PayPal Holdings, Inc. (PYPL) Q4 2023 Earnings Call Transcript

PayPal Holdings, Inc. (NASDAQ:PYPL) Q4 2023 Earnings Conference Call February 7, 2024 5:00 PM ET

Company Participants

Ryan Wallace – Senior Director, IR

James Chriss – President, CEO & Director

Jamie Miller – EVP & CFO

Conference Call Participants

Tien-Tsin Huang – JPMorgan Chase & Co.

Jason Kupferberg – Bank of America Merrill Lynch

Darrin Peller – Wolfe Research

James Faucette – Morgan Stanley

Sanjay Sakhrani – KBW

Ramsey El-Assal – Barclays Bank

Michael Ng – Goldman Sachs Group

David Togut – Evercore ISI

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 Fourth Quarter 2023. [Operator Instructions].

I would now like to introduce your host for today’s call, Ryan Wallace, Head of Investor Relations. Please go ahead.

Ryan Wallace

Good afternoon, and thank you for joining PayPal’s Fourth Quarter 2023 Earnings Conference Call. Joining me today is Alex Chriss, our President and CEO; and Jamie Miller, CFO.

We’re providing a slide presentation to accompany our commentary. This conference call is also being webcast. 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.

Our remarks today will include forward-looking statements that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. 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.

All information in this presentation is as of today’s date, we expressly disclaim any obligation to update this information. And with that, let me turn the call over to Alex.

James Chriss

Thank you, Ryan, and thank you to everyone for joining us this afternoon. It’s been a productive first 4 months. I’m pleased with what we’ve been able to accomplish in such a short period of time while delivering the solid financial results we will discuss today. More importantly, I’m excited about the foundation we’re setting and the velocity at which we’re executing as we enter 2024. Today, I’d like to walk you through the changes we’ve made to the structure of our company, including several key additions to our leadership team, give a clear road map for how we will be executing going forward and share our strategic priorities for 2024. Jamie will take you through the fourth quarter and full year results in greater detail, but the headline is that we delivered a solid quarter during the most important shopping season for our customers.

In Q4, we delivered 9% revenue growth on $410 billion in total payment volume. Transaction margin dollar performance was better than expected in the fourth quarter, and we continued strong expense discipline, reducing non-transaction-related expenses by 9% year-over-year.

Taken together with $600 million in share repurchases in the quarter, our non-GAAP earnings per share increased 19% year-over-year. While these are solid results, we know there is still much room for improvement, and we’re committed to making the necessary changes to our business and how we invest and operate to get it right. One of the key changes I talked about in our last earnings call was ensuring we have an outstanding leadership team in place. It’s important to me that we have a leadership team with a broad diversity of experience, deep operational rigor and leaders with track records of success.

I’m thrilled with the talent that we’ve assembled in the last few months. With Jamie as our new CFO; Isabel Cruz, leading people in places; Michelle Gill, leading Small Business & Financial Services; Suzan Kereere, leading Global Markets; Diego Scotti, leading Consumer and Global Marketing and Communications, combined with talented leaders who have risen within PayPal, we have a world-class leadership team in place to help the organization reach its full potential.

Each of these leaders chose to join PayPal because they see the tremendous opportunity we have in front of us to reshape commerce and are already driving a renewed energy within the company. Second, we’ve organized our teams around the customers we serve, consumers, small businesses and enterprises. This creates clear lines of accountability and will enable teams to focus on delivering the right solutions that address our customers’ greatest needs. Regardless of the customer we’re serving, we want to make the PayPal offering so user-friendly, so rewarding and so integrated into a customer’s life that PayPal is the obvious choice. Our new structure enables that.

Third, last week, we announced that we will reduce our global workforce by approximately 9% through both direct reductions and the elimination of open roles over the course of the year. As I mentioned in our last earnings call, our size has been slowing us down. While this was not an easy decision to make, this change is necessary to execute with the focus and speed required to drive our next chapter of growth and allow us to invest in our future. With these changes, we continue to reprioritize and invest in the innovation and delivery of products and solutions that offer the greatest impact for our customers.

The team has been very focused on building out our strategy and driving focused execution for 2024. These are the most important priorities we’re focused on this year, accelerating growth in our branded checkout business, improving overall profitability, including that of our high-growth PSP services, unlocking the power of data to create more value for our customers while tapping into new sources of revenue and margin and operating more efficiently.

Our first look, customer announcement 2 weeks ago was an initial demonstration of the importance of delivering compelling value propositions to consumers and merchants. As promised, we’re doing a lot of things to drive change internally and externally.

However, nothing happens overnight. It will take time for some of our initiatives to scale and move the needle, but the initial customer reaction and merchant demand for our new innovations has been encouraging. 2024 is going to be a transition year, focused on execution to position the business for long-term success. Our clear goal is to reshape the company to accelerate profitable growth and margin expansion in the years ahead.

Prioritization will be key allowing us to move more quickly and with better results. Later in the call, Jamie will take you through our full year guidance. We have made strategic decisions to reinvest cost savings back into our most important initiatives. It is critical that we remain on offense and position ourselves to not only innovate but capture our share of the growth in global commerce. We want to be clear-eyed in terms of the potential near-term benefits from our initiatives, which is why our 2024 guidance includes minimal contribution from the innovations we recently announced. We want to see execution and clear results prior to embedding these initiatives into our financial outlook.

As a company, we will build back a track record of delivering on our commitments. In November, I committed to being transparent with you all on how we will run the business. I want to spend a few minutes to share our operating principles and how we expect these will drive value creation over time. Our 5 operating principles are: number one, start with the customer. I believe in working customer back. We will start by defining our customers and their most critical needs. Then we will use that knowledge to inform everything we do, including investments and innovation.

Number two, focus on profitable growth. We will prioritize high-quality, profitable growth and driving improved transaction margin dollars through more rigor and discipline.

Number three, drive operating leverage over time. We will combine our assets and data to develop more personalized experiences for our customers and drive efficiencies across the business to leverage our cost base.

Number four, set measurable goals and communicate consistently. We say what we mean and mean what we say, we will be transparent and accountable for our performance; and number five, maintain a strong balance sheet. We will be diligent in managing our resources and returning excess cash to our shareholders. These 5 principles will guide how we make decisions and will ultimately keep us accountable to deliver what we say we will do.

Let me now take you through what this means for how we serve our customers and what we’re focused on in 2024. For enterprises, we’re focused on accelerating growth in branded checkout and driving the profitable growth of our PSP services this year. Branded checkout is a critical part of PayPal’s value proposition. We need to ensure we have our best checkout experience available to every consumer on every merchant every time. This will be a multiyear effort.

To start, we’ve redesigned our branded checkout experience, creating more simplicity and consistency with the goal of optimizing presentment, increasing speed and minimizing friction across all major checkout flows. When combined with our efforts in password-less authentication, these new flows can result in up to an additional 50% drop in latency, allowing a shopper to check out twice as fast. Improvements like this are aimed at driving a higher selection rate of PayPal and better conversion for our merchants.

A challenge in the past has been bringing existing merchants on to our latest integrations and experiences. This is one of the reasons why our new guest checkout experience Fastlane by PayPal is so exciting. It’s truly differentiated and will provide a compelling reason for merchants to operate. With it, we can recognize up to 70% of guests visiting a merchant, reduced checkout time by up to 40% and grow the top of our branded checkout funnel. BigCommerce, one of our long-time partners has already implemented Fastlane on their platform, and the conversion of their merchants using this new solution is as high as 79%. Combining solutions like Fastlane with a full suite of PSP offerings and more targeted, personalized commerce experiences creates a powerful end-to-end suite of capabilities that drive higher sales for merchants and gives them more reason to choose PayPal.

We’re focused on driving profitable growth, including within our PSP services like Braintree. The team continues to earn market share and merchant confidence through product and performance enhancements, delivering auth rate improvements of up to 240 basis points for enterprise customers in the U.S. We’re continuing to build out and seamlessly integrate additional value-added services in areas like orchestration, routing optimization, payouts and risk as a service in addition to serving as a seamless integration point for our latest branded checkout experiences, including PayPal, Venmo and Buy Now, Pay Later. We will be able to compete in the market with a best-in-class offering and price to value. In addition, we’re putting greater discipline into our go-to-market and renewal processes as we focus on profitable growth. These areas take time to scale, but we’re laser-focused on them and expect to make steady progress this year.

For small businesses, we’re on a journey to move from a variety of standalone products to a modern platform with a comprehensive suite of solutions. What this means in 2024 is that we’re focused on accelerating the adoption of PayPal Complete Payments, or PPCP, through a reinvigorated go-to-market approach for partners and developers. This full stack solution enables us to distribute our best branded checkout flow to SMBs while also competing for the approximately $750 billion addressable market of processing volumes. We’ve had limited penetration of SMB full stack processing to date due to the lack of a strong product, but that is now changing.

November and December were record-setting months for new SMB adoption of PPCP. We’re seeing lower churn rates for merchants on PPCP year-over-year, but we’ve also seen increases in transaction volume for merchants migrating to full stack processing from our legacy products. As the year progresses, we intend to drive additional adoption through partner channels, targeted marketing and developer-friendly capabilities like low- and no-code integration paths available through our brand new developer portal.

Over time, we want to better serve other important SMB needs, offering more ways to help them connect to new customers. It’s also worth noting that all the checkout improvements I just discussed as part of our enterprise strategy can also benefit the tens of millions of SMBs that use PayPal. For consumers, we’re focused on differentiating our value proposition, deepening existing relationships and giving shoppers more reasons to choose PayPal. PayPal already has strong consumer awareness and trust, but that is not enough to compete in today’s world. Part of a person’s decision to choose PayPal comes down to presentment, ease of use and speed, areas where we still have room to improve. We also want to give consumers more reasons to choose PayPal by delivering personal lines and rewarding shopping experiences that also drive higher conversion for merchants.

This year, we’re launching and evolving a new PayPal app to create . We will also leverage our merchant relationships and the power of AI to make the entire shopping experience personalized for consumers while giving them control over their data. In addition, we will drive increased understanding and awareness of Why PayPal via sustained marketing efforts. Our goal is to drive quality customer growth over time as well as deeper relationships that include more frequent use and a greater range of product adoption.

The new checkout and app experiences we are rolling out this year will also create an engagement loop that will drive higher awareness of the various products we offer and drive higher adoption of our portfolio over time. Let me give you 2 examples of where we have significant opportunity to drive increased adoption. In the U.S., we have over 27 million active accounts using PayPal Rewards. In the fourth quarter, rewards accounts had higher engagement and average revenue per account that was almost double that of non-rewards accounts. The average revenue per account of someone who adopts the PayPal Cashback Mastercard is about 5x higher than the average checkout-only account.

Today, only about 2% of active accounts have that card in their wallet. Increasing adoption of these products will not only drive a richer experience for our customers but improvement in customer engagement and lifetime value for us. Redesigning our app and creating improved frictionless onboarding paths are tangible ways that we plan to drive higher penetration of these types of products.

We’re also bringing more functionality and better experiences to Venmo this year, like the ability to connect consumers with cash back offers from small businesses in their local communities. In addition to this innovation, we’re focused on driving adoption of the Venmo debit card. Venmo debit card holders are among our most engaged accounts and drive 6x the incremental revenue than that of a P2P only customer, about 6% of our active Venmo customers have a Venmo debit card today.

So there is a significant opportunity there for us to focus on. Finally, this year, we will demonstrate meaningful progress towards operating more efficiently. We’ve already consolidated many disparate technology services into common platforms. So we have more work to unleash the power of our data in service of our customers. We’re simplifying and automating manual processes and investing in tools and services needed to drive productivity and innovation velocity. This will reduce cost and complexity, improve the developer experience and give more reasons for customers to choose PayPal.

For example, we’re converging to a single merchant reporting system, so that our merchants will get consistent and accurate reports, which will make a huge difference in how they run their business. Another outcome of consolidating platforms is that we will now see one view of the customer, which allows us to more effectively cross-sell the various products we offer. We will be moving at lightning speed and with the weight of the company behind each of these initiatives to deliver the best experiences possible for our customers this year.

To wrap up, I am pleased with our fourth quarter results and the execution that the team delivered throughout the quarter amid an enormous amount of change. I’m excited about the year ahead and all the innovation we have in store for our customers. With that, I’ll hand the call over to Jamie to take you through our results for the fourth quarter and full year.

Jamie Miller

Thanks, Alex. Good afternoon. First, let me say that I’m very excited to have joined PayPal. Our new leadership team is laser-focused on our customers, and I am incredibly energized to see our team come together to deliver PayPal’s full potential. Before I discuss our financial results, you’ll notice several things different in our materials today. First, we’ve redesigned our press release in a more standardized tabular format designed to allow ease of use and better consumption of information. We have also included additional supplemental metrics in our investor presentation intended to provide greater transparency into our business. We will continue to evaluate these and other changes over time.

I’ll start with a summary of our financial performance. In the fourth quarter, we reported 9% revenue growth on a spot and currency-neutral basis. For the full year, revenue grew 8% at spot and 9% on a currency-neutral basis. Transaction margin dollars were flat year-over-year in the fourth quarter and declined 1% for the full year. Non-GAAP earnings per share were $1.48 in the quarter, representing 19% year-over-year growth. Higher earnings per share in the quarter were driven by ongoing expense discipline and better-than-expected transaction margin dollars, which benefited from branded checkout, Braintree and interest on customer balances.

We ended the full year with $5.10 of non-GAAP earnings per share, up 24%. Our full year results benefited from lower operating expenses, the higher interest rate environment and the impact of share buybacks. Now I’ll walk you through some key operating metrics that support these results. We ended the year with 426 million active accounts and 224 million monthly active accounts. Throughout last year, we indicated that we expected ongoing churn of unengaged accounts in less developed markets, predominantly in Latin America and the Asia Pacific region.

This was the primary driver of our year-over-year reduction in total active accounts. We had modest growth in monthly active accounts, up 1% for both the quarter and the full year, and our active base of engaged counts remain stable. More than 50% of our total active accounts were monthly actives over the course of 2023. Transactions per active account, which is a trailing 12-month number, was 58.7 in the fourth quarter, up 14%. If we exclude PSP processing, which is primarily Braintree from that figure, transactions per active account grew 7%. Part of this growth rate is driven by the churn of unengaged accounts that I just mentioned, but we were also encouraged by the higher activity levels we’re seeing among our core base of accounts.

Page 14 in our investor presentation includes additional information on our historical trends in monthly active accounts and transactions per active account, excluding PSP processing. On volume growth in the fourth quarter, we saw total payment volume, or TPV, of $409.8 billion, representing 15% growth at spot and 13% growth on a currency-neutral basis.

This growth was driven primarily by Braintree as well as branded checkout and Venmo. U.S. TPV grew 11%, International TPV grew 17% on a currency-neutral basis, primarily driven by strength in Europe and improvement in Asia. For the full year, TPV was $1.5 trillion, increasing 13% at spot and 12% on a currency-neutral basis.

PayPal’s fourth quarter global branded checkout volumes grew by approximately 5% on a currency-neutral basis, bringing full year branded checkout volume growth to 6%. We have seen a solid start to the year with consistent global branded checkout growth through January. PSP processing volumes grew 29% in the quarter, driven by ongoing growth in Braintree. The team continues to make product and performance enhancements for merchants. We are also putting greater discipline into our go-to-market and renewal processes as we focus on overall profitable growth.

With respect to revenue, as I noted earlier, revenue in the fourth quarter increased 9% on a spot and currency-neutral basis to $8 billion. Transaction revenue grew 9% on a spot basis to $7.3 billion, driven by Braintree and branded checkout. In the fourth quarter, U.S. revenue grew 8%. International revenue increased 10% at spot and 12% on a currency-neutral basis, accelerating from the third quarter.

Similar to TPV, we saw ongoing strength in Europe and improvements in Asia. For the full year, U.S. revenue grew 9% and international revenue increased 7% at spot and 9% on a currency-neutral basis. Other value-added services revenue in the quarter grew 9% on a spot basis to $743 million. For the full year, other value-added services revenue grew 26% or by approximately $600 million. For both the quarter and the full year, this growth was driven almost entirely by increased interest income on customer stored balances.

Transaction take rate declined 10 basis points to 1.78% in the fourth quarter. Approximately 7 bps of this decline was driven by 2 factors: lower gains from foreign currency hedges, which are recorded as international transaction revenue and flat foreign exchange fees. In addition, mix shift with higher volumes from large merchants continued to have a slight impact on our branded checkout take rate. Transaction take rate for the full year was 1.76%, also down 10 basis points year-over-year. Transaction margin dollars were flat year-over-year in the fourth quarter compared to a 3.5% decline in the third quarter. This approximate 4 percentage point improvement was driven by a combination of the absence of merchant contractual compensation in the prior year period and by branded checkout and Braintree.

The growth of interest income on customer stored balances and growth of branded checkout were the largest contributors to transaction margin dollars in the fourth quarter. This growth was offset by the absence of hedge gains compared to the prior year period as well as declines in other parts of the portfolio, including the impact of migrating and consolidating legacy PayPal payment services. Fourth quarter transaction expense as a rate of TPV came in at 97 basis points, 4 basis points higher than the same period last year. This increase was primarily driven by Braintree volume growth and was partially offset by a favorable geographic mix of PayPal volumes and rate benefits in Venmo.

Full year transaction expense as a rate of TPV was 94 basis points. Transaction loss as a rate of TPV was 7 basis points for the quarter, up 1 basis point from the fourth quarter last year and 8 basis points for the full year. Credit losses were $119 million for the quarter or 3 basis points as a rate of TPV, down 32% year-over-year and 3 basis points as a rate of TPV for the full year.

We have taken a prudent and active approach to managing our overall credit risk, tightening originations within our PayPal business loans portfolio and externalizing our European Buy Now, Pay Later portfolio. In the fourth quarter, non-transaction-related operating expenses declined 9% as we continue to actively manage our cost structure.

For the full year, the same expenses declined 11%.

Non-GAAP operating income grew 11% in the quarter to nearly $1.9 billion and for the full year by 14% to $6.7 billion. Our non-GAAP operating margin increased 40 basis points to 23.3% in the quarter and increased 110 basis points to 22.4% for the full year due to better operating expense leverage in each period. PayPal generated $2.5 billion in free cash flow in the fourth quarter. This includes a $1.7 billion net benefit from the sale of our European Buy Now, Pay Later receivables to KKR, partly offset by the impact of new loans originated as held for sale.

Adjusting for this impact, we generated nearly $800 million in adjusted free cash flow in the quarter and $4.6 billion for the full year. Higher-than-expected changes in working capital and cash taxes had a negative impact on fourth quarter free cash flow. In the quarter, we completed more than $600 million in share repurchases, bringing full year share repurchases to approximately $5 billion. We ended the quarter with cash, cash equivalents and investments of $17.3 billion and debt of $11.3 billion.

Before turning to our first quarter and 2024 guidance, I have 2 updates to our guidance approach to share. First, for the time being, we intend to move away from providing annual revenue guidance and instead provide guidance for the upcoming quarter. Given the considerable changes underway at the company, we believe it is prudent to guide revenue 1 quarter ahead and provide updates as the year progresses. Second, the first quarter and 2024 guidance that we’re providing today excludes the impact of stock-based compensation from our non-GAAP results. This is consistent with our historical approach.

Beginning in the first quarter, we will include stock-based compensation expense in our non-GAAP results. We will update our reporting and guidance accordingly at that time. Stock-based compensation is an integral part of our cost structure and one that we believe we need to manage more directly and transparently. Including stock-based compensation expense in our non-GAAP earnings, we’ll introduce more accountability and discipline and will align our own performance measures to the way that many investors already evaluate our business.

In terms of our outlook for the first quarter, we expect revenue to increase approximately 6.5% at spot and 7% on a currency-neutral basis. In addition, we expect non-GAAP earnings per share in the first quarter to grow at a mid-single-digit percentage. With respect to our full year financial plan, as we have said previously, with all of the changes we are making, 2024 will be an execution year and one we’re positioning the business for long-term success will be critical. For the full year, we are planning for a relatively consistent macroeconomic environment with some level of interest rate declines as we move through the year.

We also assume that overall consumer spending and activity levels will remain relatively consistent. We expect full year 2024 non-GAAP EPS to be roughly in line with prior year EPS of $5.10. Underpinning our outlook, we expect roughly flat transaction margin dollars. Alex discussed our innovation and product enhancements earlier. Many of these are already in pilot or launch, but will require execution throughout the year before we begin to see impact. Our guidance includes minimal impact from these initiatives. We expect a low single-digit increase in non-transaction operating expense. As Alex mentioned, we announced actions last week to reduce cost to drive continued efficiencies while at the same time, investing more in our product engineering and platform teams to drive growth.

There are 2 factors to be mindful of that will impact our other value-added services revenue. First, while we are still seeing benefit from the higher interest rate environment, we expect that this tailwind will be much less significant in 2024. Second, we continue to take an active and prudent approach to managing our credit exposure. We are carrying lower credit receivables after tightening originations last year. And for our off-balance sheet originations, we are planning for ongoing normalization and loss rates, which will impact the revenue share that we earn.

We expect free cash flow for 2024 to be approximately $5 billion. From a financial policy perspective, we remain committed to maintaining an investment-grade credit rating. Absent inorganic growth opportunities, we expect to continue allocating approximately 70% to 80% of our free cash flow to share buybacks.

However, given our strong cash position as we enter the year, we are currently planning for at least $5 billion in share buybacks in 2024. That concludes my prepared remarks. I’ll now hand it back over to the operator to begin Q&A.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Tien-Tsin Huang of JPMorgan.

Tien-Tsin Huang

Appreciate all the details here. I wanted to dig in on the outlook for transaction margin dollars to be flat. Can you just give us a little bit more, maybe high-level thoughts on the key drivers there, and maybe some of the levers that are available to you to get the transaction margin dollar growth to accelerate beyond that in 2024. I get a lot of questions about it, obviously. So I’d love to hear the puts and takes that you would underline for us.

James Chriss

First, let me start just with recognizing how much change there is that we’ve gone through. You heard it in my prepared remarks, but we essentially have a brand-new executive leadership team. We’ve accelerated the pace of innovation. The first-look experience you saw a couple of weeks ago, really was innovation that could have taken months or years that I’m very proud of the team, accelerating and getting done in 60 days. And we are at a point now where even our mindset shift, this focus on profitable growth is something that’s new for the organization, and we are grinding away every day. And so with that said, let me unpack the components of transaction margin growth.

The way I think about it is there’s 3 levers there. The first is really around the branded experience. This is a proven experience for us. It’s one that we — in some of the innovations that we put out, both for merchants that improve their experience as well as consumers with a new app that allows them to get through the experience better. That is a significant lever for us. And one that, to be honest, we’ve under-invested in. And if I take just specifically the mobile experience for our consumers, has been underwhelming. And it’s something that with the new innovations we just rolled out, I expect for us to be able to continue to see improvement there.

The second is around the unbranded processing. This is an area that we have invested significantly in. With Fastlane now, we have really, I believe, one of the best products in the market for our merchants. We’re seeing the highest conversion rates out there, and it’s something that our merchants are looking for and looking to adopt. We also are looking to move into new areas for growth that have higher margin opportunities such as international and small business. And it allows us to actually have different conversations with our customers and really price to value the product. And the third is really what I’d consider a bucket of value-added services.

This is a combination of improving our flows with our consumers to ensure that we’re attaching the products that we need to whether it’s Buy Now, Pay Later or our Cashback Mastercard, these are flows that we’ve not optimized and were underperforming when it comes to really attach.

And then some of the new offerings that we rolled out, you saw our advanced offerings platform as well as smart receipts. These are all ways that we can monetize and improve the connection between our merchants and consumers. So that’s different ways that I think about the components.

Jamie Miller

Yes. And Tien-Tsin, I’ll jump in on the ’24 specific puts and takes on transaction margin dollars. And first, you heard us both say earlier that on the initiatives that Alex has been talking about, we have included limited impact on that in our guidance. But if I pull back, really, we’re viewing largely steady trends to what you saw last year, maybe in slightly different proportions. So Branded Checkout being a healthy contributor to growth, improvement in our PSP margin profile. We expect some benefit in our interest income on customer balances, but really, that should be much smaller than what we saw last year. And we do expect some headwinds to our credit revenue, which as I think, as I mentioned in the script on the call, with loss rate normalization happening to pre-pandemic levels and that trend is starting to work.

We’ll just see lower rev share from our partnerships in that space. And then offsetting that, we really see also that some of our smaller product lines in the aggregate will be a drag on TM. This will be to a much lower extent than last year. But in areas where we do platform consolidation, there are times we deprecate products to really push customers to new platforms.

Good example of that is PPCP, we do see some drop-off. And we’ve got a few other products that, as you know, we have not invested as heavily as perhaps we should have in the last couple of years. And as we work our way through that, there’ll be some offset there.

Operator

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

Jason Kupferberg

I wanted to hone in on branded TPV growth a bit. I think it slowed by 1 point in the fourth quarter to 5%. Was hoping you could maybe take us through some of the monthly intra-quarter trends there, any market share observations you might have had from holiday season. And then just some general comments on what you’re planning for on branded TPV growth in the first quarter and full year ’24?

James Chriss

Thanks, Jason. Let me set the context and I’ll see if Jamie wants to pile on. Our branded checkout performance was 6% for the year. It’s been pretty consistent. And for what we’re looking going into next year, we’re expecting it to be consistent as well. And as we’ve talked about, that doesn’t include or includes minimal aspects of the new innovations that we put out there.

Let me talk about just some of the levers when it comes to the new innovations or ways that I think about accelerating branded checkout because this obviously is going to be a big focus for the organization. The first is we really have to improve the value proposition for our consumers. This is why you see us leaning into rewards, ensuring that we’ve got an improved experience that reduces latency and really leaning in on mobile as well so that our consumers have a better branded checkout experience.

Second, the acceleration of Fastlane when it comes to our merchants not only improves the unbranded opportunity where we can see 70% of the customers that come through the Fastlane experience, but allows us to have a second engagement with our customers and bring them back into a branded experience at a later date, show them all the different reasons why they should be using PayPal or getting a reward back for a purchase that they made.

So I think these, again, are just a couple of examples of innovations that we’re leaning into now that allow us to really focus on that branded experience.

Operator

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

Darrin Peller

Alex, Jamie, just to follow up a bit on some of this train of thought. I mean I know you’re mentioning you’re not incorporating these new initiatives in your transaction profit growth thoughts for this year. But when we think about some of these — I mean most of these to your point, Alex, are going to be beneficial to gross profit growth. And so I guess we’d love to hear a little bit more around what you’d measure us, how you would measure success, whether it’s the PPCP initiatives or unbranded as well as the branded checkout experience, what KPI should we look for? And I guess a little bit more on timing. If not this year, when do you want investors to expect some traction in actual gross profit re-acceleration?

James Chriss

Yes. Well, thank you, Darrin. And look, let me be clear. We are not putting in the expectations into the guidance until we see execution. We just think it’s prudent for us to put points on the board before we put it into the guidance. That said, the teams are grinding on this every single day. We are having conversations with our merchants and introducing them. As I mentioned on the call, the reaction has been quite encouraging from the innovations. There is demand in the market, and we are starting right now. And I will tell you, the conversations that we’re having now that we’re focused on both innovations that are driving demand as well as improvements for these merchants are different than we’ve had in the past. So I just want you to know, we are working now on this, and we will update you as we start to see points on the board and adjust our guidance as needed.

Secondly, back to your first question around how I think about this. Look, the thing I want you to take away from all of this innovation that we rolled out in first look is this is really changing the way we engage with our customers and our merchants. We are now creating experiences across the entire customer life cycle, not just at checkout. So we are driving not only a checkout improvement, the 50% improvement in latency being able to improve Fastlane, but now we’re starting to see a customer value proposition with CashPass, giving rewards back to our customers so that they have a reason to choose PayPal at every purchase. We’re improving the onboarding and the reboarding as they come back into the app and start to now attach our Mastercard or debit experiences or Buy Now, Pay Later. We’re improving the post-purchase experience where we now have smart receipts or package tracking so that we can improve the engagement between our merchants and our consumers, and we now have an ongoing active use engagement.

And then we’re leaning into demand generation and actually solving the biggest challenge that our merchants have, which is finding new customers as we think about our Advanced Offers Platform or creating shopper insights so that our merchants can start to engage and personalize their experience through our data and through the AI that we can lean through. So the way I think about it is we are looking at the entire end-to-end experience, and we’ll measure our success through the metrics that you have. It’s going to turn into what does transaction margin look like? What are — what does active use look like from our ongoing users? So that’s how we think about it.

Operator

Your next question comes from the line of Michael Ng with Goldman Sachs.

Michael Ng

I wanted to ask a question about PayPal’s commitment to durable, high-quality profitable growth. How does that impact the pricing strategy in Braintree? What unprofitable is the system products will PayPal deemphasize? And how does that tie into your 2024 non-transaction OpEx outlook of flat?

James Chriss

Great. Thanks, Mike. Let me talk about Braintree and then I’ll have Jamie talk about potentially some of the other products and businesses. So let me take you back. Braintree, if you go back a few years ago, was really trying to establish itself in the market. It hasn’t delivered at scale, and there were gaps in the product. We’ve invested heavily in the product and have really focused on some of the largest U.S. enterprise customers, which now have proven the scale while we’ve gotten the product to parity. Then you look at what we just rolled out with innovations like Fastlane, I think we’ve now leapfrogged the competition.

So what does that allow us to do? It allows us to be the one-stop shop for merchants, it allows us to provide a best-in-class experience on auth rates and give them the ability to have not only the best processing and unbranded, but also package that with PayPal and with all the other ways that customers want to pay, including Buy Now, Pay Later.

We now are shifting towards being able to have a price-to-value conversation with our merchants and being able to really start to think about how will we ramp up go to market for not only Braintree, but also PPCP.

We also are now moving into markets that have higher margins. So international and small business with both Braintree and PPCP allow us to now, again, price to value and have different conversations. So that is how we think about it. We’re not focused on unprofitable growth when it comes to Braintree. We think we now have the product in market to be able to compete effectively and win.

Jamie Miller

Yes. And Mike, on the other part of your question, I guess what I’d say is we are just doing too many things. And our biggest opportunity is that we have to make decisions to stop things and to really focus and that gets into market competitiveness. It gets into pricing, it gets into really leaning into market opportunity and really stopping doing things that prevent us from doing the right thing in those spaces. So we are knee deep in that right now. And so when we talk about a year of transformation and execution, that’s exactly what we’re talking about.

Operator

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

Ramsey El-Assal

I wanted to ask about how much leeway or opportunity you have to continue kind of taking out expenses while simultaneously executing on the growth strategy? How are you thinking about striking that balance sort of cost control versus growth? And I guess, how confident are you that you have room to do both?

Jamie Miller

Yes, I would say that is definitely an and, not an or. And that’s exactly what we’re doing with the workforce announcements we made a week ago and really taking that and putting that back into product into engineering and into marketing, we have got to invest deeply to grow this place. And it’s really important for us to just set the company up for the future. And to do that, the innovation muscle, the commercial muscle means that rightsizing our expense levels isn’t going to be something that we — that is a won and done.

We know we have significant opportunity to continue to be more efficient, be that through automation, be that through driving deeper productivity. And as we harvest that, that just gives us more levers to invest that are — the right things for our profile as we go forward.

Operator

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

James Faucette

James, a quick clarification and I have a question for Alex. But you said that starting from the first quarter, you’ll be including stock-based compensation in your non-GAAP rather than excluding it. So does that mean that if we just imagine that we fast forward a few months, that the non-GAAP earnings would be reduced by roughly that $1.8 billion. Just looking for a little bit of clarification there.

And then, Alex, you made an interesting comment in terms of like feeling things are too big organizationally. But I’m wondering how you’re feeling about the tech stack right now and the level of integration and where we’re at from that perspective in terms of your ability to drive the kinds of improvements and perhaps add functionality to improve the customer experience.

Jamie Miller

Yes, James, on your first question, you have it exactly right. So beginning in the first quarter, we’ll start including stock-based compensation expense in our non-GAAP and closer to that time, we’ll do the look back where we’ll provide the retrospective data so that we’ve got everything on a comparable basis. But yes, you’re thinking about that right.

James Chriss

And then, James, on your question around the tech stack. Look, I’ll be transparent. The company has gone through significant growth over the last few years and a lot of acquisitions. We have not invested enough in creating a single platform. That again slows us down when it comes to innovation, and it slows us down when it comes to being able to leverage the data across the ecosystem. We are investing heavily in that now and starting to see real improvement.

I mentioned a couple of things on the call, but really being able to put out a reporting system that now sees across the entire ecosystem, being able to see a single view of the customer so that now we can provide innovations to customers but also actually be able to cross-sell and be able to say, “hey, this is a customer that has this risk profile and should be in these 2 or 3 different products”, is a huge win for us as we start to consolidate. It also just accelerates our engineering velocity, being able to have a services-based engineering team that can build once and deploy across the entire ecosystem is the direction that we’re heading in. And so you started to see that. We — even the innovations that we just put out over the last couple of weeks weren’t really possible without us being investing heavily in the platform. But I also would say we have a ways to go. And so it’s a primary focus for me and the organization and will drive velocity and efficiency.

Operator

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

David Togut

A major regulatory change in payments just went through in Europe with Apple opening up its iOS and NFC chip for physical point-of-sale payments. What opportunity does this present to PayPal?

James Chriss

Yes. Thanks for the question, David. We are tracking this closely. Apple is a great partner of ours. And our customers that love PayPal on the online e-commerce side are demanding — being able to have an omnichannel and off-line solution as well. So we’ll be working closely on this. And when it is available, we will be ready to be able to deliver for our customers, both online and off-line.

Operator

Your next question comes from the line of Sanjay Sakhrani with KBW.

Sanjay Sakhrani

Alex, one more on the initiatives. I’m just trying to think through the prioritization of these additional investments you’ll be making. Of those 6 initiatives, which do you think will sort of yield the returns quickest? And maybe a little bit more on timing of them, maybe not 2024, but how early?

And then, Jamie, just a quick question on the interest rates. I think you mentioned, you don’t expect it to have a big impact or as big an impact in 2024, but is there an explicit rate forecast you have? Like do you have lower rates in 2024?

James Chriss

So all of the innovations are incredibly exciting for us, but let me be specific on your question. The two that I am closely watching and our teams are executing on immediately is really a focus on the branded experience. This is both for the combination of merchants and consumers, easing that experience for a customer to choose PayPal, have a reward that comes back to them, ensure that they’re able to get through the experience with velocity and check out every time with PayPal, is a huge focus for us, and that’s where we are driving a new app experience. And again, all of these innovations will be coming out over the next couple of weeks to months.

Then we have to drive adoption. So that is having conversations with merchants, ensuring that they’re upgrading to our latest innovations, that’s ensuring that we make it easy for them as well. So that’s why you’ve seen us launch a new developer portal. We’re creating no-code, low-code experiences so developers can take the demand that they’ve shown because they have a best-in-class experience now and get it into market. So step one is I’m very focused on that branded experience.

The second one is on the unbranded side, which is ensuring that Fastlane gets rolled out. That, to me, starts to create an interesting network effect of us being able to have not only a branded experience, but for them, those consumers that pass a branded experience, whether it’s ours or anyone else’s and want to just go through a guest checkout flow, we’re able to identify them, we’re able to help them and our merchants complete the transaction. And then we’re able to have a follow-up conversation with that customer as well because they’ve gone through our Fastlane experience. So those 2 to me, we need to get rolled out, we need to get points on the board and show that it’s driving, but driving outcomes, but that is where I’m most focused on right now.

Jamie Miller

Yes. And Sanjay, on the interest rate question, we do expect that the interest income on customer balances will have a strong growth this year, but really it will be more first half-focused. The second half, we do expect a series of rate cuts that is assumed in our macroeconomic scenario that underpins our guide, and that’s why the second half should be much lighter on that front.

Operator

That is all the time we have for questions. I will turn it to Alex Chriss for closing remarks.

James Chriss

Fantastic. Thank you, Sarah, and thank you all for joining us today. I want to reemphasize that 2024 is going to be a transition year focused on execution to position our business for long-term success. I’m excited with where we’re positioned in the market, and I know that there is a real opportunity to grow our role in commerce. We’re driving the foundational and transformative changes that will set the company up for the future. Thank you.

Operator

Thank you. This concludes today’s conference call. We thank you for joining. You may now disconnect your lines.