Am listening to a replay of PayPal’s Q2 2020 earnings call. Am going to drop some thoughts on a thread here. I don’t own PayPal stock (but wish I did buy post-Honey acquisition).

Start is filled with legal jargon related to securities law. I’m a lawyer who used to do securities work and even I’m bored. We get it — forward looking statements. Info presented subject to change. PayPal has no obligation to update.

Dan Schulman (CEO) kicks off with quarter highlights. Very slow speaking cadence and sounds like he’s shouting a bit. Reminds me of trying to zoom with my wife’s 98-year old grandmother.

Company killed it. First ever $200B payment volume quarter. First time quarterly revenues had exceeded $5B. More than $2B in free cash flow. Just a monster performance.

Side note while Dan waxes on about the great quarter — payments is hard. Managing money and dealing with all the small dollar payments PayPal sees due to consumer usage is very hard. Doing it cross border is crazy. Closing your books with all that data/reconciliation is hard.

Tl;dr — PayPal team must be top notch to manage that company and also see continued returns from their large M&A bounties.

Dan talking about rolling QR code’s in Venmo to in-store merchants. Says merchants need it to fight off existential threat from COVID. Casually notes this will accelerate monetization of Venmo.

Slides back this up, noting that merchant services was 91% of the $220B in volume in the quarter (so 200ish). Slides say Venmo was 37% of payment volume ($81Bish). So already some overlap on merchant penetration.

Dan mentions Venmo monetization again. Talks about bringing more services to the app. Bill pay gets a shout out. Subscriptions and rewards management. Shopping tools from Honey.

“Combination of these assets together that provides a unique competitive differentiation for our enterprise merchants, channel partners and small business customers.”

Side note — and curious if this will come up from analysts during the call — should PayPal buy Squarespace or Wix? Shopify feels like default site, tools and payments default for e-commerce without dev skills these days. PayPal’s financial services blow them away. Missing piece?

And I type that as someone who loves what Shopify is doing and sees their relentless execution, especially in the financial services space.

Dan says next five years will bring even bigger opportunities. Have track record, differentiation, track record . . .So much management jargon. Sounds like he’s hired Pete Buttigieg’s campaign speech writers. Or at least the guys who wrote Gavin Belson’s lines on Silicon Valley.

Turns it over to CFO John Rainey. John talks about Q2 and hints he’ll give full guidance. PayPal withdrew it’s full-year guidance in March (as did most others). So they’re feeling good that e-commerce will buoy them through any possible COVID related downturn.

I have a tinfoil hat here. Can’t imagine US commerce chugs along with 30 million out of work and all the government relief aid about to end.

CFO gets to take rates. This is the good stuff.

223 bps for transactional take rate, down only 2 bps.

Shows they’re earning most money off consumer and SMB, as enterprise would command lower IC+ rates. See Adyen take rates for comps (they’re much lower).

Total take rates from all services is 237 bps. Down 13 bps for the quarter.

They keep talking about “other services” being down, but it’s not clear what those are. Tokenization? Drop shipping? PayPal Beacon?

Interesting cost data. Transactional costs are coming in at 83 bps. Shows a lot of their volume is still card based, as ACH would be much lower (not to mention free for wallet <> wallet or “on us” transactions).

Says that risk losses were just 12 bps. Says improvement of 2 bps.

Leads to a fun startup story. One CFO I worked with use to say that 2 bps at PayPal’s scale would add a billion or two to a company’s valuation. Pushed us to find the 2 bps in company improvements.

$117M in reserves for credit losses. John (PayPal CFO) has mentioned credit losses a few times. Seems to be talking about SMB loan product.

Has also shared that company has limited new loan originations in Q2.

Slides note that they did $2B in PPP loans in the quarter, but haven’t heard it pop up on call yet. That’s ~half of BlueVine’s total over same time frame and and a third of Kabbage’s.

On this point — I don’t fully understand how Square (signaled around $1B in PPP) and PayPal ($2B) didn’t do more. They both have such large, captive SMB populations. Loan originations should have been like shooting fish in a barrel. Will be interesting to see what Intuit did.

Time for analyst questions!

JPM is first. Wonders what’s changed since April to give them enough confidence to reinstate guidance.

Schulman: “Obviously, our best quarter.”

Says big driver in confidence is net new active accounts. Says these are high-quality and global. Says Honey is also up 3x. Xoom cross border net new accounts up 600% over Q1.

Shulmam says company measures strength of new account cohorts based on activity in first 10 days. More than 4 tnx is stellar. Seeing that now. Churn has also “meaningfully declined.”

Basically sounds like PayPal, Braintree seeing Sharo V recovery. Even with travel and events transactions down 60%.

Shulman rambling a bit now. Can see why this call is 75 mins long. Rainey is much stronger at this.

Also a contrast with Square, where Jack hits high notes and CFO leads calls.

Rainey adds on. Says regions with relaxed shelter in place are seeing good volume. This seems to bode well for Square’s earnings. SQ hinted at the same on their last call and should benefit from the boost in in-person commerce from this.

Disclaimer that I do own Square shares.

Shulman says EBay will be important partner for the future, while EBay has been heavily promoting their push to own their own payment stack in the past few weeks.

Shulman likely winking to PayPal’s strength in ecommerce outside of US. In Germany the stack rank by volume goes V/MC then PayPal third. More than AmEx (and certainly more than diners, but keep trying Discover).

Question on EBay was from Goldman Sachs, btw. Goldman analyst also slips in a Shopify reference. Excited to see if Shulman tackles it or side steps. It was more a “and also Shopify, given their earnings today” than a concrete question by Goldman.

Shulman says he’s not worried about EBay managed payments. Even those that move see 60%+ on PayPal. Says NPS shows merchants prefer PayPal solution.

Good talking points, but his tone isn’t as peppy as earlier. Feels like he doesn’t believe it either.

Shulman does talk about Shopify, but lumps them in with Etsy as a “marketplace.” Guess he missed @tobi on @patrick_oshag’s pod @InvestLikeBest — everyone rooting for the rebels (and their arms dealer) knows Shopify’s not a marketplace.

Shulman says top 15% marketplaces (including Shopify) growth rate approached 100% in Q2. Seems to not know how Shopify’s own payment solution has grown in Q2, as the 100% metric is lagging that.

Tours Facebook and Google partnerships.

Schulman (yes, I’ve been misspelling) hints at other partnerships coming up. Says now that EBay agreement has expired, PayPal has more room to partner.

Likely talking Amazon, Walmart and Target, who would have likely been on a “Will not compete with” list under EBay contract.

For context, it’s very common for a big partner to schedule out a list of competitors in contracts with key suppliers. I’m exchange for doing business with the supplier, the supplier agrees not to work with key competitors of the partner.

EBay would definitely have had Amazon on that list. Which explains why we haven’t seen any big PayPal <> Amazon collaborations yet. Target, Walmart, BestBuy and other large online retailers likely also on that list and now fair game for PayPal.

Schulman again calls Shopify a marketplace, says they’re working quite closely with them. Pro tip — when you do work closely with a partner, try and mirror the partner’s language. Other pro tip — Shopify is not a marketplace.

Moffit Nathanson asks for more detail about QR code strategy. Also wants to know if it’s a pass through (e.g., is PayPal getting credit card processing margins or nice, fat on-is margins from wallet-to-wallet transactions).

Dan says will take a few quarters. Says consumers and merchants are asking for this, so demand is there. Lots of micro and small merchants. Working with over 100 large merchants as well as channel partners. Sounds like deals with terminal providers and acquirers. Says CVS onboard

Will be successful becaus there is consumer and merchant demand. Will also market heavily.

I hope Lucas dreams of QR! But maybe now he’s a dad, stuck juggling a job and homeschooling his two kids during shelter in place.

Shulman (old habits die hard) on economics of QR. Some will be pass through, but should look like economic benefits of online commerce.

Rainey (CFO) says need to look beyond economics. Will boost engagement and give a halo.

Darin Peller asks next — how do they balance investments vs. margin expansion?

Schulman channeling Gavin Belson — “we invest where we see opportunity.”

“Opportunity to invest in new areas . . . Meaningful to the business”

This close to announcing The Box!

Now starts talking details. Wants to invest in-store commerce. Also in their walllet. Want to be an every day use case. Good news for large neo banks that need an exit (or an OnDeck like post-IPO landing). Two quarters of PayPal FCF = Chime’s valuation.

Shulman says also wants to invest in international markets. China. Explosive growth in Mexico, Brazil, Western Europe. Good news for Stripe (investing in LatAm) and Square (bought EU P2P to expand Cash). Shows opportunity is there in those markets.

John Rainey hops in. Says incremental revenue was highest it’s ever been. Exclude losses for credit reserve and acquisitions, and incremental revenue was 70%.

Dan and John says will continue mix of organic investment and M&A. Want to invest to shape the outcome.

Bob Napoli from William Blair. Asks about Venmo. 60M customers. What’s up with revenue run rate, direct deposit strategy? Asks if Venmo customer is really the right target for direct deposit?

Rainey — no update on Venmo revenue. Don’t provide every Q and this is one of those.

Rainey says monetization strategy is multi-faceted. But sounds like most is focused on shifting to merchant services and making it a “pay with” option. Also the Venmo credit card.

Schulman notes that folks shouldn’t sleep on how “zealous” Venmo users are to live their entire financial lives on Venmo. New use cases are exciting.

Schulman ranting about the youngs now. Online workout classes. Delivery. Seeing Venmo payments on all. Venmo is crown jewel.

Next question — what drove tripling of net new accounts for Honey? An what are the benefits for PayPal ecosystem as a whole?

Schulman gives non-answer on tripling of accounts. Waxes about honey building marketplace to drive demand to merchants.

Honey allows PayPal merchants to see shopper intent. Schulman claiming it’s a powerful data tool.

Says Honey integration is going smoothly. “Right on track . . . Real powerful set of capabilities a head of us.”

Sounds like Trump talking about Hydroxychloroquine studies.

Last question — how should analysts think about market expansion?

Market is still difficult to forecast. Rainey says comfortable enough to provide H2 guidance.

Rainey says medium term outlook trickier. Seeing accelerated compounding benefits coming to the platform right now. PayPal will be a structural winner. But premature to give medium-term guidance.