PayPal Holdings (PYPL) Q2 2022 Earnings Call Transcript

PayPal Holdings (PYPL -1.19%)
Q2 2022 Earnings Call
Aug 02, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good evening. My name is Savannah, and I will be your conference operator for today. At this time, I would like to welcome everyone to PayPal Holdings' earnings conference call for the second quarter 2022. [Operator instructions] Thank you.

And I would now like to introduce you to your host for today's call, Ms. Gabrielle Rabinovitch, senior vice president, corporate finance and investor relations. Please go ahead.

Gabs Rabinovitch -- Vice President, Corporate Finance and Investor Relations

Thank you, Savannah. Good afternoon, and thank you for joining us. Welcome to PayPal's earnings conference call for the second quarter of 2022. Joining me today on the call is Dan Schulman, our president and CEO.

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 our investor relations website. In discussing our company's performance, we will 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 third quarter and full year 2022 and comments related to anticipated cost savings, operating margin and share repurchase activity. 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 our investor relations website.

You should not place undue reliance on any forward-looking statements. All information in this presentation is as of today's date, August 2, 2022. We expressly disclaim any obligation to update this information. With that, let me turn the call over to Dan.

Dan Schulman -- President and Chief Executive Officer

Thanks, Gabrielle, and thanks, everyone, for joining us. I'm pleased to share that in the second quarter, we met or exceeded our expectations announced in April, marking the second quarter in a row of hitting our non-GAAP guidance. We are well underway in a deep transformation of our business to regain our momentum. This transformation is supported by three major initiatives.

The first is to seize the opportunity to grow our market share as many of our competitors retrench and reorient their business models. We are focusing our investments in the areas where we have tremendous advantage due to our scale and the inherent network effects, driven by our two-sided network. We are doubling down on checkout, our PayPal and Venmo digital wallets and our Braintree platform. These efforts are having their anticipated effect as we, once again, took share in Q2.

Secondly, we are meaningfully reducing our cost structure. I will discuss this in detail, but over the past six months, we have taken action to exit the year with operating margin leverage that will continue to grow in 2023. And third, we have reinvigorated our organizational operating model, and we are recruiting world-class talent to our product, engineering and technology functions. And later in my remarks, I'll expand on our progress in these areas.

With that in mind, I'm very pleased to announce that Blake Jorgensen will be joining us as PayPal's new chief financial officer starting this week. Blake joins us from electronic arts, where he was CFO and chief operating officer, driving extensive operational excellence and shareholder value. He has also been CFO at Yahoo and Levi's and was co-founder and president of the investment bank, Thomas Weisel Partners. I am looking forward to working with Blake as we enter the next chapter in PayPal's journey.

I would also like to thank Gabrielle for all she has done to support me and the PayPal team in her role as interim CFO. I can't say enough good words about her performance, and I'm pleased to announce that she will be taking on the additional role of treasurer, as well as our investor relations and corporate finance responsibilities. Let me now turn to our results. Our revenues in the second quarter came in at $6.81 billion, up 10% FXN and 9% spot.

Importantly, the shape and dynamics of the quarter reflect the trends we anticipated in our full year guidance. April revenue growth was 7% FXN, May was 10% and June was 12%. And our preliminary revenue growth rate in July further accelerated to north of 14%. eBay payment intermediation was a 400-basis-points drag on revenue growth in the quarter, and we anticipate that will drop to approximately 100 basis points in the third quarter and be inconsequential to our results in the fourth quarter.

Non-GAAP EPS of $0.93 exceeded our guidance by $0.07 as actions we have taken slowed nontransaction-related expenses to 6% year over year in Q2. As we discussed during our last call, we have been working to drive productivity improvements across all functions. Our strategy shift to focus on customer engagement from our unparalleled network of consumer and merchant accounts led to significant opportunity for greater efficiency and, importantly, deeper investments in our world-class portfolio of assets. We have narrowed our focus, driven greater productivity and increased our market share gains with profitable growth.

We are leveraging our enhanced scale coming out of the pandemic to drive meaningful reductions in unit costs across our supplier base. As a result, we will realize our target of approximately $900 million of savings in 2022 across our opex and transaction expenses, which was contemplated in our reset guidance last quarter. We anticipate this reduction in our cost structure will result in at least $1.3 billion of cost savings in 2023, which will result in operating margin expansion next year. These cost savings are not onetime in nature and will continue to benefit the company on a run-rate basis.

We are also still sharpening our pencils to identify additional areas of productivity improvements across our servicing, marketing and engineering functions, as well as opportunities to rationalize our real estate footprint and shift our hiring to lower-cost geographies. These efficiency gains will allow us to increase our investments in our highest conviction growth opportunities, which, as I mentioned, include checkout, Braintree and our digital wallets. Importantly, as a result of this exercise and disciplined leadership from our team, we are targeting nontransaction-related operating expenses to be roughly flat as we exit 2022. Consequently, we expect operating margin expansion beginning in the fourth quarter of this year and continuing in 2023.

As we said last quarter, NNAs for Q2 will represent our low watermark for the year. We are reiterating our full year guidance of approximately 10 million NNAs. However, as with all of our forecasts, NNA growth could be affected by broader economic factors, given the channels that drive organic customer acquisition may be negatively impacted by falling consumer sentiment and reduced demand for discretionary goods. That said, almost 80% of our volume is driven by 30% of our active accounts, which is why our primary focus is on driving engagement across our base.

And here, I'm pleased to report that our transactions per active account, or our TPA, grew 12% to 48.7 times per year. And our core daily active users are up over 40% from Q2 2019, a three-year CAGR of about 13%. Signaling its confidence in our business, the PayPal Board of Directors has authorized an additional $15 billion share repurchase plan. We expect the pace of our share repurchases to remain aggressive as we believe there's currently a unique and attractive opportunity to return capital to our shareholders.

Our board is committed to evaluating all options for return of capital to our shareholders. And we expect to share a financial and strategic update, including capital allocation, at an investor day in early 2023. PayPal is one of the most trusted consumer brands in the world, and we have built a diversified platform with unparalleled global scale. We believe the recent turmoil in both the e-commerce and fintech sectors has created an unparalleled opportunity for PayPal.

In contrast to others in the industry, our strong financial model, which will generate more than $5 billion in free cash flow this year, provides us the flexibility to invest and strengthen our competitive position. We are clearly seeing a flight to quality in the market and we expect to continue to drive market share gains. Our share of branded checkout grew in Q2 and remains strong with leading retailers, where we are retaining the share gains we drove over the last two years. We continue to leverage our inherent strengths in checkout, which include our base of more than 35 million active merchant accounts with billions of financial instruments vaulted across PayPal and Braintree.

We are currently testing our new mobile SDK, software development kit, which enables native in-line checkout, removing friction to make our payment experiences faster and more convenient. And we are also enhancing our checkout user experience to better serve our nearly 400 million consumer accounts by surfacing the most relevant funding instrument based on past purchase behavior, merchant category and purchase price, among other attributes. We believe innovations like these will continue to differentiate our value proposition and drive increased conversion for our merchants. We are making great strides in the presentment and global distribution of our branded marks.

We have expanded our relationship with Shopify, and we are now powering Shopify Payments in France. In addition, we continue to win large and significant full-stack processing deals with leading merchants across the world, including Shein, Zappos, BetMGM and Carrefour. We intend to press the advantages we have in scale with our portfolio of payment assets to take additional share in this challenging macro environment. Our Buy Now, Pay Later products continue to distinguish themselves from our competitors.

In the second quarter, we processed $4.9 billion in volume, up 226% year over year with over 22 million consumers using our Buy Now, Pay Later services over 100 million times since launch. Our upstream presentment continues to grow with over 200,000 merchants displaying our Buy Now, Pay Later on their product pages. We recently expanded our offerings with the launch of Pay Monthly, which gives U.S. consumers the ability to spread payments over longer periods of time.

A key competitive advantage for us is our deep expertise and experience lending through all types of credit environments. We benefit from both our scale and long-standing relationships with our customers. We know who we are lending to, and as a result, we have high approval rates and loss rates that are among the lowest in the industry. Our PayPal and Venmo digital wallets are formidable assets that drive engagement across our commerce and payments platform.

Digital wallet users are twice as likely to choose PayPal at checkout. And we have an opportunity to increase both engagement and ARPA by continuing to invest in commerce tools. As macroeconomic factors such as inflation impact our customers, our services like PayPal Honey are helping consumers make their money go further. Through the browser extension, PayPal Honey serves up targeted coupons and rewards at checkout and through our digital wallet shopping hub at the beginning of the shopping journey.

We are working hard to help our customers save money. Already this year, we've helped consumers save over $100 million. In an inflationary environment, these products are increasingly sought after and valuable. In fact, the PayPal Honey browser extension increased selection and conversion at checkout by 18%.

And in the second half of this year, we are focused on driving even more savings for our customers by redesigning the shopping hub and our digital wallet and unifying our rewards programs. Venmo remains a key growth driver for our business with nearly 90 million active accounts, driving revenue growth in Q2 of more than 50%, with the revenues exceeding $100 million last month alone. We continue to see increased commerce transactions on Venmo with commerce volumes growing more than 250%. In Q2, we signed or launched Pay with Venmo with leading merchants, including DICK'S Sporting Goods, DraftKings, Booking.com and The Washington Post.

And of course, we look forward to launching Pay with Venmo on Amazon. We are also hard at work on new initiatives that will increase both scale and engagement, including allowing teens to create their own Venmo accounts. And in September, we plan to launch the ability for charities to establish a profile on the Venmo app to encourage more giving ahead of the holiday season. As I shared last quarter, we are meaningfully streamlining our organizational structure to simplify decision-making, drive end-to-end accountability and make it easier for our teams to rapidly bring innovative products to market.

Our new operating model is oriented around our customers. Our consumer business is led by Doug Bland, and Doug joined PayPal through our acquisition of Swift Financial, where he was chief operating officer. He has been leading the rapid expansion of our global credit products, overseeing the introduction of a wide range of products, including our Buy Now, Pay Later services. And he has deep expertise in navigating challenging credit and economic environments.

Our merchant business is organized into two primary areas of focus: enterprise and merchant platform led by Frank Keller and small- and medium-sized businesses and partner channels led by Dan Leberman. Both Frank and Dan have been with PayPal since before separation in various leadership capacities and have extensive product and operational expertise. These changes will ensure we make the necessary decisions and trade-offs to accelerate our delivery of the highest-quality products while driving our operating metrics. Mark Britto, our chief product officer for the past several years, will retire from PayPal at the end of the year.

I'm very grateful for Mark's leadership, counsel and friendship during a period of tremendous growth for PayPal and for the strong bench of talent he has cultivated. An external search to replace Mark is well underway, and we expect to announce his replacement in the near future. In closing, I'd like to acknowledge again that it has been a volatile time for our sector, for our shareholders, for the market and the global economy at large. But we feel this is a unique opportunity for high-quality market leaders like PayPal with strong business models to increase their market leadership.

We are laser-focused on delivering on our key initiatives. We continue to take share. While others pull back, we are investing to improve our value proposition. We are finally moving beyond the lapping of both the pandemic stimulus payouts and eBay intermediated payments.

And our increasing revenue growth rate in each successive month of Q2 and July reflect this, setting us up to deliver on our second-half expectations. We're driving meaningful productivity and cost improvement in opex and our transaction expenses, and we expect to see these actions result in increased operating margins as we exit the year, setting us up for a strong 2023. And we've made significant and positive changes to our organizational model with several additional talented leaders joining our senior leadership team. I want to thank our PayPal team for their continued dedication and commitment.

I'm grateful for the outstanding support you provide each other and our customers each and every day. And with that, I'll turn the call over to Gabrielle.

Gabs Rabinovitch -- Vice President, Corporate Finance and Investor Relations

Thanks, Dan. I'd like to start by thanking the entire PayPal team for their continued commitment to serve our customers and execute on our priorities. PayPal delivered another solid quarter, meeting or surpassing the second quarter non-GAAP financial targets we shared with you in April. We delivered on our commitment of sequential acceleration in our revenue growth and slowed our nontransaction-related operating expense growth.

Our results are indicative of the strength, diversification and breadth of our two-sided global payments platform. Our team remains focused on what we can control. And more importantly, we're committed to accelerating our core strengths and building PayPal for the future. We are guided by our relentless focus on creating the best possible experiences for our customers and value for our stakeholders.

Over the past two quarters, we have seen even stronger opportunities to advance our leadership position in payments and add to our momentum with our digital wallet, checkout and unbranded processing strategies. Of course, unlike everyone, we're closely monitoring the impact of high inflation on economic growth, consumer demand and sentiment, as well as broader global macroeconomic indicators. The backdrop continues to be complex, and we're taking an appropriately prudent approach to managing our business. PayPal's unique competitive advantages continue to drive us forward.

Today, we believe we are better positioned to deliver sustainable long-term growth than we were before the pandemic. At the same time, we're increasing our rigor in managing our cost structure and prioritizing higher-return strategic initiatives. We are focused on improving our operating margin profile while investing in our key priorities. Over the years, PayPal has experienced serious business and macro challenges and has emerged stronger every time.

As we look ahead, we're confident in our long-term strategy and our growth outlook. We believe we are operating in an environment in which strong and enduring platforms like ours get stronger. That has never been more apparent than it is today. Before discussing our outlook for the remainder of the year, I'd like to highlight our second quarter performance.

As Dan mentioned, revenue increased 10% on an FX-neutral basis, more than 0.5 point ahead of our guidance and 9% at spot to $6.8 billion. At the time we provided guidance, there was an approximately 30-basis-point difference between our spot and FX-neutral growth rates, which essentially doubled during the quarter given dollar strength. We expect FX to continue to be a headwind as we move through the back half of 2022. Transaction revenue grew 8% to $6.3 billion, driven primarily by Braintree and Venmo.

Other value-added services revenue grew 21% to $534 million. This performance resulted from solid growth of our credit products, as well as increased interest income on customer stored balances. In the second quarter, U.S. revenue grew 18% while international revenue declined 1%.

In addition, on a currency-neutral basis, international revenue increased 1%, and excluding eBay, 8%. On both a spot and currency-neutral basis, international revenue growth accelerated 5 points sequentially. Additionally, eBay Marketplaces' revenue declined 60% to $166 million and represented less than 2.5% of our total revenue. Our revenue, excluding eBay, grew 14% at spot.

Transaction take rate was 1.85% and total take rate was 2%, both essentially flat to last year and to Q1 of this year. The blended take rate on eBay volumes declined to 2.13% from 3.22% in Q2 last year. This was offset by an approximately 5-basis-point increase in the take rate on non-eBay volumes, resulting from gains from foreign currency hedges recorded as international transaction revenue, Venmo and lower P2P volumes. Transaction expense came in at 90 basis points as a rate of TPV relative to 81 basis points as a rate last year.

This result was largely driven by the increase in contribution of Braintree, which is predominantly card-funded, to our overall mix of payment volume. To a lesser extent, funding mix also contributed to higher transaction expenses as a result of more normalized debit card usage relative to 2021. Transaction loss as a rate of TPV was 11 basis points versus 9 basis points in Q2 last year. In addition, credit losses were $68 million or 2 basis points of the rate of TPV.

In the second quarter of 2021, we released $156 million of credit reserves, which benefited transaction margin and operating margin performance in the prior period by 250 basis points. In the quarter, loan originations increased and we ended Q2 with $6.2 billion in gross receivables, reflecting sequential growth of 9%. The growth in global Pay Later receivables was the largest driver of originations. The mix of shorter-duration originations from our Pay Later products and strong performance of our loan receivables portfolio resulted in our reserve coverage ratio declining to 7.3% from 8.3% at the end of the first quarter.

Overall, our volume-based expenses grew 30%, which in conjunction with 9% revenue growth resulted in a transaction margin of 48.7%. This was 814 basis points lower than last year and represents a 7% decline in transaction margin dollars. Excluding the benefit from reserve release last year, transaction margin dollars declined 2% or 564 basis points as a rate, which was primarily driven by TPV mix. Starting in the back half of this year, we expect to begin seeing benefits to our transaction expense from leveraging our scale across the network ecosystem.

In addition, we have directed our focus on rationalizing nontransaction-related expense growth. In the second quarter, overall, these expenses grew 6% year over year, relative to growth of 27% in the second quarter of 2021. Nontransaction-related expenses represented 29.6% of revenue, an improvement of approximately 80 basis points from the second quarter of 2021. The growth rates for customer support and operations, sales and marketing and technology and development expenses were meaningfully lower than last year.

Notably, sales and marketing spend declined 7% year over year in the second quarter, following a 68% increase in Q2 last year. On a non-GAAP basis, operating income was $1.3 billion. Our operating margin was 19.1%, which is nearly 1 point better than our outlook going into the quarter. For the second quarter, non-GAAP EPS was $0.93, $0.07 stronger than our expectations.

In the quarter, we faced an approximate $0.11 per share headwind from the release of credit reserves last year. Our outperformance was predominantly driven by lower nontransaction-related operating expenses and a lower effective tax rate. We ended the quarter with cash, cash equivalents and investments of $15.6 billion, which includes approximately $6 billion of cash we estimate is needed to satisfy operational and regulatory requirements. Our cash position is inclusive of $3 billion in proceeds from debt we issued in May.

Approximately half of the proceeds from this offering were used to refinance upcoming maturities coming due in September 2022 and June 2023. Importantly, through this transaction, we were able to extend our weighted average maturity by approximately five years while increasing our average bond coupon by only 70 basis points. During the quarter, we generated $1.3 billion in free cash flow, bringing year-to-date free cash flow to $2.3 billion. In the second quarter, we also completed an additional $750 million in share repurchases, bringing 2022 year-to-date repurchase activity to $2.25 billion, representing approximately 95% of free cash flow generated so far this year.

We have taken a more aggressive approach to our capital return program over the past several quarters. We continue to believe that share repurchase remains an excellent use of capital for our shareholders. And as Dan mentioned, our board recently approved a new $15 billion share repurchase authorization. Combined with the $2.8 billion remaining on our 2018 repurchase authorization, this brings our aggregate outstanding authorization to nearly $18 billion.

Given our desire to return capital to shareholders and the confidence we have in our business, we will continue to be opportunistic with the pace and quantum of our share repurchases. Overall, this year, we plan to return 75% to 80% of free cash flow to shareholders in the form of share repurchases. In addition, as we look to optimize our capital allocation and increase our flexibility, we are renewing our focus on credit externalization opportunities. Our last significant credit externalization event occurred in July 2018 when we closed the sale of our U.S.

consumer revolving credit portfolio to Synchrony. Since that time, the composition of our on-balance sheet credit portfolio has changed meaningfully. While today, credit receivables represent about 7% of overall assets versus 17% at the time of the Synchrony transaction, funding our credit products continues to require an increasing amount of our free cash flow. Our credit products are an important driver of customer lifetime value and engagement.

In addition, we believe they represent best-in-class products in each of the key credit categories in which we compete. That said, to optimize the use of our balance sheet and remain maximally capital efficient, we're assessing opportunities for additional strategic credit externalization. And we'll update you on our progress as we move through the back half of the year. I would now like to discuss our outlook for the remainder of 2022.

When we provided guidance last quarter, we contemplated that there would be a challenging macro environment for the balance of the year. As everyone has seen across the market, macro conditions remain highly dynamic. We guided last quarter to a range of 11% to 13% revenue growth, and given today's environment, we think it's important to be conservative. Accordingly, I would point you to the lower end of that range on a currency-neutral basis.

While the macro remains uncertain, I also want to underscore that we have strong momentum across the business with accelerating revenue growth from April to May to June and now through July, and the team is focused on achieving our targets for the year. We expect third quarter revenue growth to accelerate 2 points to 12% on a currency-neutral basis and that we will exit the year with revenue growth of approximately 14% in the fourth quarter. It is important to note that we had a 150-basis-point headwind in the third quarter related to revenue we recognized from the PPP lending program in the third quarter last year. Excluding this impact, we expect our third quarter revenue growth to reach nearly 14%, which results in relatively consistent growth in both the third and fourth quarters.

The vast majority of the expected acceleration in our top-line performance from the first half of 2022 relates to finally having the tougher eBay compares behind us. In addition, we expect the diversification of our platform and the contribution from new initiatives and our merchant pipeline to allow us to exit the year with our business in a stronger position than how we entered 2022. We are also raising our non-GAAP EPS guidance and now expect to deliver non-GAAP EPS in the range of $3.87 to $3.97. Our cost discipline in conjunction with our efficiency and prioritization initiatives are enabling us to drive this improved earnings performance.

We also expect that this progress will allow us to deliver non-GAAP operating margin expansion in the fourth quarter and into 2023. In addition, we remain on track to generate more than $5 billion in free cash flow this year. In closing, we're pleased with the progress we're making across many fronts. We're advancing our strategic priorities and, at the same time, sustainably improving our cost structure.

The cash flow generating power of our business is a strategic competitive advantage and continues to give us a high degree of flexibility as we allocate capital with discipline. We are focused on creating value for our shareholders and strengthening our position as the world's leading digital payments platform for our customers. And while we are not immune to economic headwinds, we will continue to deepen our focus, invest for the long term and strengthen our competitive advantages. Finally, I'd like to welcome Blake to PayPal.

I'm absolutely thrilled that he'll be leading our finance organization and I look forward to supporting him. With that, I'll turn it back over to Dan.

Dan Schulman -- President and Chief Executive Officer

Thanks, Gabs. So before we start the Q&A section, I'd like to take the opportunity to provide some color on the discussions we've had with Elliott Investment Management. First of all, the discussions have been both constructive and collaborative, and we appreciate the partnership we've built with Jesse Cohn and his team. We are completely aligned in our mutual goal to maximize shareholder value, and we are substantially aligned on the areas of focus for achieving our objectives.

Our discussions are focused on operational improvements, revenue-generating investments and capital allocation, and they are consistent with our short- and long-term objectives and plans. We've been working on a number of initiatives such as improved profitability and return of capital and we appreciate Jesse's collaboration and input on these important topics. And as we discussed, we're pleased to announce the following: approximately $900 million of cost savings in 2022 across operating and transaction expenses, with savings potential of at least $1.3 billion through fiscal year '23; an invigorating capital return program, including a new $15 billion share repurchase authorization, full evaluation of capital return alternatives; and an upcoming investor day in early 2023 to share operational, capital allocation and strategic updates. We continue to engage with Jesse and his team at Elliott, and they have communicated that their investment is a vote of confidence in our strategy, in our management team and our ability to generate long-term value for shareholders.

We have also entered into an information sharing agreement to maintain our collaboration across the previously mentioned initiatives, and we look forward to our continued partnership. That's the extent of our comments on Elliott's position in PayPal. And now, I'd like to turn it over to the operator to hear your questions on other areas of our business. Thanks very much, and operator, let's open it up for questions.

Questions & Answers:

Operator

[Operator instructions] And our first question will come from Tien-Tsin Huang with J.P. Morgan. Please go ahead.

Tien-Tsin Huang -- J.P. Morgan -- Analyst

Hey. Great. Thanks so much. Lots to digest here, and Gabs, congrats on the elevated role of treasurer.

I figure for Dan, just to kick it off, the Q&A, I wanted to hear how you're prioritizing executing the strategy you mentioned with lots going on here, right, with filling some key roles, you've got Elliott. As you just mentioned, you've got cost-cutting plan, capital allocation consideration. So what part of the strategy, as we've heard it, do you think of as nonnegotiable, right, in the short and the long term? That was the key question I had, but also what moves down in priority? I didn't hear about things like in-store and others. So would you mind commenting on that? .

Dan Schulman -- President and Chief Executive Officer

Yeah, it's a great question. So we're executing on the game plan that we started laying out at the beginning of the year. We knew we had a lot to get done. And we knew we had to, one, narrow our focus on growth opportunities in which we had high conviction of their ability to make an impact.

Does it -- make no mistake, we are in the business of strengthening our value proposition, growing going forward and gaining share. That is our No. 1 priority. And we know the three things that we really need to invest in there, and there's no debate around that whatsoever.

It is checkout because that is the bread and butter of our business. We have a lot of advantages there. We continue to gain share, but there are a lot of places where we can make incremental improvements and, in some cases, some pretty radical improvements to improve our value proposition and competitive position. Number two is in our digital wallets.

Both Venmo and PayPal, we are seeing very encouraging green shoots. We've talked about some of those. I'll probably talk about more of it in future questions, I'm sure. But that is the future.

Digital wallets are the future, a combination of both payments and commerce and financial services coming together. And we are seeing some really -- some quite a bit of adoption, quite a bit of churn reduction for those who come in. So we'll continue to invest there. And finally, Braintree.

My hat goes off to that Braintree team. They have done some Herculean tasks this year. We have tremendous momentum in our full stack processing in the marketplace. As I mentioned, there is a flight to quality in the market.

We are clearly seeing that. And that platform, we're just going to continue to invest in, both on the pay-in side and the payout side on things like orchestration and a multi-PSP environment. And so, those are the three areas that we are going to double down on and they're nonnegotiable. We are, by the way, pulling back on other areas like you mentioned because if you're going to narrow your focus by definition, there are places where you're pulling back.

For instance, we were going to focus on invest this year, like stock trading and that kind of thing. We are not going to do that. We have reallocated those headcount into checkout. We've also been able to reduce headcount.

We don't have the same regulatory footprint that we thought we might have. In store, we're really moving into card as opposed to a focus exclusively on QR. That is kind of where the market is right now. It is much more impactful for us and much less expensive as we go into card being off-line tied fully into the app in a fully integrated way.

And so, you've got certain things long-tail international that we're just going to have cross-border come on that. We are not going to go into those domestically because they've got high beta and cost a lot, and it just takes a lot of time and effort to go and do those things. So we are focused on the things we think will make the largest impact. We see the impact of that already.

I'm quite pleased with our ability to consistently take share. We saw that, I think, accelerate in this quarter and do all of that while being efficient and productive. And those are things that we started quite a bit. We are making really good progress and they are beginning to show up in our results.

And I think, as Gab mentioned and I mentioned, by the time we get to the fourth quarter, we'll start to see operating margin expansion.

Tien-Tsin Huang -- J.P. Morgan -- Analyst

Great. I appreciate that.

Operator

Our next question will come from the line of Darrin Peller with Wolfe Research. Please go ahead.

Darrin Peller -- Wolfe Research -- Analyst

Hey, guys. Hey, guys, thank you. look, we had expected some cost saves, and it makes sense just given the growth of expense lines over the last couple of years. But the magnitude you're talking about is definitely more than we anticipated.

So if you can just touch on how we should think about the sources of the expense saves. Maybe, if any, will be reinvested into areas versus pass through to the bottom line, and really what we can expect in terms of investment levels into the wallet and checkout and kind of operating leverage, this would be, too. Thanks, guys.

Dan Schulman -- President and Chief Executive Officer

Yeah, yeah, I'll start and then maybe Gabs will jump in. So first of all, we're a growth business. And for us to continue to improve our value proposition, we need to invest and we need to invest in those areas that I've just mentioned to the last question. It's in checkout and our digital wallets and our Braintree platform.

And we are doing increased investments this year around that. But we're doing that while being quite aggressive and focused on where do we have costs and how can we start to take those out? One is focus, as I mentioned. We are like -- we're not -- we were doing 100 things. We are now doing three or four things extremely well.

There are some things, obviously, but we are really focused. And all those other things are being applied to those key focus areas. Number two, we have a tremendous amount of scale coming out of the pandemic. We are going to do somewhere around $1.4 trillion of TPV this year.

Our transactions are at $5.5 billion in the quarter, up 16%, up 20% ex eBay. And so, the amount of volume we have in the business has and now has been leveraged across all of our suppliers. The more volume, the better your unit costs are. We've renegotiated our contracts across many of our suppliers, and that is giving us both opex savings and transaction unit cost savings in our transaction expenses as well.

And then, of course, you can always drive more and more productivity. We put on quite a number of headcount. As Gabs mentioned a year ago, our opex grew by 27%. We have plenty of heads.

We can be more productive. In fact, our headcount is lower than when we started the year, both in our contingent workforce and our full-time workforce. But we are doing that by reallocating resources, investing in some places, taking away from others. We are driving a better product experience so we have less calls coming into servicing.

Therefore, we need less people. Those are the good ways of achieving productivity. And of course, we're looking at low-cost geos to do incremental hiring in and rationalizing things like our footprint, looking at our consulting spend. And we're cutting all of that back as we focus.

And so, we feel really comfortable with the investments that we're putting in. It's really important that we continue to invest in the business. But at the same time, be able to take out a tremendous amount of cost to be quite efficient.

Gabs Rabinovitch -- Vice President, Corporate Finance and Investor Relations

Yeah. Maybe I would just add, in terms of the $900 million of identified savings this year and the $1.3 billion next year, nearly 50% of that really comes from transaction-related expenses. And as Dan mentioned, really sort of benefiting from the scale we have and the ecosystem. So I wouldn't think about that as cuts to the way we do business, more really benefiting from the scale that we have and the large platform that we have.

In addition, I'd say even with those savings, we would expect transaction expense to grow next year. And that's really just from the strong growth of Braintree that continues to impact our mix. And so, we don't expect year on year for TE to come down. The other point I would mention is some of the savings, and really not an insignificant amount, as Dan mentioned, really do relate to headcount.

And we recalibrated our headcount plans to really be balanced with our growth plans on the year. So some of our expectations around the top line have come in the way. We've thought about growing headcount in the year has really adjusted. And so, that's an important driver of the savings as well.

Dan Schulman -- President and Chief Executive Officer

Yeah, well, I don't think we'd be seeing the incremental revenue growth. I mean, we've gone from 7% in April to north of 14% in July revenue growth. A piece of that has been the eBay lapping, for sure. But a part of it is just taking share of the sales pipeline from our Braintree, implementing that live to site and slow-but-sure incremental improvements in checkout.

That has to happen and needs to be a balance between cost cutting and investment.

Darrin Peller -- Wolfe Research -- Analyst

OK. That's great. Thanks, guys.

Operator

Our next question will come from the line of Lisa Ellis with MoffettNathanson. Please go ahead.

Lisa Ellis -- MoffettNathanson -- Analyst

Terrific. Thank you. A follow-up on Darrin's question related to the expense and margin side of things. Just maybe taking a longer-term view, how should investors think about the margin trajectory of PayPal given that you've got Braintree growing so well, but the implication being it's mixing in as a lower gross margin business? So just looking out kind of beyond this immediate $900 million, $1.3 billion, but sort of more conceptually or structurally over the long term, how do you think about navigating that kind of mix-related gross margin pressure and then operating margin potential for the business? Thank you. 

Gabs Rabinovitch -- Vice President, Corporate Finance and Investor Relations

Yeah, absolutely. Thanks, Lisa. So I think, as a starting point, I mentioned, sure, on the Braintree side, yes, mix is important. And certainly, there is a different profitability sort of dynamic to Braintree.

At the same time, I would mention that that really is limited to the LE side of Braintree. And to the extent that we continue to grow our Braintree franchise in the SMB space, and to the extent we continue to grow it in Europe, really, the profitability characteristics of it are quite attractive and will continue to support the business. But in addition to that, we do have a long track record of profitable growth. And so, as both Dan and I have mentioned, we do expect to begin showing operating margin expansion in the fourth quarter.

If we think about next year, a little early right now to provide full guidance on the year. But to start right now, we're targeting at least 50 basis points of operating margin expansion. And importantly, sort of the initiatives that Dan had mentioned and the efficiencies that we're realizing the work that we're doing will allow us to grow profitably and sustainably improve the margin profile over time.

Lisa Ellis -- MoffettNathanson -- Analyst

Good. Thank you.

Operator

Our next question will come from Jason Kupferberg with Bank of America. Please go ahead.

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

Good afternoon, guys. I wanted to ask a little bit about Venmo. I saw the overall volume there grew 6%. I think, it slowed a bit against an easier comparison.

So just curious how it came in versus your expectations, maybe what we should expect for the second half there. It sounds like the Venmo revenue growth was robust again, so I'm assuming you're still on track for the 50% revenue growth in Venmo for this year. But just curious to get your take on what's happening with volume growth. Thank you.

Dan Schulman -- President and Chief Executive Officer

Yeah, you bet. Jason, thanks for the question. So look, there's a lot to be excited about at Venmo right now. It's closing in on 90 million active accounts.

It's going to do something like $0.25 trillion of TPV this year. And when you have that kind of scale, clearly, things begin to slow down a little bit. As you mentioned, revenue is up 54% in the first half. We had -- we're doing $100 million revenue months now.

And a host of initiatives, I'll touch on in a second. But on the TPV side specifically, it's still tough comps. I mean, we grew 58% TPV in Q2 of last year. I mean, I wouldn't say that's easing comps.

It's still pretty tough comps. So on top of, obviously, you're ending stimulus, you got reopening, macroeconomic conditions, etc. But there are a lot of things that we can do to improve the value proposition around P2P and around increasing TPV there. And the team is working on that, on a complete refresh of the app, which really will focus around like search improvements, syncing up with contacts, persistent send and receive buttons no matter where you are in the app.

So there are things we can do, I think, to help improve the accessibility and the ease of use of P2P in Venmo, but it's still going right now from strength to strength. It's commerce volumes, which really Pay with Venmo goods and services and business profiles, as I mentioned, are up 250% year over year. These guys are working on a debit card reboot, which will be kind of like metal form factor, full app integration, rewards integration, teen accounts, which opens up the addressable market anywhere between 20 million and 30 million TAM that opens up with that. You have charities start to come on to the -- their profiles, which will encourage giving before the holiday season there.

So I'm pretty pleased with what they're doing. We are also looking at things like PayPal, Venmo, P2P interoperability, which I think is a very big opportunity. Networks, the bigger they are, the more valuable they are and the ability to start to link the PayPal and Venmo P2P interoperability, I think, is a big opportunity as well. So a lot to think about, a lot to look forward to, obviously, including Pay with Venmo on Amazon.

So more to come but they're working on a ton of things right now.

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

Thanks, man.

Dan Schulman -- President and Chief Executive Officer

You bet.

Operator

Our next question will come from David Togut with Evercore ISI. Please go ahead.

David Togut -- Evercore ISI -- Analyst

Thanks so much, and congratulations, Gabrielle. Good to see the accelerating 12% growth in transaction per account in Q2, which is actually your highest in at least the last six quarters. So what do you see as the key proof points that this higher growth rate in customer engagement is sustainable? And are you on track to increase ARPA this year enough to support your new 2022 revenue guidance?

Dan Schulman -- President and Chief Executive Officer

Yeah, well, first of all, I think on the revenue guide, as Gab talked about in her remarks, I mean, our guide for Q3 normalized is about 14% if you removed the sale of the PPP onetime thing we did last year. So just this quarter, we're going to -- and then the jump-off into fourth quarter is basically flat to hit the guidance that we put out there. And July came in north of 14%. So I think, we're feeling as good as you can be in an environment that is unpredictable and anything can happen.

But we're feeling really good about the revenue guidance that we gave. In terms of the engagement in TPA, I think you're going to continue to see TPA increase as the year unfolds. And you can hold me to that next quarter. But some of the proof points are, if you look at people who are in the digital wallet and we now have over 50% of our base in our digital wallet, they've got two times higher the ARPA than those not in the digital wallet.

They do 25% more checkout. Churn is now -- our best view of it now is churn is reduced by 33%. We thought that was about 25% last quarter so that's gotten slightly better. And they do two times the transactions per active for those who aren't in the wallet.

And so, one, the more we can enhance and move people to the digital wallet, the more engagement and TPA growth we'll have. The other thing is we actually have a lot room to improve in terms of just usage of PayPal. If you look at the Fed came out with how many financial transactions does a typical consumer do in a year, and it's a little over 800. About 25% of those are online, so about 200 of those are online transactions.

We only capture about 25% of those. And so, there's a huge opportunity as more and more moves online, as we expand the digital wallet, as people see all they can do with that. We just launched our high-yield savings at 1.65% interest rate. That's about 16 times the national average.

We are putting on thousands of people a day on to that. There's a lot we can do as we look forward. And I think, the more we can put on to the digital wallet and the more compelling those services can be, the more you'll see TPA and ARPA grow. And we'll see it as we go through the rest of the year.

David Togut -- Evercore ISI -- Analyst

Understood. Thanks so much. 

Dan Schulman -- President and Chief Executive Officer

Yeah, you bet. Pleasure.

Operator

Our next question will come from the line of Rayna Kumar with UBS. Please go ahead.

Rayna Kumar -- UBS -- Analyst

Good afternoon. Congratulations, Gabrielle. You have a very unique strategy in Buy Now, Pay Later, so I just want to dig into that. If you can discuss the progress of Pay in 4 and Pay in 3 and how it may evolve if we were to enter a global downturn.

And secondly, have you been able to get better button placement as a result of your BNPL strategy?

Dan Schulman -- President and Chief Executive Officer

Thank you. I guess, maybe I'll start. Gabs, you can jump in. Obviously, we do have a unique approach to Buy Now, Pay Later, Rayna, as you mentioned.

We don't charge any merchant fees. We have no late fees to consumers. We make our money not off of the Buy Now, Pay Later but the halo impact, which is about a 21% halo impact when somebody uses Buy Now, Pay Later. And so, we aren't dependent on those revenue streams.

And the profit pool for us in Buy Now, Pay Later is not inherent within Buy Now, Pay Later, but in checkout and in our take rates. That gives us a tremendous advantage. As we look at different credit cycles, we can tighten up quite easily where we need to on that. We also know, 90% of the people that apply for Buy Now, Pay Later.

That is a tremendous advantage for us. We know their history. We know how they've paid. So we have among, if not, the highest approval rates in the Buy Now, Pay Later, and at the same time, among, if not, the lowest loss rates as well.

And so -- and we also -- we've been in this business for 15 years or so in the credit business. We've gone through cycles. We have people who understand this inside and out. And so, I think, we have a huge amount of advantages.

We continue to leverage it. And your last question is, are we seeing incremental share gain when we have Buy Now, Pay Later? Clearly, we now have, with our 200,000 merchants, where we now are up on product pages. That is tremendous share gain for us and placement where, in many cases, it never even gets to the checkout page. It's just done right.

The checkout is done right off the product page. And so, as we continue to grow that and as again, there's a flight to quality in the market as well, and we have such a kind of robust value proposition, we continue to see more and more merchants place us upstream in their checkout.

Gabs Rabinovitch -- Vice President, Corporate Finance and Investor Relations

I'd also just add, we're continuing to see better upstream presentment in part because of how we're continuing to grow the product characteristics. So introducing longer duration, more options with monthly payments gives merchants more ways to allow their consumers to spend. And so, that also helps drive that upstream presentment. It's been a really great product for us.

We continue to see very strong performance, very low loss rates as well.

Dan Schulman -- President and Chief Executive Officer

And you saw that over 100 million times used by 22 million consumers. That shows the value that consumers see in it.

Gabs Rabinovitch -- Vice President, Corporate Finance and Investor Relations

I'd also add, as we think about potentially an environment where we can see some contraction in the economy, the new late fee dynamic to what we do is just exceptionally consumer-friendly. So we don't charge transaction fees for consumers on Pay in 4, Pay in 3, no interest fees, no late fees. And so, overall, it's an incredibly attractive product for our customers.

Rayna Kumar -- UBS -- Analyst

Very helpful. Thank you.

Operator

And we have time for one last question, and it will come from the line of Mike Ng with Goldman Sachs. Please go ahead.

Mike Ng -- Goldman Sachs -- Analyst

Hey, good afternoon. And thank you for squeezing me in the end. It was encouraging to hear about the share gains within branded checkout. I was wondering if you could just explore that a little bit more and talk about where you see e-commerce industry growth right now and how core PayPal is performing relative to that.

And Dan, you teased some potential radical improvements at checkout. I was just wondering if you could talk a little bit about that and initiatives that the core PayPal branded checkout is pursuing to improve or maintain share. Thanks.

Dan Schulman -- President and Chief Executive Officer

Yeah, sure. First of all on e-commerce growth rates. It's tricky and people have different opinions on it. As best we can tell, in the second quarter, e-commerce growth was relatively flat.

If you take out travel out of that, it might have actually been slightly down, probably negative if you remove travel from it. And if you look at our branded checkout, which is sort of ex eBay, P2P and Venmo, we had positive growth and we likely gained a bit of share, if not a little bit, more than a little bit of share on that. We, obviously, want to continue to do better on that. And as we come into this quarter in July, we're beginning to see that turn and branded checkout is actually growing again, which is, obviously, also really helpful as we look at margin dynamics and that kind of thing as well.

For the full year, people were talking about 10% early on. That has kind of dropped into about the 8% for the full year. It's kind of what we're hearing as we look at a number of estimates out there. But BofA is down at 5% for the year.

JPM is at 7% for the year. All of them accelerating in the back half, by the way. But it's still a little hazy, Mike, honestly, to understand what normalized e-commerce will look like. We clearly did not see the bump-up of five years that everybody had seen during the pandemic.

But we are along the traditional historic e-commerce penetration rates and I'd expect that to continue. But we'll see how that normalizes. But we'll continue to expect to grow significantly faster than the rate of e-commerce going forward, both on branded, by the way, and unbranded as well. And just really quickly on the checkout side of this.

I mentioned this on our last call. There are certain ways that we want to modernize the merchant experience. There's kind of the basics of this because checkout and payments are a hard business. They're like the lifeblood of a merchant.

Scale matters, trust matters. Reliability is crucial on that. Conversion rates are crucial. Like, for instance, the average conversion rate for a merchant outside of PayPal is between 50% and 60%.

For PayPal, it's between 80% and 90%. So we've got big advantages but there are also a lot of things we can do better. Latency is one of them. Our goal is to get to three seconds of latency.

We've already cut, this year alone, five seconds out of our latency. That's huge when every second really matters. The other thing that we're really focused on is removing clicks and scrolls. Right now, too often, click on PayPal, especially in a mobile piece and you go into a pop-up window, it takes you out of context and then back into the merchant app.

We are just rolling out a beta on a new mobile SDK and API that offers a consistent user experience across form factors and gives full control to a merchant of their native app. So no bouncing out, eliminating friction, increasing speed. And for consumers who are using it, it's fast, simple, there are no redirects. You can sign up, log in, stay vaulted, change your app, get rewards, use rewards all inside the merchant app, all native.

And for merchants, it's sort of a minimum -- minimal integration. It's lightweight, and it improves, obviously, conversion and card abandonment. We are just putting that out into the market and into a beta, into our small businesses. We are working with larger businesses to do that later this year.

But that -- we've got a lot of legacy checkout out there, making something simple and easy to integrate and lightweight that offers sort of like a no-password account for consumers, one-click checkout across our network that can be extremely powerful. And we are beginning to deliver on that as we speak into the market. It will take time for it to roll out through the base, but I'm really pleased with what the team is putting out there right now.

Mike Ng -- Goldman Sachs -- Analyst

Great. That was very helpful.

Dan Schulman -- President and Chief Executive Officer

OK. I'm glad, Mike. Well, operator, that's gonna be the end of the call. I do want to thank everybody for the great questions, for your time, and we, obviously, look forward to speaking to all of you again soon.

Thanks again. Bye-bye.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Gabs Rabinovitch -- Vice President, Corporate Finance and Investor Relations

Dan Schulman -- President and Chief Executive Officer

Tien-Tsin Huang -- J.P. Morgan -- Analyst

Darrin Peller -- Wolfe Research -- Analyst

Lisa Ellis -- MoffettNathanson -- Analyst

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

David Togut -- Evercore ISI -- Analyst

Rayna Kumar -- UBS -- Analyst

Mike Ng -- Goldman Sachs -- Analyst

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