PayPal (PYPL) Q2 2023 Earnings Call Transcript

PayPal (PYPL 2.90%)
Q2 2023 Earnings Call
Aug 02, 2023, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to PayPal Holdings' earnings conference call for the second-quarter 2023. [Operator instructions] I would now like to introduce your host for today's call, Ms.

Gabrielle Rabinovitch, senior vice president and acting CFO. Please go ahead.

Gabrielle Rabinovitch -- Senior Vice President, Corporate Finance and Investor Relations

Thank you, Sarah. Good afternoon, and thank you for joining us. Welcome to PayPal's earnings conference call for the second quarter of 2023. 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.

We will make forward-looking statements that are based on our current expectations, forecasts, and assumptions and involve risks and uncertainties. These statements include, without limitation, our guidance for the third quarter and full year 2023 are planning assumptions for 2023. Our comments related to anticipated foreign exchange rates, operating margin impact from our sale of loans to KKR, 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 2nd, 2023. 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, Gabe, and thanks, everyone, for joining us on today's call. I'm proud of the PayPal team as we delivered another solid quarter. Revenues came in above the top end of our guidance, and non-GAAP EPS grew 24% to $1.16 in line with the midpoint of our guide. And we are reiterating our guidance for non-GAAP EPS and operating margin expansion for the full year.

Encouragingly, e-commerce growth appears to have stabilized in the mid-single digits, substantially above our estimates when we entered 2023. Our branded checkout volumes grew roughly in line with the industry in Q2 and accelerated to nearly 6.5% growth in the month of June, and in July, our branded checkout volume growth accelerated again to over 8%, our highest monthly growth rate since the end of the pandemic. We expect branded checkout volumes will strengthen throughout the back half of the year, supported by traction from our key strategic initiatives. Of course, we still face a fluid global macroeconomic environment.

However, it is quite encouraging to see core inflation rates continue to come down. As inflation cools, we would expect to see discretionary spending rise, which we believe will support and possibly accelerate the overall growth of e-commerce spending. And as the market leader in digital payments, any uptick in e-commerce will accelerate our growth. Revenues in Q2 grew by 8% on a currency-neutral basis to approximately $7.3 billion.

It's instructive to note that we are lapping certain items that provided an outsized benefit to us in Q2 and Q3 last year. Consequently, those items pressure our revenue growth rate by approximately 1.25% in each of those quarters this year. Excluding these items, our growth in Q2 would have been between 9% and 10%. As we mentioned last quarter, we expect our revenue growth in the second half of the year to be roughly the same as and given recent trends, maybe a bit better than the first half.

We expect Q3 revenues to grow approximately 8% on a currency-neutral basis. I would highlight that July was a very strong start to the quarter with currency-neutral revenue growth of 9% and TPV growth accelerating into the low teens. And for the year, we anticipate our revenue growth to be between 9% and 10% on a currency-neutral basis. We continue to exercise good discipline in managing operating expenses.

For the quarter, non-GAAP nontransaction-related expenses fell 11% year over year. As a result, our non-GAAP operating margin was 21.4%, up approximately 230 basis points from a year ago. We expect to increase our non-GAAP operating margin for the full year by at least 100 basis points. As we look ahead to the rest of 2023 and into 2024, we expect to drive meaningful productivity improvements.

Our initial experiences with AI and continuing advances in our processes, infrastructure and product quality, enable us to see a future where we do things better, faster and cheaper. These overall cost savings come even as we significantly invest against our three strategic priorities. We know exactly what we need to do as we look toward 2024. And as you can see in our results, we are beginning to see the fruits of our labor.

We understand that over the medium to long term, we need to deliver growth in our transaction margin dollars to ensure we sustainably grow our earnings. And we are beginning to see clear signs that our initiatives will yield notable traction against that objective over the next several quarters. As I mentioned, we expect our top line to accelerate to low double-digit growth by Q4. We expect transaction margin dollars to increase while our operating expenses continue to create significant leverage.

That in connection with our share buybacks enables us to target low to mid-teens EPS growth for the remainder of 2023, even as we begin to lap the increases we enjoyed on our interest income. I'd like to now turn to our three strategic priorities in which we are investing our resources and energy, branded checkout, our PSC merchant solutions, and our digital wallets. As I've mentioned in the past, all three of these are critical and interrelated. They are essential for us to increase our share of the e-commerce market as well as accelerate our margin dollar growth.

As we discussed in our June investor meeting, we are meaningfully accelerating new product innovations into the market, scaling our A/B testing and significantly improving our time to market. We are now consistently delivering against our road map on schedule. This is the result of significant investments in our platform infrastructure and tools and enhanced set of measurements and performance indicators, hiring new talent and early successes using AI in our software development process. We continue to ramp our test velocity with more than 300 experiments launched across our product experience in the first half of the year.

Every successful test leads to incremental customer benefits and the cumulative effect of those changes leads to noticeable improvements in our key metrics, including the gains we are seeing in branded checkout growth. For instance, our buy now, pay later traction has meaningfully accelerated with the introduction of preapproved amounts to our consumers. Our work in onboarding and onboarding new experiences has driven new monthly cohorts with higher engagement and lifetime value. In this month, we are expanding the rollout of Passkeys in the U.S.

and Europe, which will greatly simplify the branded checkout log-in experience and drive improved authorization rates that will further extend our lead over our competitors. Our goal is to continually close the gap in our log-in and checkout experiences every quarter and to be equal to or better than any competitor within the next year. We simultaneously aim to drive differentiated wallet experiences across both PayPal and Venmo. We believe that only those companies with unique and scaled data sets, we'll be able to fully utilize the power of AI to drive actionable insights and differentiated value propositions for their customers.

We are already experimenting internally with an AI-driven PayPal assistant. We envision that a version of this will be part of our consumer app, and we plan to introduce it later this year. We continue to see impressive traction in our PSP business with our growth rates nearly 30% on a currency-neutral basis. Many of the largest tech companies in the world are now either using our Braintree capabilities or are in deep strategic negotiations with us to do so.

We are in the process of rolling out high-margin, value-added services, expanding internationally and making noticeable progress with in-person payments. And we continue to receive exceptional interest in our next-generation checkout solution, which will leverage the scale of our network Vault, our deep understanding of our two-sided network and the development of proprietary AI models. I couldn't be more pleased with the initial rollout of PayPal Complete payments. Our PSP merchant solution for channel partners and the SMB market.

We are seeing tremendous interest in the platform with a substantial pipeline of completed sales and a backlog of deals that continues to grow. Importantly, our major channel partners are enthusiastic about its capabilities. We have already implemented PPCP, with leading channel partners like Adobe, LightSpeed, Recurly, Shift4, Shopify, Stacks Payments, UltraCart, Wix, and WooCommerce with more than 25 additional channel partners scheduled to be live by the end of the year. This not only demonstrates the strength of our platform capabilities but will also enable a meaningful number of SMB merchants to access our latest checkout experiences.

There is a remarkable sense of energy, excitement, and enthusiasm among our leadership teams as we see clear and distinct signs of reinvigorated success in the market. We are now able to take advantage of many of the investments we have made over the past years to deliver a best-in-class experience for our customers, leveraging a modern infrastructure and our scale in the age of AI. We have successfully recruited a large number of external talent to complement our internal teams in both AI and machine learning as well as throughout our product, engineering, and technology groups in order to build upon our success and maximize our opportunity. I'd like to end my remarks talking about our CEO succession plan.

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

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

Thank you. And with that, let me turn the call over to Gab.

Gabrielle Rabinovitch -- Senior 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 serving our customers and executing our priorities. PayPal delivered another solid quarter in a dynamic environment. We're reporting revenue at the high end of our guidance range and earnings per share consistent with our expectations.

Our results are tracking with the guidance we gave for the full year and reflect steady progress against our long-term growth aspirations. We continue to invest in our key initiatives, while demonstrating discipline in delivering on our operating expense commitments. In June, we were delighted to share more about our long-term strategic plan and product road maps at our investment community meeting. Importantly, the product launches we discussed are on track, and we continue to gain conviction in our ability to accelerate our branded checkout volumes and drive greater profitability across our PSP services.

During the quarter, we were pleased to announce a multiyear agreement to sell both our existing European Buy Now, Pay Later receivables as well as future originations to KKR. During my remarks, I will discuss the impact of this externalization on our financial results. We have also included additional details in our investor update presentation. Before discussing our outlook for the remainder of the year, I'd like to highlight our second-quarter performance.

As Dan mentioned, revenue increased 8% on a currency-neutral basis and 7% at spot to $7.3 billion. Transaction revenue grew 5% to $6.6 billion, driven primarily by Braintree and PayPal branded checkout. Headwinds to growth in the quarter included the lapping of $75 million in contractual compensation from merchants last year, which was de minimis this year, $72 million less in hedge gains relative to Q2 last year and the impact from migrating and consolidating legacy PayPal payment services. Other value-added services revenue grew 37% to $731 million.

This performance was predominantly due to increased interest income on customer store balances and to a lesser extent, revenue growth from consumer credit products. In the second quarter, U.S. revenue grew 9% and international revenue increased 5%. On a currency-neutral basis, international revenue increased 7%, accelerating sequentially and year over year.

Transaction take rate declined 11 basis points to 1.74%. Approximately two-thirds of this decline was driven by a decline in foreign exchange fees, in part driven by lower currency volatility, a decline in gains from foreign currency hedges, which are recorded as international transaction revenue and the headwind from lapping elevated contractual assessments from merchants last year. While merchant mix continued to pressure our branded checkout take rate, the second quarter was an improvement from Q1. Our total take rate declined 6 basis points to 1.94%, affected by the same factors as transaction take rate.

Transaction expense as a rate of TPV came in at 94 basis points, 4 basis points higher than Q2 last year. This increase was primarily driven by growth in Braintree volumes, partially offset by rate benefits in core PayPal and Venmo. Overall, transaction expense dollars grew 16%. Transaction loss as a rate of TPV was 8 basis points for the quarter, a 3.6 basis point improvement versus last year.

Transaction loss dollars declined 25%. The decrease this year was primarily due to an atypical merchandise solvency last year, which drove a sizable loss in the second quarter with no comparable exposure this year. Our ongoing risk mitigation activities and mix of volumes also contributed to this performance. Credit losses were $112 million or 3 basis points of the rate of TPV.

On a dollar basis, credit losses increased 65%. Provisions in the quarter were driven by a build of $146 million, partially offset by a $33 million reserve release from the reclassification of our European Buy Now, Pay Later portfolio to held for sale from held for investment. The operating income benefit from this release of reserves was entirely offset by the fair value discount on the portfolio classified as held for sale. The increased provisioning resulted from increased expected losses in our PayPal business loans portfolio as well as growth in our U.S.

Paylater portfolio. Like the broader industry, we're seeing a normalization of our credit portfolio to pre -- COVID delinquency levels across our consumer and PayPal working capital portfolio. That said, we have seen some deterioration in our business loans portfolio. This portfolio represents less than 15% of our overall net credit receivables.

And as we discussed last quarter, we have taken remedial actions to address this performance. We've tightened originations and have already seen improvement in new cohorts. We'll be managing the book with similar rigor as we move through the remainder of the year. As a result of designating $1.9 billion in pay later receivables to assets held for sale, we ended Q2 with $5.5 billion in net credit receivables, a 3.5% decline year over year, and a 26% decline sequentially.

The decline in receivables due to held for sale accounting also contributed to an increase in our reserve coverage ratio. This ratio increased to 10% from 7.8% in Q1. In the aggregate, volume-based expenses increased 13% in Q2 relative to an increase of 30% in the second quarter of 2022. Transaction margin dollars grew 1% to $3.3 billion, and transaction margin was 45.9%.

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

On a non-GAAP basis, non transaction-related operating expenses declined 11%, with reductions across each of our principal operating expense categories contributing significant leverage. Strong expense performance resulted in 20% growth in non-GAAP operating income to $1.6 billion. This is the highest growth in operating income that we've delivered in more than two years. Non-GAAP operating margin expanded 228 basis points to 21.4%, which was slightly below the guidance we gave for the quarter.

This is principally attributable to our credit portfolio, where we earned less revenue than expected and increased loss provisions. For the second quarter, non-GAAP EPS increased 24% to $1.16, which was the midpoint of our guidance range. We ended the quarter with cash, cash equivalents, and investments of $14.4 billion. The net cash outflows for originations of loans held for sale reduced cash flows from operations by $1.2 billion in the quarter, resulting in free cash flow for the quarter of negative $350 million.

Later this year, when the sale of the European BNPL back book closes, the proceeds will be recognized in cash flows from operations and offset this decline. So while the timing of accounting treatment will affect the quarterly profile of our free cash flow, there is no change to our outlook for the year, and we continue to expect to generate approximately $5 billion in free cash flow. In the quarter, we completed $1.5 million in share repurchases. For the full year, we now expect to allocate approximately $5 billion to our buyback program.

Our recently announced credit externalization will help optimize our balance sheet and improve our capital efficiency. Given our desire to return capital to shareholders and the confidence we have in our business, we've taken a more aggressive approach to share repurchases. Since the end of 2021, our diluted share count has declined 6%. I would now like to discuss our outlook for the remainder of 2023.

As Dan shared, based on our results from the first half of the year, we're reaffirming our guidance for the year for non-GAAP operating margin expansion and earnings per share. In the aggregate, for the first and second quarters of 2023, we've delivered revenue growth of approximately 9% on a currency-neutral basis. We expect revenue growth in the back half of the year to be in line with this performance, if not slightly ahead, given the momentum we're seeing in the business. In addition, we're on track to meet our expense guidance for the year and are committed to delivering at least 100 basis points of non-GAAP operating margin improvement.

We also continue to expect to deliver non-GAAP earnings per share of approximately $4.95, representing 20% growth from 2022. We're reiterating our full-year guidance while absorbing incremental pressure from our credit portfolio, given strengthening business performance driven by checkout initiatives and our ongoing realization of productivity gains. For the third quarter, we expect revenue to grow approximately 8% on both a spot and currency-neutral basis to approximately $7.4 billion at current spot rates. In addition, we expect non-GAAP earnings per share to be in the range of $1.22 to $1.24, representing growth of approximately 13.5% at the midpoint of the range.

In summary, we're proud of our solid operating results this quarter. PayPal's unique competitive advantages, including our portfolio of differentiated assets and our global scale and ubiquity, continue to drive us forward. We're committed to investing in our core strengths and building PayPal for the future, and we're guided by our relentless focus on creating the best possible experiences for our customers. Our revenue momentum and customer engagement trends position us well to achieve our growth objectives this year and beyond.

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

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question comes from the line of Tien-Tsin Huang. Your line is open.

Tien-Tsin Huang -- JPMorgan Chase and Company -- Analyst

Hey. Thanks a lot. I want to ask a question on e-commerce Health. And Dan, I know you talked about it upfront.

We're just getting a lot of questions on the e-commerce industry in general. So you mentioned inflation easing should help. I'm curious about other trends like shift from services to goods like our economists are talking about, which I think would also be a tailwind for you versus an previously. Is this something you're seeing? Or maybe is that changing how you're thinking about the second half versus a quarter ago? It seems like there's some room for upsetting your outlook here given the exit growth rate and what you talked about for July? Thanks.

Dan Schulman -- President and Chief Executive Officer

Yes. Thanks, Tien-Tsin. It's good to hear your voice, and thanks for the question. I think the story of the quarter is really the sort of the shape of the results inside the quarter and then the strong exit as we went into July and seeing July results.

In our view right now, we are beginning to see an inflection point. We're seeing our results on a slightly different trajectory for sure. And as I mentioned in my remarks, we're clearly seeing a lot of headwinds begin to shift toward tailwinds. E-commerce is definitely one of those.

We see e-commerce growth accelerating. We think it is at least in the mid-single digits right now. That's substantially above what we thought when we entered the year where we thought it might be flat year over year. And I would say I've got a slight bias that, that will continue to accelerate.

You've got a range out there from low of zero to high 10%. We think it's probably right in the middle of that, and we think it is being driven by a shift from travel and services into goods and to fashion, where coming into retail pieces of that. And clearly, as inflation cools, we would expect to see more discretionary spend rebound, and that will help drive e-commerce. So one of the headwinds we faced was e-commerce growth slowing.

Now it's accelerating again, and that clearly will be meaningful for us. We're also seeing improvements, as Gabi mentioned, in cross-border. That's beginning to accelerate again. That's obviously a very meaningful thing for us because, one, our value proposition is perfect for cross-border.

It's consumers buying from merchants that they don't really know, but they trust PayPal and make sure that that payment will be protected for them. It's obviously extremely high-margin business for us, and that seems to be accelerating nicely right now. PPCP, which was a really important introduction for us for numerous reasons, could not have a better reception in the market. We've got tremendous momentum there.

Braintree continues to go from strength to strength, and we're seeing a lot of our value-added services now start to take hold. I can talk about some of that later in the call. Somebody wants to ask about that. And obviously, branded checkout is accelerating.

That 8% is the highest we've seen since the end of the pandemic. And -- we continue to expect to see that strengthen as we go through the year as many of our initiatives are really taking hold in the last quarter. We've got another 200-plus experiments that are going to happen in Q3. And so that's all adding to momentum.

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

Operator

Your next question comes from the line of Darrin Peller with Wolfe Research. Your line is open.

Darrin Peller -- Wolfe Research -- Analyst

Hey. Thanks, guys. Revenue growth was obviously sound, but we still saw transaction profit dollars a little less pronounced versus revenue. I think it actually may have decreased a bit year over year.

And so Gabriel, I know you talked about some one-time grow-overs and hedging differences. And I'm sure the mix between branded and branded continues to have an impact given the growth of Braintree. But if you could just help us understand the moving parts in the quarter and the trends in the second half as far as gross profit or transaction profit growth goes, that would be great.

Gabrielle Rabinovitch -- Senior Vice President, Corporate Finance and Investor Relations

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

In my prepared remarks, I called out several items that created headwinds to growth in the quarter due to lapping. In addition, we actually had some benefits that we saw in the quarter as well from the release of reserves from held for sale reclassification as well as from lapping that large merchant exposure last year. And so when we adjust for all these items, both the benefits and the drag on a more normalized basis, we actually see transaction margin dollars in the quarter growing several points faster than the reported 1%. And what we're really encouraged by is the strengthening profile of the business.

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

Darrin Peller -- Wolfe Research -- Analyst

That's really helpful. So it sounds like some of these initiatives are third, fourth-quarter events, but they could move the needle starting them.

Gabrielle Rabinovitch -- Senior Vice President, Corporate Finance and Investor Relations

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

Darrin Peller -- Wolfe Research -- Analyst

OK. Very good. Thanks, guys.

Operator

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

James Faucette -- Morgan Stanley -- Analyst

Hey. Thanks. Thanks a lot. I wanted to follow up on Darrin's question.

I know that unbranded seems to be a drag or dilutive to margins right now overall, which is a little bit surprising given just kind of how margin structure tends to be throughout the industry. I know you've talked a little bit in the past about adding incremental services to unbranded that could improve that structural margin component in on branded. Can you talk a little bit about what that may look like, timing and if any of those initiatives are will play a role in improving the transaction margin that you're looking at for the latter part of this year? Thanks.

Gabrielle Rabinovitch -- Senior Vice President, Corporate Finance and Investor Relations

Yes. I'll take a crack at that, James. Thanks for the question. Our PSP business does continue to go from strength to strength.

-- as we talked about our overall TPV was nearly 30% in the quarter. And that's despite, as Gabriel mentioned, deprecating some of our older PSP flows, things coming off of our PayPal Pro. We actually migrated about $5 billion of TPV from our legacy stacks onto PPCP in this past quarter. And so it's a bit of a drag in the quarter, but we're going to be done with that by the end of the year.

And we continue to win marquee accounts in the business, whether that be booking.com, Meta, Allstate Insurance, these are big accounts that we are winning because winning PSP is a strategic imperative for us. It allows us to have our latest checkout experiences with the largest, most important merchants in the world across PayPal, Venmo and by now pay later. We captured 100% of the data flows, which really is feeding our AI engines. It's fueling what will be our next-generation checkout.

And most importantly, it's fueling kind of our ability to have best-in-class authorities in the industry and the lowest loss rates in the industry. In terms of the higher-margin services that we're going to be putting out there, -- we are seeing a lot of traction on that right now. For instance, we are moving into in-store. That's always been an area of opportunity for us.

We are now fully implemented with 20 marquee merchants in over 1,000 in-store locations, over 2,500 POS systems will continue to do quite well there and push significantly in that. We're making good progress in selling things like payouts, risk-as-a-service, disputes, automation. We're seeing our largest customers begin to adopt that right now, whether it be SHEIN or Meta or Tiktok, really, these are some of the bigger clients that we have adopting our value-added services -- and I'll just give you one example. We just started doing orchestration in six additional LatAm countries with much higher margins and where we're doing that orchestration for our largest customers, we're seeing like a 190 basis point off rate improvement.

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

So we're seeing a tremendous amount of scaling on that. We've also enabled here in the U.S. 1.2 million SMB merchants to basically do a one-click migration into PPCP, -- we've already done all the risk assessment for them. They're on the right platforms for us to be able to seamlessly transition them onto that platform.

So I think we're going to see a large amount of volume moving into PPP. That's obviously higher margin, high value-added services on branching will also help. And those will develop over time. Clearly, every quarter, they will add and some cumulative total will start to feel as we kind of exit the year and certainly as we go into 2024 with that.

I hope that helped.

James Faucette -- Morgan Stanley -- Analyst

Thanks.

Operator

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

Ramsey El-Assal -- Barclays -- Analyst

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

Gabrielle Rabinovitch -- Senior Vice President, Corporate Finance and Investor Relations

Absolutely. So for the quarter, we expanded our operating margin by about 228 basis points to 21.4%. This was a slight miss to our guidance of approximately 22%, and it was predominantly driven by increased pressure from PayPal business loans. There's no other items that really contributed to that miss.

Overall, PayPal business loans was about a 90 basis point drag to transaction margin and to operating margin, and this is approximately two times what we expected at the beginning of the quarter. So it really was a real impact -- as it relates to our broader credit business, we're in a really good position. Like the rest of the industry, we're seeing some reversion back to pre-covid levels of performance. But across our diversified portfolio of consumer and merchant credit, we're seeing relatively stable delinquency and charge-off trends The largest growth area for us continues to be our Buy Now, Pay Later solutions, where our performance continues to be very strong.

Of course, going forward, given our partnership with KKR, the majority of the originations are going to be funded off-balance sheet for us, and we'll be able to support the sustained growth of that business. On the PayPal business loan side, this is really the part of our portfolio where we have seen deterioration. This portfolio represents less than 15% of our overall net receivables. We've historically seen consistently strong performance in this book.

And last year, we widened the credit box and the performance has not been within our expected risk appetite. We've taken steps to improve performance. We significantly tightened originations. Today, the book is down about 30% in total receivables, and we expect this pressure to continue through the back half of the year, but then really to abate as we move into next year.

That said, the overall strength of our business and the momentum we're seeing is allowing us to maintain our operating margin and EPS guidance for the year while we're absorbing this credit pressure.

Ramsey El-Assal -- Barclays -- Analyst

Thanks so much. Very helpful. Appreciate it.

Operator

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

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

Thanks, guys. I wanted to come back to branded TPV growth. So you had 6.5% in the month of June. You were over 8% in July, you're expecting further acceleration during the balance of the year.

So can you just talk more specifically about the drivers of and the visibility on that ongoing improvement? Like how much of it is better macro? How much is traction with PayPal's own branded checkout initiatives and which among those branded checkout initiatives is moving the needle most materially here in 2023?

Dan Schulman -- President and Chief Executive Officer

I'll take a crack at that, Jason. Thanks for the question. It's an important one we are really pleased, obviously, to see branded checkout accelerate like it is. And we have good confidence that the initiatives that we're putting into place are going to continue to drive that growth.

As I think about what is driving that growth. It's hard to delineate exactly what is happening because of macro, in terms of e-commerce, improving in general, as I mentioned, to Tianjin's first question around e-commerce and what is due to our initiatives, but we are clearly putting a lot of time, effort and resource into improving the checkout experience. And my adds off to that entire checkout team for all that they've done here. And I say, look, first of all, as e-commerce is growing, we're going to grow with it because we are clearly one of the market leaders, if not the market leader in digital payments around that.

We do have a scale advantage over anybody in terms of 30 million-plus merchants that we have out there, 80% of the top 1,500 Internet retailers. We have a performance advantage in checkout up to 600 basis points better in auto rates than the industry average. And we have a trust advantage. When small businesses put PayPal on their site, they see their online sales go up by almost 44%.

So those are things that we are building upon. But as we mentioned in our Investor Day on June 8th, we've -- the amount of acceleration in the amount of innovation we're putting into the market has improved dramatically. -- we did 100 A/B tests in the first quarter. We did 200 A/B tests and incremental 200 in the second quarter.

We're going to do another $200 million coming here in the third quarter. And in general, about 30% or so of those AB tests that we run actually create positive benefit coming out of them. What that means is we're going to have like 150 or so improvements in checkout in our digital wallets running through our metrics as we go through. And some of those are 1 or 2 basis points difference.

Some of those can increase DPA by 10 or 15 basis points. And when you put all of those together, it's extraordinarily powerful, and we are definitely seeing that in our results. We also are beginning to see a lot of our merchants move to our latest integrations. We know that when we're native in app on the mobile that we hold or gain share.

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

We are approving availability. Latency has now improved by 45% year over year. Every couple of milliseconds increases conversion rates on that. And passwordless is really important for us.

And the rollout of Passkeys, some other authentication methodologies that we're using now ex the EU, which has SCA strong customer authentication, we're at about 70% of our checkouts that are passwordless. That's going to continue to go up as we push tasks, and we're now taking Paskes into the EU, which will be very beneficial because you can actually take out the friction of SCA in those conversions as well. And so we're going to push that really hard. And then you see all the other big initiatives that we're doing, the pre-introduction preapproved amount for buying -- by the way, in the U.S., we've rolled that out to 60 million of our customers.

We are seeing 25% to 30% increase in first-time users of Buy Now, Pay Later and those are using it 5% to 10% more in terms of the overall TPV than those that didn't have the preapproved amounts. And we're going to roll out another $50 million preapproved into the EU beginning of this quarter. We're taking our rewards up, our rewards, and cash back. We saw a 20% increase in the number of people using it from Q1 to Q2.

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

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

Thanks for all the thoughts.

Operator

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

David Togut -- Evercore ISI -- Analyst

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

Dan Schulman -- President and Chief Executive Officer

Yeah. Thanks, David. I'll start and then probably Jens will jump in on this. Look, we're going to continue to do surgical discipline in our cost structure.

It was down 11% and in Q2 for the full year. We still expect that to decline consistent with what we talked about by 10%. And therefore, when we think about our operating margin expansion coming up by at least 100 basis points and some of that incremental pressure that we're absorbing on the credit side that as Gabi mentioned, we'll kind of move through our numbers by the end of the year. You're obviously seeing growing margin expansion driven by some of the top-line enhancements we're doing not just the cost discipline that we've demonstrated.

I would just say that this is not just about efficiencies, but this is about doing things faster and accelerating the velocity of our innovation. It's not about trade-offs. It's not about trade-offs. It's about lower cost, but higher performance.

And you're seeing that because I look at our MBS being at seven-year highs. Look at the amount of innovation that we're now pumping through the system right now. We're getting more done more efficiently. There's no question that AI is going to impact every single company and every function just as it will inside of PayPal.

And we've been experimenting with a couple of hundred of our developers using tools from both Google, Microsoft as well as Amazon. And we are seeing 20% to 40% increases in engineering productivity. Just imagine that in terms of how much more product we can get into the market and how efficiently we can do that. And I think we've always known and anticipated that AI will drive productivity improvements really for foreseeable future.

But I think the exciting more unexpected result is that we think it's going to transform our value proposition as well. things like enabling us to look into all of our transactions, look at early fraud metrics to be able to feed that back to customers with early fraud alerts that assured them that we are protecting them, enabling them to add more and more financial instruments to us as well that we can protect this PayPal assistant that's going to -- that's really an AI chatbot. We've been using it internally inside our consumer app. It's pretty amazing what it can do.

Obviously, our advanced checkout, things like customized rewards. So AI is going to be a thing that not only drives productivity improvements for us, but really importantly, value proposition improvements for us. And so we're surgical on our cost thing. We've been very disciplined in it.

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

Gabrielle Rabinovitch -- Senior Vice President, Corporate Finance and Investor Relations

Yeah. As Dan said, we're on track for a 10% decline in our other opex for the year. The first half is down kind of low double digits, call it, 11.5%, 12%. In the back half of the year, of course, we begin to lap some of the cost savings that we began to take out last year.

And so the decline in other opex declines a bit, and so we'll be in sort of the high single digits then, building on what Dan said, just around delivering better experiences to our customers and the productivity gains, it's also coming from the platform migration and consolidation work that we're doing. And that too allows us to scale more efficiently over time. And so you should expect to see us continue to look for ways to deliver better experiences to our customers and scale them efficiently on our platform.

Operator

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

Bryan Keane -- Deutsche Bank -- Analyst

Question here. I wanted to ask about the consumer value prop and a big piece of that is going to be the wallet and the enhancements of the wallet, including offers. Can you just talk about some of the initiatives you're doing there that's going to improve the digital wallet going forward?

Dan Schulman -- President and Chief Executive Officer

Yeah. Sure. Thanks for the question. I mean, obviously, increasing the number of consumers who use our digital wallet, it's one of our most important initiatives because we feel it's going to drive both engagement, ARPA, monthly active users.

The app user today, the typical app user has a 35% greater ARPU, 60% greater TPV, and 25% less churn. And so the more we can put on that, the better. And about 55% of our base today uses the app, just to give you an idea of that. And the app, to your point, is designed to enable the full shopping experience, from discovery, which is like the deals and offers that you just mentioned; to flexible payments; the widest array of funding choices, things like buy now, pay later, split tender that enables you to utilize two different funding sources to buy your purchase; to a post purchase, which includes package tracking and returns management, refunds directly into your PayPal wallet.

I won't go in again to all the experimentation we're doing, but you can see kind of the tremendous amount of velocity there. The new features that are coming into the wallet include this early fraud alert. We've scaled that now to 10%. That's really designed to protect our customers.

We can see fraudulent signals well before others. We can let a consumer know that their card has been compromised. We can simultaneous let the FI know so that card can be reissued instantaneously. And so we're seeing early but really positive response to consumers from this, and it causes them, these alerts that come, it causes them to open the app.

The more they open the app, the more they do with us. I think I mentioned on the rewards cash back, that will be something that we'll be putting some resource into because we're seeing a tremendous interest in it. These users are up 20% quarter over quarter. And the TPA is gigantic improvement, as I mentioned, about a 32% improvement on that.

Package tracking, we're now 100% ramped across iOS and Android. It scrapes basically your Gmail account to look for any of your e-commerce orders. They don't even have to be through PayPal. We consolidate them all into one place into our PayPal app.

We're seeing a 20% app engagement uplift for those who sign up for that, a 10% improvement in TPA. Things like savings, that's now at a 4.3% interest rate. When somebody does that, their ARPA goes up $26. And their log-in to the app goes up 16 times those who don't have a savings account with us.

I mentioned buy now, pay later preapproval, that's 50 million more to come this quarter in the EU. And we'll start things like our advanced AI checkout with our first clients later this year and our PayPal Assistant using AI technology as well. Those are just some of the things to come. There's a lot of innovation.

And as I mentioned, my hats off to the team because I think they're just doing a great job hitting their schedule, doing constant experimentation, and really making our experiences much improved and moving toward best-in-class. So thanks, everyone, for your great questions. I really appreciate it. I want to thank everybody for your time, and we look forward to speaking to all of you later.

So take care. Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Gabrielle Rabinovitch -- Senior Vice President, Corporate Finance and Investor Relations

Dan Schulman -- President and Chief Executive Officer

Tien-Tsin Huang -- JPMorgan Chase and Company -- Analyst

Darrin Peller -- Wolfe Research -- Analyst

James Faucette -- Morgan Stanley -- Analyst

Ramsey El-Assal -- Barclays -- Analyst

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

David Togut -- Evercore ISI -- Analyst

Bryan Keane -- Deutsche Bank -- Analyst

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