Dan Schulman
President and Chief Executive Officer at PayPal
Thanks, Gabrielle, and thanks everyone for joining us. We obviously have a lot to cover today. But before I begin my formal remarks, I want to start by saying how dismayed we are at the atrocities happening in Ukraine. Early on, we suspended our transactional services in Ukraine -- in Russia and worked quickly to enable PayPal send and receive services in Ukraine. Since then our platform has enabled approximately $100 million to be sent to Ukrainian citizens and refugees. In addition, thanks to the generosity of our community, nearly $1.5 billion has been sent over our platform to leading non-profit organizations supporting Ukraine. It is in times like these that we are most reminded of the essential role our platform and services provide to those most in need.
This afternoon, in the interest of time, I'm going to briefly cover our first-quarter results before I provide a strategic update and discuss our outlook for the quarter and year ahead. We have provided additional coverage of our Q1 results in our investor update presentation.
As all of you know, after almost seven years at PayPal, John Rainey will be leaving the company to join the leadership team at Walmart. I'm happy for John, and I'm not surprised that the Fortune 1 company has recognized all that John has done to help build PayPal into what it is today. John, I'm going to miss you, and I wish you the very best of success and happiness in your next chapter. I also want to say that I'm thrilled that the Board has appointed Gabrielle Rabinovitch as Interim-CFO. The three of us are here together and we will be handling Q&A as a team.
I want to begin my prepared remarks by acknowledging that our shareholders expect more from us than our track record over the past several quarters has delivered and I take full accountability for that. Navigating through the pandemic in an uncertain macroeconomic environment, with the resulting shifts in consumer behavior has made visibility more challenging. But we need to do better and you will hear more from us today about delivering on our commitments.
Before we talk more about our go-forward focus, let me touch on our Q1 results. I'm pleased to report, we delivered solid results that exceeded our guidance on revenue and earnings. The first quarter of 2021 was the strongest in our history, with 31% spot revenue growth and 84% non-GAAP EPS growth. And despite lapping this growth, revenues increased 7% to $6.48 billion and increased 15% excluding eBay.
U.S. revenues grew 20% and international revenue decreased 5%. Ex-eBay International revenue grew 5%, which was on top of 47% growth in Q1 last year. Volume-based expenses increased 25% and represent 49% of revenue versus 42% of revenue last year. The subject of approximately 700 basis points resulted from increased funding costs driven primarily by volume mix and lapping the release of $84 million of credit reserves. Non-transaction related expenses grew 8% in the quarter and represented 30% of revenue, which was flat to last year. Investments in technology and development were offset by leverage in our other non-transaction operating expenses.
We delivered non-GAAP EPS of $0.88 in the quarter, absorbing incremental $0.03 of earnings pressure due to our suspension of transactional services in Russia. We also generated more than $1 billion in free cash flow and returned $1.5 billion in capital to stockholders through share repurchases.
As I shared last quarter, we are increasing our emphasis on incremental engagement across our existing customer base while continuing to add higher-value accounts. In Q1, we added 2.4 million net new active accounts in the quarter, bringing our total active base to 429 million.
Our transactions per active account grew 11% to 47. We continue to be pleased with our Buy Now Pay Later franchise, which is seeing persistent market share gains. We did 3.6 billion in volume in Q1, up 256% with over 18 million consumer accounts choosing this funding option since launch. And we are seeing increased merchant penetration and upstream presentment, which will allow us to continue to deliver strong results.
In Q1, Braintree outperformed again with volumes growing 61%. This growth comes with the success of key customers like Airbnb, Uber, DoorDash, Live Nation, Vineyard Vines and TikTok. Importantly, for many of these merchants we are their exclusive or primary provider of unbranded processing. In addition, Venmo delivered strong revenue performance in Q1 with growth of approximately 60%. Volume grew 12% to $58 billion on top of 63% growth a year ago. Venmo now has more than 85 million accounts in the U.S., and our goal in the coming years is to drive more commerce transactions on Venmo while continuing to be a leading P2P platform.
We are making progress in driving more Pay with Venmo transactions, business profiles and offline purchases with the Venmo debit and credit cards, and our integration plans with Amazon are progressing with the back half of the year as our current launch timeframe. Across both PayPal and Venmo, we are working hard to have our digital wallets at the center of our consumers daily financial lives. Our redesign PayPal Digital Wallet app is now installed by over 50% of our base and our app users are engaging with more features and driving incremental average revenue per account as a result.
Customers who use our Digital Wallet transact 20% more at checkout than users that are not using the app and over 70% of our Buy Now Pay Later users engage through our Digital Wallet. We have nearly completed the rollout of our savings product and we will be introducing additional financial services and commerce functionality in the coming quarters.
Our digital wallet ARPA is two times that of a customer who only uses Checkout and the churn rate for digital wallet users is 25% less than the rest of our base. We are focused on increasing adoption of our Digital Wallet and believe it is one of our most meaningful opportunities to drive growth.
In addition, working with partners has been and continues to be an important ingredient to our success. We recently renewed and expanded our strategic partnerships with American Express and Citibank. Our strong and growing relationships with these important partners and others highlight our commitment to offering our customers choice and how they pay by enabling seamless FI integrations into our products and services.
I'd like to now discuss our outlook for Q2 and the year. While we are pleased that we delivered Q1 with a beat on revenue and EPS, 2022 remains another challenging year to forecast. In laying out our 2022 outlook several months ago, we noted that if macro pressures persisted, we will trend towards the lower end of our range, and if we saw a structural improvement, it would push us upwards towards the upper bound. It is clear that relative to early February, the macro environment has deteriorated. Russia, Ukraine, and China are contributing to increased global uncertainty and incremental inflationary and supply chain pressures.
And more specific to PayPal, forecasting normalized consumer e-commerce spending as we come out of the pandemic is exceedingly complex. As a result, we believe it is prudent to lower our 2022 guidance and reevaluate our medium-term outlook.
For the second quarter, we expect revenue growth of approximately 9% and non-GAAP EPS to be approximately $0.86. We expect a bit more than $200 million of impact from eBay in Q2 and we have tough comps as eBay revenue grew -- as eBay -- ex-eBay revenue, excuse me, grew 30% in the second quarter last year. We also had reserve releases of $156 million in Q2 2021 which creates an approximate $0.11 headwind to earnings growth.
For the year, we now expect 11% to 13% revenue growth and non-GAAP EPS to be in the range of $3.81 to $3.93. Ex-eBay, this represents revenue growth of approximately 15% to 17%. In addition, at the midpoint of our range, this equates to back half revenue growth of 15.5%. Our revised EPS guidance reflects the flow through implications of our revenue expectations and volume mix. We are now forecasting 10 million net new active accounts for the year, we expect to add positive NNAs to our platform every quarter this year with Q2, representing the low point.
I want to share additional context about the work we are doing to increase our operating leverage. Pre-pandemic, we were in the process of simplifying our operating model and enhancing our operating efficiency. The pandemic forced us to put many of those initiatives on hold to simply scale the business and support the unprecedented growth on our platform. We are now coming back to this work with renewed focus, energy and purpose. While we are focused on incorporating more discipline into our operating model and driving operating leverage in our business, we are simultaneously investing to grow. We see opportunities to accelerate our growth and customer engagement. We believe our portfolio of digital payment assets is unmatched in breadth and depths, which creates a powerful competitive advantage for us.
To extend this advantage and advance our leadership position, our focus on streamlining and improving the way we work is critical and will allow us to achieve more efficient growth.
Overall, these efforts will yield significant savings allowing us to continue to reinvest in the business and drive profitable growth.
For the year, we now expect to generate more than $5 billion in free cash flow. In addition, we still plan to balance capital allocation between investing organically in our business, share repurchase and inorganic growth. That said, to be clear, transformative acquisitions are not on our growth agenda at this time. We currently expect that any activity for the foreseeable future will be focused on straightforward deals that have clear and unassailable alignment with our skills and capabilities.
Finally, I'd like to discuss our medium-term outlook as provided at our Investor Day in February 2021. We have reassessed the feasibility of achieving our revenue and earnings targets. These targets relied on several baseline assumptions relating to both e-commerce penetration and macroeconomic factors that are no longer on the trajectory that we forecasted.
As a result, we're withdrawing our medium-term outlook. We will continue to guide revenue and earnings on both a quarter and full-year basis and continue to update you on how we are thinking about our business over the long term. Make no mistake, we have strong conviction in the growth potential of our business and our ability to sustainably create value for our shareholders. However, we recognize the need to level-set expectations in what remains a dynamic environment. We know the scale of our two-sided platform is truly differentiated and gives us strong competitive advantage. We believe the secular tailwinds from the digitization of payments and e-commerce growth are persisted, and we believe that we are uniquely positioned to bring more merchants and consumers together globally than any other company and help them connect and transact safely.
We continue to have many opportunities in front of us, given the scale of our two-sided network and the ongoing growth in digitized payments. We will advance our leadership in Checkout, continue our work to become the pre-eminent digital wallet and bring PayPal's tools to more in-person contexts, all the while investing in our foundational technologies. Hundreds of millions of consumers and tens of millions of merchants value our comprehensive set of products and services. We are investing resources to both improve our existing products and innovate for the future, with capabilities, including enhanced loyalty programs, package tracking and returns management.
With branded Checkout and full-stack processing is the foundational elements of our platform and competitive advantage. The opportunities ahead are significant and we believe PayPal is well positioned to play a leading role in driving the future of digital payments and e-commerce.
We believe we will continue to grow revenue faster than the rate of e-commerce growth and increase our market share in digital payments. At the same time, we will continue to focus on improving operating leverage to support sustained value creation, accelerating the velocity of getting product into the hands of our customers and driving greater organizational effectiveness by simplifying processes and increasing accountability. We look forward to sharing our progress with you as the year unfolds.
And with that, let me turn the call back to the operator for your questions.
