimulus programs, election outcomes and the normalization of economic activity all affect our estimates.

What we do know is that our business is very strong. Our core business continues to perform at an unprecedented level. We've seen a step change in e-commerce penetration this year. We expect there to be a deep and permanent change to commerce and consumer behavior, both in the U.S. and internationally. While it's difficult to quantify the precise degree to which secular trends will be affected by the pandemic, our addressable opportunity has grown meaningfully.

Our fourth quarter forecast contemplates sustained strength in our business, reflecting the powerful value proposition of our 2-sided platform and the profound shift in consumer behavior we've seen this year towards e-commerce and increased digitization. Relative to a few months ago, we expect a greater impact on fourth quarter revenue growth from eBay's payments intermediation given the pace of merchant migration in the third quarter. Heading into Q3, we anticipated this to be about a 2 point headwind to fourth quarter revenue growth. We now expect it to be about 3.5 points.

Over the longer term, a more rapid transition of merchants to eBay's managed payments platform is better for us strategically, financially and operationally. It will allow us to contain this impact mostly to the back half of this year and next year, relative to a slower progression of merchants with a much longer tail. All of this is to say, and this is a very important point, that while headwinds to our revenue growth and transaction margin expansion will appear more pronounced over the next year from eBay, this impact will be largely contained to that period. Even more importantly, once we are beyond this transition, we expect our volume and revenue growth rates to reaccelerate given the drag that eBay has been for the past 5 years. During this period, on average, PayPal's revenue, excluding eBay, has grown about 23% annually. By comparison, revenue from eBay's Marketplaces business, even including this year's stronger growth profile, has grown, on average, only about 4% each year. On a volume basis, the divergence between these growth rates is even more stark.

In addition, we expect the slower recovery in travel to persist. While we saw travel volumes strengthen in June and July, we've not seen these levels sustain. We believe this is likely due, in part, to continued high coronavirus infection rates and the impact of the virus on global mobility. Similar to eBay, the headwinds from travel volumes are transitory and exogenous. As a result of these dynamics, we expect our fourth quarter revenue growth to be in the range of 20% to 25% on both a spot and currency-neutral basis. For the full year, this will result in a range for revenue growth of 21% to 22% on a currency-neutral basis or 20% to 21% on a spot basis. This guidance is approximately 3 points higher than our expectations at the start of the year. To put in perspective, we expect to add more than $3.5 billion to our revenue base this year, which is more than 1.5x the revenue we added in 2019.

On our call last quarter, we stated that we expected to deliver 25% EPS growth for the back half of the year. We are raising that outlook to 29%. Incorporated into this outlook is 17% to 18% growth in EPS in the fourth quarter, which reflects the increased weighting of investment spend relative to the third. For the year, we now expect this will result in approximately 27% to 28% growth in non-GAAP EPS, marking the fourth consecutive year in which we've delivered at least 25% growth in EPS.

Again, to put this in context, relative to last year, on an essentially flat share count, we'll be adding more than $0.80 in earnings for each share outstanding. And relative to our medium-term outlook, which calls for approximately 20% EPS growth each year, we are now more than $0.30 per share ahead of this plan.

I'd now like to discuss how we're thinking about our outlook beyond 2020. The strong acceleration we've experienced this year, along with the pronounced shift in consumer behavior, sets us up exceptionally well for the years ahead. I don't think we've ever been more excited or energized about our prospects. We are clearly on a trajectory to deliver stronger long-term growth than our previously guided medium-term outlook of 17% to 18% currency-neutral revenue growth and approximately 20% earnings growth on average annually.

That said, 2021 still presents a hurdle. Given the transition off of eBay, next year was always going to be a tougher comp for us. Our very strong performance this year adds to this dynamic. In providing guidance this year, our goal has been to responsibly balance transparency with reliability and certainty.

Looking at the range of outcomes for the entirety of 2021 requires us to look out over the next 14 months. We are very confident in our opportunity set, positioning and ability to drive increased engagement. However, there continues to be significant variability in macro-related factors, and we feel that providing guidance for that period right now would require a wider guidance range than we believe is constructive. Once we close out 2020, we'll be better positioned to provide our thoughts for 2021, which we will share in February when we report our full year results. In addition, at our Investor Day later that month, we look forward to providing more context for our longer-term outlook.

Our ability to sustainably deliver strong growth at our scale is indicative of the network effects of our business. Our performance demonstrates our ability to successfully execute in the face of a more challenging operating environment as well as the strength, diversity and resilience of our platform. This is really a year unlike any other. In many ways, our collective experience has demonstrated that we've never been more connected or more dependent on one another to help each other, drive prosperity and development and realize the promise of globalization. PayPal stands at the center of this.

In 2020, we will process more than $900 billion in payment volume and serve approximately 375 million customers. We are the largest open digital platform for payments globally, and the events of this year have served to strengthen our value proposition and relevance. We have an important role to play in facilitating commerce and payments, and we're executing our plans with an urgency to meet the growing needs of our customers in this increasingly digital world.

With that, I'll turn it over to the operator for Q&A.

(Operator Instructions) Our first question will come from the line of Darrin Peller of Wolfe Research.

All right. I know you're all holding off at this point on guidance given the macro variability, but coming off the year with 70 million net new actives, which is at least 30 million more than you would have expected, and a lot of these are new demographics rather than a pull forward as you guys have talked about. Can you just talk -- maybe touch on the types of NNAs you'd expect for either '21 or even longer term, kind of additions you can add? And really thinking about that, in context to 32% growth in daily active users, what are we talking about in terms of opportunity there? And really, what are the drivers of it? Is it international? All the partnerships? It seems like there could be a long runway but a lot of people. I mean I just want to hear where -- what sources are.

Yes. Darrin, it's Dan. Thanks for your question. So we had another strong quarter for NNAs, our second highest organic quarter for net new actives. By the way, interestingly, the shape of that is very consistent, approximately 5 million net new actives each month coming in, no falloff, no pull forward, just consistent growth in that metric. And as you know, we're still targeting and feel comfortable with the 70 million number that we gave last quarter for NNAs for the year.

I think a couple of important things to point out here. First of all, the number of new merchants that are coming on the platform remains quite elevated, over 1.5 million merchant accounts this quarter. Our run rate pre-COVID was somewhere around 500,000 to 750,000. So now we've got 28 million merchants on the platform and 361 million total active accounts.

In many ways here, scale begets scale. As we grow, as more and more merchants have PayPal, you probably have noticed as well more and more merchants are putting PayPal front and center. We're creating new and more compelling ways to buy. Our buy now, pay later has exploded into the marketplace. We've just rolled that out to the vast majority of our consumer base. We're seeing huge take-up in that and incremental halo as a result of it.

And so my view on net new actives is we're going to continue to see good growth on that for a couple of reasons. One, our checkout experience and the number of products that we're putting out there is just increasing. You heard me say in my remarks, we are very focused on expanding our digital wallet capabilities, both on Venmo and PayPal. We are very serious about driving towards being an everyday use case.

Why is that so important? When somebody uses 2 or more of our products, say, checkout and P2P, their churn reduces by 50%. And think about as we approach 400 million customers on our platform, every basis point of churn reduction matters a ton in terms of our NNAs going forward. And so I think you've got a continued drive every industry towards digitization, more and more merchants coming on, more products, more functionality and reduced churn, and I think as we look forward, I think NNAs will continue to remain elevated versus pre-COVID levels.

Your next question will come from the line of Tien-Tsin Huang of JPMorgan.

I wanted to ask on the -- on some of the KPIs. I think they're related, if you don't mind me just putting them all together. So TPV accelerated, while transaction revenue growth held pretty constant. And I know you talked about the take rate here, John. But can you maybe unpack it for us a little bit more and help us on how it might trend in the fourth quarter and maybe even in 2021 with eBay and Paymentus and PayPal and everything else?

And then separately, but somewhat related, just looking at the fourth quarter guide, I know you're assuming some deceleration from the third quarter. I heard eBay being 1.5 incrementally weaker here. Any other call-outs beyond conservatism? I totally get why you're not giving 2021, but I know a lot of moving pieces going into the end of the year here.

Sure, Tien-Tsin. It's good to speak with you. So we did see a strong acceleration in TPV in the quarter. And aside from just growth overall in the business, there's a couple of things to call out. I think notably, P2P volume was up almost 50%. 47%, I believe, is the exact number. And then we saw a lot more volume from bill pay with the 100% ramp of Paymentus in the quarter and so good, strong growth there. As it relates to revenue, we had a $17 million hedge loss in the quarter, and that relates to a $70 million hedge gain in the prior year. So you've got the difference there that really put pressure on the revenue side relative to TPV.

On take rate, there's a couple of dynamics to think about, too. You got -- well, P2P and bill pay tend to have lower take rates. They also have lower transaction expenses. And so what we consistently focus on in our business is not necessarily take rate, but the incremental transaction margin dollars. And a way to think about our business in the quarter, Tien-Tsin, like for every dollar of revenue -- of incremental growth that we brought in, in the quarter, almost $0.70 of that fell to the transaction margin line. And so it shows that there's a good balance between those items that maybe have a lower take rate but also have a lower transaction expense. So we're very focused on the margin profile of those different elements of our business.

With respect to the fourth quarter, the only thing I'd call out in addition to eBay, which we talked about in our prepared remarks, the travel and event vertical, as I also mentioned, has been slower to recover than we anticipated. Again, we saw some green shoots back in June and July, and those haven't persisted to the extent that we mentioned. But again, I'll point out, both of those things are transitory, and they really -- in terms of the long-term impact to our business, it's not going to matter for us. We're very excited about not only what next year holds but each year thereafter. The math of each of those is that, yes, it's a tougher comp for next year, but when we lap that, we'll be at a place where we actually have accelerated growth from that time period.

Yes. And I'd just add to that. Giving a wider range in Q4 just makes sense to go do. It's the prudent thing to do. It, in no way, takes away from the underlying strength in our business. I mean, our core remains extremely strong, core PayPal growing at 30% plus in revenue. October was a good month for us. But you've got everything from virus numbers, lockdowns, which probably have the benefit of helping us as more people are at home, spending online. But we balance that with what is consumer confidence is going to look like, what's the economy due to stimulus payments, what's the holiday shopping season going to look like. We've got an election coming up tomorrow, potential social unrest. When we put all of that together, it just is prudent to give a wider range. And so that wider range to us does nothing to take away from the strength we see in the business, but we thought it was the right thing to do.

Your next question will come from the line of Jason Kupferberg of Bank of America.

So just wondering as we think about the puts and takes for 2021, I mean, is it fair to assume that the eBay headwind of 3.5% in Q4 '20 is a decent proxy for next year? And then how we should think about some of the other puts and takes, whether it be the ongoing travel headwind -- or, obviously, you've got a whole host of new initiatives like Pay in 4 and in-store, et cetera. So that's the first part of my question.

And then just on the second part, regarding this notion of acceleration in the core business due to COVID, any way to give us a rough idea of that? I mean if you just take eBay out of the equation, how much do you think your revenue growth profile has structurally accelerated with a multiyear view, again, excluding eBay?

Thanks for the question, Jason. I appreciate trying to kind of parse out what 2021 would look like. Let me just say this. There are a number of puts and takes for our business next year. On the sort of headwind side, obviously, eBay will continue to be a headwind next year as they ramp through the year. We've been pretty consistent, though, with our expectations around the pace of that. And we've long thought that they would be largely complete by the end of next year. And at the same time, we are still maintaining a share of checkout, which is north of 50%. And so this has been very consistent with our expectations from the onset.

Travel and event is going to be largely tied to the path of the virus. It's an overused term, I know, but that's largely outside of our control. And when the world regains mobility, I'm sure we will see a resurgence in that. But the other area that I think people perhaps haven't quite taken into account yet is the ongoing headwind that credit should be next year. And so those would be on the headwind category.

In terms of things that we're excited about that can help mute that or completely offset that, there's a number of things that we're doing that we've called out. But the continued monetization of Venmo, the launch of Pay in 4 is something that we're very excited about and then expanding the consumer wallet with things like bill pay and subscriptions and so forth. So it puts us in a pretty good position as we look at the new products that we're rolling out, which I'll say is like our product and technology team has never rolled out more products at the rate that they are at any time in my 5 years here. So we're exceedingly pleased about the progress there.

Yes. I mean I think we'd expect our core business to remain strong, maybe even get stronger throughout '21 as we add more and more capabilities. We're seeing really nice adoption very early, obviously, in what we're doing in the offline space. The crypto announcement, just the very early reactions to that are well beyond our expectations. Our buy now, pay later value proposition is a great one. I mean, for merchants, it's no incremental cost, just increases sales to them. It is -- and we get to leverage the large base that we have right now. And as I mentioned, we've got a host of new services coming onboard next year. And as Darrin talked about, we have 70 million net new actives that we'll ride on increased transactions with each of them, counterbalanced by what we always knew was eBay, which is, as John mentioned, a transitory event. It will play itself out next year and will accelerate out from that.

So I think the really important thing to emphasize here is that when we come into our Investor Day in February, we will be raising our medium-term guidance. We feel quite confident about that given everything that we've seen. 2021 was always going to be the year that we would transition away from eBay. Frankly, I'm happy that that's going as well as it is right now and as fast as it is so that, as John mentioned, we take that part of our business that is the slowest growing part of our business and we replace it with the faster growing parts of our core business and other marketplaces. And so for us, this really couldn't come at a better time. The transition from eBay and all the things that we're doing to build our business and shape the future gives us a lot of confidence as we look out at over the next several years.

Your next question will come from the line of James Faucette of Morgan Stanley.

I wanted to just build on some questions, particularly around next quarter and that cadence. It looks like -- it sounds like, John, from what you're saying is that there's going to be some incremental spend in the fourth quarter. Maybe it got started late in the third quarter and that is going to impact margins. Can you talk a little bit about, I guess, the contributors to the very strong margins in the third quarter, a little more color on how to think about the spending and impact on the fourth quarter and then how we should think about what that margin trajectory looks like beyond that and particularly as we head towards a normalized world?

Sure. Well, first, James, you're exactly right. The balance of spend of that $300 million that we earmarked on the last call is going to happen in the fourth quarter, and that really gives you the different margin profile from the third to the fourth. But looking out on a more sustainable level or run rate basis, whether it's 2021 or beyond, there's a data point in our third quarter results, which I think really illustrates the potential that we have, and that's the incremental operating margin that we had in the quarter. So what I mean by that is for every dollar of growth that we had in revenue, how much of that fell to the bottom line.

And if you normalize for acquisitions, it was roughly $0.50 -- $0.48 fell to the bottom line. And that demonstrates 2 things, which I think are relevant and hopefully answer your question. But one is just the trends that we're seeing around our core checkout, and we have an expectation that those persist at a higher level than we entered this pandemic period. And so certainly, that has implications on our business.

But the second and equally as important is what it says about the scalability of our business. We, in the past, have not always done the best job of growing at a low marginal cost. And for the past 2 or 3 years now, we've very -- we've demonstrated very well our ability to do that. And ours is a platform that performs very well in a growth environment because it -- we can do it at a very low marginal cost. And so that's what you see in that operating margin performance.

So I would say that there's a natural tendency as we grow that margins are going to want to increase. That said, we also recognize we have a tremendous opportunity in front of us with the change that's happening. And we clearly want to invest into that. But it's the right thing to do in the fourth quarter, and it will be the right thing to do going forward. I think, fortunately, given the financial profile of our business, we've been able to demonstrate that we can both do that and expand our margins, and we anticipate doing so going forward.

Your next question will come from the line of David Togut of Evercore ISI.

Could you dimension the impact on PayPal's ecosystem from introducing cryptocurrencies, both to buy, sell and hold and to use as a funding mechanism in the PayPal Wallet? And if it's used as a funding source, can you help us think through the impact on transaction expense? Would that be similar, let's say, to ACH or debit funding?

Yes. David, I'll take that question. So I just take a step back. Clearly, the world is rapidly moving from physical to digital, and that's so true for payments and financial services. My conversations with central banks, with the regulators, with a number of folks in the crypto field, there's no question that digital currencies are going to be rising in importance, having increasing functionality and increasing prominence. CBDCs, from my perspective and all my conversations, are a matter of when and how they're done, not if. And I think that our platform, with its digital wallets and the scale that we have right now, can help shape the utility of those currencies. That can range from interoperability between wallets, between the currencies themselves and importantly, into our network of merchants for commerce. And I do think that our platform and all the new digital infrastructure that we're putting in place right now can help make that management and movement of money more efficient and less expensive and faster.

Just in terms of what we've introduced with buy, hold, sell, did a lot of research on that. Our base is very eager for us to offer these capabilities. It really came up very high on their wish list, and we are seeing that come into fruition very quickly. Now we've only rolled this out to 10% of our base. We did that a couple of days ago, but our waiting list was 2 to 3x what our expectations were. We're going to take up our $10,000 limit per day to $15,000 per day based on the demand that we're seeing. And we'll roll out to 100% in the U.S. in the next 2 to 3 weeks. We're then going to expand internationally, and we'll expand into Venmo in the first half of next year.

So that's what we're starting off with. What -- and we're seeing people who have already bought crypto open their wallet several times a day to check on what's happening with their crypto investments. We're beginning to already see some halo effects that go on with that. But what I'm really excited about is what we're going to introduce next year, which is, I think, going to dramatically increase the utility of cryptocurrencies by enabling somebody who holds a cryptocurrency in a PayPal account to instantaneously transfer that crypto into fiat currency at a step rate, so volatility is taken out of the equation. No incremental fees charged for them to do that transaction from crypto into a fiat and then immediately settle in fiat with all $28 million of our merchants at our current take rates. And so you have no additional integration needed at any of our merchants. And this is just an elegant way of using cryptocurrencies as a funding mechanism; and yes, it is a lower-cost funding mechanism for us in terms of those transactions.

But that's just the start of things that we want to go and do with the crypto capabilities. Over the course of next year, you'll see us move into a couple of different areas. Those are the only 2 we're talking about right now, but I see a lot of interesting things we can do with cryptocurrencies, with functionality -- increasing functionality and again, working hand in hand with regulators every step of the way, which is so important, and what they expect from us in order to be a market leader in the digital currency space.

Your next question will come from the line of Heath Terry of Goldman Sachs.

Great. Dan, you've done a lot over the last year in terms of product development between crypto and pay later, so I realize it's a bit of a greedy ask. But when you look at the size of the point-of-sale opportunity and the success that some startups are having and taking share against the incumbents, I'm curious where your in-person payment strategy stands at this point and how much of a priority it is for you.

Yes. So I think the best way of thinking about this, Heath, is that every 5 to 7 years, there's a replacement cycle for point of sale. And we are really entering a period of change right now where the operating models for POS have kind of literally changed overnight. Payments clearly need to now reside in the cloud, not at the physical retail location. They need to be fully on omni. They need to reside on a full platform experience across channels.

And I would say that being an incumbent, the space does not add any advantage. In fact, they will need to change fundamentally the way that they think about point of sale. And clearly, the tailwinds are moving towards mobile-oriented point of sale. And we want to capture what is a huge in-store opportunity, be one of the first movers to move to an online full omni solution and then set that up to take advantage of our 2-sided network. And we have a number of plans underway with our iZettle and PayPal Here teams really to try and become a market leader over the longer term. That could be 5 to 7 years, but you'll start to see us make moves in that. I think that really complements all the things we're doing as we move in-store with our consumer base, our QR codes, our contactless payments, NFC inside our app as well as embedding ourselves in other star pays.

But we're beginning to see, as I mentioned, a lot of early traction in our move in the offline space. And I think there's a really huge opportunity. And we are -- as I mentioned last quarter, we are being pulled into that space by retailers and by consumers. And the faster we move, the more opportunity I think we can gain there.

Your next question will come from the line of Bryan Keane of Deutsche Bank.

Just want to ask about the new products, in particular, the BNPL. Just trying to get a sense of how much incremental volume opportunity is there versus replacing other PayPal payment options. Just thinking about are you going to be able to gain share or checkout at the merchant site. And then secondly, on the Venmo monetization, I heard the $900 million revenue number. Any sense of how that breaks out next year with growth rates from the Venmo credit card? Is that a big percentage of that versus Pay with Venmo, et cetera?

Yes. So I'll start now with buy now, pay later and then quickly go into Venmo. I'm extraordinarily pleased with the success that we're having with buy now, pay later. We rolled this out in France several months before we introduced this into the U.S. and then into the U.K. And the uptake that we are seeing in the French market is well beyond any of our expectations. And we just rolled out in the U.S., and the demand is tremendous. And you probably -- if you've opened up your PayPal app very recently in the last couple of days to pay for something on a merchant location, you're probably seeing Pay in 4 pop up as a option.

I think our value proposition there is second to none. And the reason I say that is it is a beautiful experience in terms of the ability to simply, easily from a consumer to take a larger purchase and divide it in 4 payments interest free. We know our consumers. We have a very high acceptance rate as a result of that. And for merchants, unlike any of the competitors that are offering buy now, pay later functionality, we are offering this as part of our service. There are no incremental fees except for the basic transaction fees that we charge merchants today.

And so what we are seeing is just use of it that's well beyond our expectations. I think it's going to be one of our big growth drivers as we go into next year and into 2022. I'm quite high on the potential of what we -- what we'll see with buy now, pay later. And by the way, there's a ton more we can do on that, too, and we have got a large road map around that.

On Venmo, look, we've put out a couple of things here that are new. We do expect Venmo to approach about $900 million in revenues next year. By the way, we expect Venmo to reach profitability in 2022, and that's another big thing to think about. Venmo is clearly turning the corner right now. These are just like these incremental steps that people have been waiting for but we are seeing that come to play. And Venmo has a host of new things coming out. They've got the Venmo credit card, which is one. And by the way, I said it's best in the market, like I've been using the Venmo credit card for the last month or so. It is an incredible experience. I really cannot wait for all of you to use it and see just what I mean.

Second, we are really revamping the Pay with Venmo experience. It's been a little clunky, more clunky than I would have liked. But by first quarter, that will be as seamless as a PayPal transaction. And we have a ton of extremely large merchants and marketplaces that are anxious to integrate Venmo as a payment mark.

And then we obviously have business profiles, crypto capabilities, more basic financial tools, shopping tools coming into that. All of those will add to the Venmo revenue. There isn't one thing that's dominant in that they're all adding to that. And so really pleased with Venmo's growth and trajectory. And to see an acceleration in its TPV growth now 2 quarters in a row at the scale that it has, it's pretty impressive.

We have time for one last question from Lisa Ellis of MoffettNathanson.

Terrific. Dan, so you've highlighted a number of times on the call, the transformation underway with the PayPal and Venmo consumer apps to add all these new use cases, like bill payments, Pay in 4, crypto, Honey, et cetera. Can you just talk a bit more about how we should think about the operational and financial rollout of this transformation, meaning what's sort of the road map or timing of when the functionality will be rolled out? How are you going to be driving adoption? How should we think about monetization, et cetera, just as we look out over the next 12 to 18 months?

Yes. Lisa, good to hear your voice. Happy to do so. This is probably one of our -- not probably. This is one of our top focus areas, this building out a comprehensive and compelling digital wallet for our consumers. I don't think there's any question as we move into the digital economy that apps that provide a comprehensive suite of interlinked functionality around financial services, payment, shopping, identity management, will be an essential part of our customers' lives, I mean, a daily part of their lives.

Now with the wallet, the capabilities that we're talking about are both online and in-store. So that's sort of online, offline shopping capabilities, rewards management, being able to use rewards points, translate those to fiat to pay at any one of our merchants and also incorporate that in in-store as well.

All sorts of financial services, you mentioned a couple of them, bill pay, increasing focus on direct deposit, check cashing, savings goals, investments, PFM, and then integrating all of our Honey shopping tools, crypto capabilities, buy now, pay later and by the way, Lisa, importantly, not just putting all that functionality out into our digital wallet but creating a UX, a user experience, that enables somebody to simply and easily move from one experience to another and have each of those experiences build on each other. And so we will start to roll out bill pay this month. We will -- towards the end of the month, we'll start to roll that out. I think you can expect kind of at end of the first half this year for us to have a pretty large UX completion design in our customers' hands with a lot of functionality coming out, in my view, in the second quarter and the back half of the year.

But I expect to have the predominance of what I just talked about in place by the end of next year. And as John said, we're investing behind this. I'm really pleased, as John mentioned, with the delivery and the on-time delivery and the excellence of the applications that are coming out into our market. And so expect to see a step functionality in the back half of Q2 of this year and then to build on that as we go into the rest of the year.

Very exciting.

Yes, it is exciting.

Okay. I want to thank everybody for all of your great questions as we really -- I'm glad we had a chance to talk about all those things and look forward to talking to each of you more in the weeks and months ahead. So thank you very much, everybody. Have a good day, and we'll talk to you soon. Bye-bye.

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