EBay Inc (EBAY) — Q1 2015 Earnings Call Transcript

Good afternoon and thank you for joining us, and welcome to eBay's earnings release conference call for the first quarter of 2015. Joining me today on the call are John Donahoe, our President and Chief Executive Officer; and Bob Swan, Chief Financial Officer, Dan Schulman, our CEO elect of PayPal, and Devin Wenig, our CEO elect of eBay. We're providing a slide presentation to accompany Bob's commentary during the call. All growth rates mentioned in John and Bob's prepared remarks represent year-over-year comparisons, unless they clarify otherwise. This would also include Dan and Devin’s statements as well. In addition, all segments' results are adjusted for the effects of foreign currency exchange. This conference call is also being broadcast on the Internet, and both the presentation and call are available through the Investor Relations section of eBay's website at investor.ebayinc.com. You can visit our Investor Relations website for the latest company news and updates. In addition, an archive of the webcast will be accessible for 90 days through the same link. Before we begin, I'd like to remind you that during the course of this conference call, we'll discuss non-GAAP measures in talking about our company's performance. You can find a reconciliation of those measures to the nearest comparable GAAP measures in the slide presentation accompanying the call. In addition, management will make forward-looking statements relating to the planned separation of eBay Inc.'s Marketplaces and PayPal businesses, and our future performance that are based on our current expectations, forecasts and assumptions involve risks and uncertainties. These statements include, but are not limited to, statements regarding expected financial results for the second quarter and full year 2015; future growth in Payments, Marketplaces and eBay Enterprise businesses; and the implementation, completion, and timing of the planned separation. Our actual results may differ materially from those discussed in the call for a variety of reasons. You can find more information about the risks, uncertainties, and other factors that could affect our operating results in our most recent annual report or on our Form 10-K or in future quarterly reports or Form 10-Q available at investor.ebayinc.com. You should not rely on any forward-looking statements. All information in this presentation is as of April 22, 2015, and we do not intend and undertake no duty to update this information. With that, let me turn the call over to John.

Thanks, Tom. Good afternoon, everyone, and welcome to our Q1 earnings call. We had a strong first quarter and despite currency headwinds pressuring top-line growth, eBay and PayPal had a good start for the full year. I feel very good about the focus and performance of our teams at eBay and PayPal. Each business is executing well with greater focus on operating discipline as we prepare for separation. Joining our call today are eBay CEO Designee Devin Wenig and PayPal CEO Designee, Dan Schulman. Devin and Dan will provide more perspective on Q1 performance for eBay and PayPal respectively, as well as their views on the future opportunities and focus for each business. Bob will then provide full details on the quarter including eBay Enterprise. But let me provide some highlights. In the first quarter, eBay Inc. revenue was up 9% on an FX neutral basis with PayPal contributing 17% growth and eBay Marketplaces up 3%. Non-GAAP EPS was up 10%. For Q1, PayPal enabled $61 billion of volume, topping 165 million active accounts, and eBay drove $20 billion of gross merchandise volume, topping 157 million active buyers. Before I turn it over to Dan and Devin, let me briefly recap where we are in the separation process. As you know, last September we announced our decision to separate eBay and PayPal into independent publicly traded companies. Separation will enable each business to operate with greater focus and strategic agility and better position to capitalize on the respective growth opportunities. We believe more than ever that separation is the best path for eBay and PayPal and the right approach to delivering sustainable value to shareholders. We are moving forward with clarity and speed. We passed the significant milestone in Q1 with the initial filing of the PayPal Form-10 and we filed our first amendment earlier this month with additional information. We expect the separation to occur in the third quarter. The operating agreement between eBay and PayPal is designed to preserve synergies while giving each business the strategic flexibility to pursue growth opportunities. Highlights of the operating agreement include: First, economics in the form of incentive payments designed to maintain PayPal’s current penetration rate of approximately 80%. Second, data sharing that enables each company to provide great customer service and maintain world-class risk, trust, and fraud prevention programs. Third, product development and service agreements that ensure PayPal devotes resources to developing new payments products and services for eBay, preserving a high level of service quality. And fourth, non-compete agreements that encourage eBay and PayPal to continue their strong partnership. The operating agreement is designed to set up eBay and PayPal to succeed as independent companies. Meanwhile, Dan and Devin are building out their leadership teams and driving sharper strategic focus on the opportunities ahead. You will hear more from them in a moment. In Q1, we announced two new Board members, Tony Bates and Gail McGovern. This is in addition to our previous announcements of new Board members, Bonnie Hammer, Frank Yeary, Perry Traquina, and Jonathan Christodoro. We feel very good about our ability to create two world-class Boards for eBay and PayPal at separation. In summary, we remain deeply committed to doing what's best for eBay and PayPal and to delivering sustainable value for shareholders. Looking ahead, we are clear on what we need to do to deliver on our 2015 plans and ensure a smooth separation process. We'll continue to do what's best for our business, for our customers, and for our shareholders. Now I will turn it over to Dan Schulman, who will provide more details on PayPal.

Thank you, John, and thanks everyone for being on the call today. PayPal is off to a solid start this year, and I am optimistic about our current trajectory and progress. We saw a 17% growth in revenues on an FX neutral basis, and the total payment volume for Merchant Services continued to rise in the first quarter, increasing by 33% year-over-year, which is more than double the growth rate of the e-commerce market, indicating that we gained significant market share. Our growth and the new capabilities we are developing position us well for the future. There are four key metrics I believe demonstrate the growth and health of our business. First is our top-line growth. Second is the growth of our account base, showcasing our scale. Third is the engagement of that base, measured by revenue per active account. Fourth is free cash flow. These metrics are my primary focus as they track the progress of our strategic initiatives, which include expanding ubiquity, enhancing engagement among both merchants and consumers, and ensuring strong returns for investors. We made advancements in all these areas in the first quarter. Initially, our top-line growth. The 17% revenue increase we achieved provides a robust foundation as we continue into 2015. Next, we maintained steady growth in our customer accounts, adding 3.6 million to reach 165 million active customers globally. We anticipate continued strong growth in 2015 as we delve deeper into the merchant sector and enhance our products and services to be increasingly relevant to consumers. Additionally, our customer engagement rose consistently, with transactions per account increasing from 21 last year to 23 in the first quarter. We processed over 1 billion transactions in the first quarter, which reflects a 24% year-over-year increase, and our monetization per account also rose sequentially to $49. Moreover, mobile payment transaction volume has increased significantly, now making up nearly 30% of our total transactions, with growth exceeding 40% year-over-year. Our Merchant Services now constitutes 76% of total volume and grew by 33%, and we have improved our eBay penetration by 260 basis points year-over-year. Our penetration of the top online merchants reached 74% of the IR100 merchants in the U.S. and Braintree saw strong triple-digit growth in the first quarter, signing several notable new accounts, including Lyft, SHAG, and One Kings Lane. The fourth key metric for PayPal is free cash flow. We executed substantial cost-reduction measures in Q1 to streamline operations and increase capacity. Consequently, we project that segment margins will rise by one to two percentage points year-over-year for the entirety of 2015, as we outlined in January. We plan to reinvest some of the margin leverage to further expand our business and generate significant long-term shareholder returns, while still focusing on growing free cash flow. For this year, we expect free cash flow to range from $1.7 billion to $1.9 billion, accounting for one-time transition costs related to the separation. We are currently in an exciting era in the financial services landscape. Today, PayPal operates in two rapidly growing segments of the digital payments sector: online and mobile. The integration of online and offline payments is evolving through mobile experiences. Thus, I believe our market potential extends beyond the $2.5 trillion linked to online and mobile transactions, reaching closer to $25 trillion associated with all commerce, whether online or offline. PayPal possesses formidable assets, and we are strategically positioned to leverage the transformative changes in our industry. To seize this opportunity, we are undergoing a significant transformation, entirely reengineering our technology platform to enable greater scale, faster production cycles, and enhanced collaboration among teams so we can consistently deliver superior products to our customers. PayPal now boasts one of the largest hybrid clouds globally and has modernized its core business capabilities into robust service-based platforms. Our revamped technology platform is becoming a strategic asset. In upgrading our technology and processes, we are greatly shortening our product development cycles, allowing us to release software updates in weeks rather than months. We are also accelerating growth through strategic acquisitions. In March, we announced the acquisition of CyActive, which will be integral to our security initiatives. That transaction closed on April 9th. We also announced the acquisition of Paydiant, which was finalized on April 1st. Utilizing Paydiant's platform, our merchant partners can establish their branded digital wallets to boost mobile in-store payments and enhance consumer engagement. Everything we have accomplished in the first six months of my tenure is positioning PayPal to seize what I consider one of the most significant growth opportunities the payments industry has encountered. While we have much to execute, we have established the right organizational structure, leadership team, and operational processes to achieve our objectives. I am enthusiastic about our current position, what we are building, and PayPal’s strong potential in this evolving market. Thank you, and I will now turn it over to Devin to discuss eBay's results.

Thanks, Dan. It's great to have the chance today to share my thoughts about eBay's Q1 performance and our plans for the future. Let's start with the quarter. eBay had a good quarter one showing signs of stabilization. Let me share some key metrics. GMV and three month trailing active buyers each grew 5%, consistent with the prior quarter. Overall traffic including mobile grew at steady rates as well. International GMV on an FX neutral basis grew 7%, a one point acceleration in Q4 and sold item growth was 9%, also a one point acceleration. In addition, StubHub and eBay classifieds both performed well. After the challenges faced in 2014 and following two sequential quarters of declining growth, our quarter one results are encouraging. I'm pleased with how our team is executing and delivering. We are certainly not ready to declare a victory over last year's SEO and password reset challenges, but we're making progress. SEO generated traffic is still impacting growth while this channel is beginning to stabilize, effectively managing SEO traffic is a constantly evolving process. We're working to stay out front of it. Also following the password reset, we're making ongoing investments to ensure we have a stable, secure platform for our users. We're focused on increasing user engagement and confidence over time. Steady progress, but we are just getting started. We have more work to do to ensure we deliver consistent sustainable performance and accelerate growth. Let me step back now and provide broader context. I'll focus the rest of my remarks on our path forward and the tremendous opportunities we see ahead. eBay turns 20 this year, in our industry and in Silicon Valley that's an extraordinary milestone. eBay helped define the beginning of e-commerce and we intend to continue being a leader in its future. Over the past two decades, eBay has created tremendous assets and deep global commerce expertise. We are launching the next chapter with a passionate community of 25 million sellers. They offer incredible diverse selection and value through 800 million listings and we have a global base of more than 157 million active buyers who generate nearly $83 billion of GMV annually. I believe as we begin creating the next 20 years of global commerce, that's a great place to start. We intend to lead by focusing on three strategic pillars. First, building a more robust commerce platform; second, engaging the core buyer and seller segments, who create a vibrant marketplace and fuel our commerce flywheel; and third, creating exceptional product and brand experiences. A robust commerce platform of vibrant marketplace, exceptional customer experiences, that's our formula for success. Let me touch on each area. First, managing a robust commerce platform is essential to creating sustainable performance. We're focused on building a stronger, more resilient foundation. We'll move towards becoming the world's first online global marketplace to use structured, cataloged data at scale for all listings. We believe that doing so will help us deliver an exceptional, unmatched experience for both buyers and sellers. At the same time, we will diversify our sources of traffic and customer acquisition, leveraging promising early trends on social and messaging platforms. eBay will have multiple robust channels competing for our marginal investment dollar. This requires a transformation in our tech and our marketing, which is already underway. The result is a more competitive eBay with more control over our experience and ultimately, our performance. Creating a vibrant marketplace is our second pillar. eBay is at its best when we bring diverse inventory at great value to customers who love to shop. Our core buyer and seller segments make eBay the world's most vibrant marketplace to find, discover, and buy practically anything. eBay's consumers love to shop. They hunt for value at different price points. They demand broad selection and they enjoy discovering unique things that express their personality. For these consumers, who represent a broad addressable and growing market, we intend to make eBay the global destination for great value and selection, ensuring a trusted marketplace is foundational, and we'll continue making investments in this area. We also will run our business more by category. We will sharpen how we merchandise our sellers' inventory, presenting eBay's unique range of choice and value in new and innovative ways. On the sellers' side, eBay's sweet spot is small and medium-sized merchants and brands. They represent 70% of the global retail market, offering the diverse inventory and value our consumers are looking for. As a partner and not a competitor to SMBs, we intend to make eBay the global platform for them to grow and thrive. We will offer improved seller tools, unmatched access to data, and more balanced and predictable policies and standards. Consumer selling is another key eBay strength and we intend to revitalize this segment of our market. An estimated $100 billion of value is trapped in people's closets and garages, and that's just in the U.S. This is an enormous opportunity with simplified listing flows, predictive pricing data, and higher touch intermediation for those that require it, we intend to make eBay the platform for consumers to buy and sell anything, anytime, anywhere. And finally, our third pillar, creating exceptional products and brand experiences. eBay is a powerful global brand and we'll strengthen that brand by delivering exceptional, engaging product experiences. Some of our recent launches, such as our iPad app and our launch of live auctions, are great examples of what we can do and we will do going forward. We will continue to substantially upgrade the buying and selling experience on eBay with much more to come this year. In summary, Q1 was a good start, and I'm confident in our full-year outlook including generating $2.1 billion to $2.3 billion of free cash flow. Going forward, we intend to play our game, no one else's, and focus where eBay can win. Global commerce trends such as the impact of mobile on consumer behavior and the influence of digital on retail favor many of our core strengths. We'll take advantage of this. We've assembled a world-class management team with deep technology, retail, data, and customer service expertise. And as we take eBay forward, we will operate with clarity and with discipline. We will pursue thoughtful capital allocation strategies that deliver compelling shareholder value while maximizing our strategic flexibility. It is an incredible privilege to be eBay's next CEO, building on our extraordinary heritage and leading this iconic brand forward. My team and I are excited to be creating eBay's next chapter and I look forward to sharing more with you in the months ahead. And with that, I will turn it over to Bob.

Thanks, Devin. During my discussion, I'll reference our earnings slide presentation that accompanies the webcast. Q1 was a great start to the year. We delivered $4.4 billion of total revenue and $0.77 of non-GAAP EPS. We generated $829 million in free cash flow and repurchased $1 billion of our stock. We're making excellent progress on our plans to separate PayPal from eBay and we currently anticipate a third-quarter close. In Q1, we generated net revenues of $4.4 billion, up 4%, with strength across the board. Organic revenue growth was 9% in the quarter and currency negatively impacted growth by approximately five points. We delivered revenue at the high end of the guidance range despite the impact of the stronger dollar which negatively impacted Q1 revenue by approximately $30 million since the guidance we provided in January. Non-GAAP EPS was $0.77, up 10%. EPS growth was driven by a strong FX-neutral revenue growth, good operating leverage across the company, and a lower share count. Operating expenses were 41% of revenue in the quarter, down 120 basis points, driven primarily by the benefits from the steps both Dan and Devin took to streamline their respective businesses, partially offset by provision for transaction loan losses and increased regulatory costs for PayPal. We generated free cash flow of $829 million in the quarter and CapEx was 7% of revenue. From a balance sheet perspective, we ended the quarter with cash, cash equivalents, and non-equity investments of $14.1 billion, including approximately $4.1 billion in the U.S. eBay ended the quarter with $11.7 billion and PayPal with $2.4 billion in cash. We are taking steps to continue to strengthen our balance sheet to provide both businesses with the financial flexibility to pursue their strategic and capital priorities. First, we continue to finance an increasing portion of our loan portfolio balance with offshore cash, currently at 78% of total. Second, as part of internal structuring, we plan to move approximately $3.5 billion of cash to PayPal in a tax-efficient manner prior to separation. And third, we announced the sale of an 85% participation interest in a pool of U.S. PayPal credit receivables that will free up approximately $700 million of incremental capacity in the U.S. to fund PayPal's growth. As a technology-enabled lender, credit is an important driver of our business, but does not need to be funded by our balance sheet. As a result of this transaction, 2015 operating income will be negatively impacted by approximately $20 million. eBay Inc. has an excellent balance sheet. As a result of these actions, both eBay and PayPal will be well capitalized at separation. Now, let's take a closer look at our segment results. PayPal had a strong quarter; revenue in Q1 was $2.1 billion, up 17% on an FX neutral basis, driven by strong Merchant Services growth and rising engagement per user, which reflects the growing popularity and relevance of the PayPal value proposition throughout the world. A few quick highlights on PayPal operating metrics. TPV on an FX neutral basis grew 25%. Merchant Services FX neutral TPV increased 33%. Transaction margin was down 80 basis points, driven by the rapid growth in Braintree volume and continued penetration of large merchants. Segment margins declined 40 basis points, less than the drop in transaction margin. PayPal generated strong leverage from Dan's steps to streamline the business while still investing in Braintree, the PayPal brand and credit. Now, let's turn to the marketplaces business. As Devin indicated, marketplaces showed signs of stabilization in Q1; trailing three months active buyer growth and FX neutral GMV were both 5%, flat with Q4 results. Marketplaces delivered $2.1 billion in revenue, up 3% on an FX neutral basis. FX neutral transaction revenue grew 3%, while Marketing Services revenue grew 5%, held by strong growth of our global classifieds business. A few quick highlights on marketplaces operating metrics. 12-month active buyer growth was up 8% and sold items growth increased to 9%. Total GMV grew 5%, with U.S. GMV up 2% and international GMV up 7% on an FX neutral basis. We saw an acceleration of U.S. GMV, which is a measure of consumer buying that accelerated by one point versus the fourth quarter. However, this acceleration was offset by a decline in cross-border trade due to the stronger dollar. Segment margin was down 50 basis points from last year. Devin took significant steps to streamline his organization in the first quarter and is reinvesting in the three priorities he highlighted: a robust commerce platform, a vibrant marketplace, and exceptional customer experiences. Now let's turn to eBay Enterprise. eBay Enterprise generated $1 billion in gross merchandise sales for its clients. GMS grew 8% and same-store sales grew 10%. Revenue was $288 million, up 7%. We continue to expand the Enterprise relationships and are pleased to announce that Enterprise is now the number one ecommerce platform as measured by the 2015 Internet Retailer Top 500 Guide. Segment margin for Enterprise came in at 4.8%, relatively flat from last year. We continue to explore strategic alternatives for eBay Enterprise including a full or partial sale or IPO and we'll update you as appropriate. Now let me turn to guidance. We're off to a great start for the year. We are maintaining our full-year guidance for FX neutral revenue growth and non-GAAP EPS. However, the first quarter momentum will be offset by the impact of a strengthening U.S. dollar which will cost us approximately $250 million in revenue and $0.05 in non-GAAP EPS versus the full-year guidance we provided in January. We're projecting 2015 revenues of $18.35 billion to $18.85 billion, representing growth of 3% to 5%. And we're projecting 2015 non-GAAP EPS of $3.05 to $3.15, up 3% to 7%. And we continue to expect to generate approximately $4 billion in free cash flow for the year with CapEx of 8% to 10% of revenue. CapEx in 2015 will be higher due to one-time costs associated with separating the businesses. Let me provide a little more context on how the U.S. stronger U.S. dollar will impact our full-year results. As you know, we have a very global business with 52% of our revenue and even a greater portion of our net income coming from outside the U.S. Additionally, the U.S. dollar has strengthened versus the euro, pound, and Australian dollar by 7%, 1%, and 5% respectively versus when we guided in January. This is driving the impact on our guidance for the year. The marketplace business will bear the brunt of the impact from a stronger dollar with greater than two-thirds of the $250 million or $175 million impacting marketplaces revenue. Going forward, our earnings for the full year are reasonably well hedged, but marketplaces revenue will continue to be exposed if the dollar continues to strengthen. With that full-year context, here's a closer look by business unit. The short story is that, on an FX neutral basis, there is no change to the guidance we gave you in January. However, we wanted to provide you with additional details that would allow you to start to model the independent companies. First, a quick housekeeping item. Historically, we have provided segment margins by business unit. As we look to stand up to independent companies, we will transition to providing fully allocated operating margins which include corporate costs, dissynergies associated with the separation and the value transfer associated with the operating agreements. Earlier John discussed the details of the operating agreements. We anticipate the financial implications to be an estimated value transfer of approximately $25 million to $50 million on an annualized basis from PayPal to eBay. So, what does that mean for full-year guidance by business unit? For PayPal, we continue to expect 15% to 18% revenue growth on an FX neutral basis. We expect that reported revenue at spot rates will be negatively impacted by approximately three points from the stronger U.S. dollar net of hedges. We expect a 19% to 21% fully allocated non-GAAP operating margin, flat to up one point from 2014, which includes four to five points impact from costs to stand up PayPal as an independent company. And as Dan mentioned, we expect free cash flow of $1.7 billion to $1.9 billion. For eBay, we continue to expect FX neutral revenue growth between zero and 5%. We expect that reported revenue at spot rates will be negatively impacted by approximately eight points from the stronger U.S. dollar. We expect fully allocated non-GAAP operating margin of 32% to 34%, flat with 2014 and this also includes four to five point impact from stand-up costs. And as Devin mentioned, we expect free cash flow of $2.1 billion to $2.3 billion. In summary, we're off to a great start to the year. We have streamlined the organization and had better execution with strength across all three businesses. The full-year FX neutral revenue outlook is on track, but our strong Q1 momentum will be offset by the negative impact of a stronger dollar. We're making excellent progress on our plans to stand up to independent companies and we expect to conclude the separation in the third quarter. And now we would be happy to answer your questions.

Hi. Thank you for taking my question. I have two questions. First, can you elaborate on what specifically we need to do to rebuild your SEO and if it's category-by-category exercise, for example, dependent on the structured catalog, have you made significant progress in some categories that give you confidence that these will work? Second, on PayPal, you said PayPal has a lot of opportunities and is still a relatively small user base and its addressable market. In an environment of similarly increasing competition, why is the right term for the business to focus on growing free cash flow instead of reinvesting more aggressively in product and user growth? Or in other words, why do you think that maintaining a 25% margin versus investing in new products and customer acquisition to accelerate user top-line growth is now the right answer? Thank you.

Devin, could you address the first part, and Dan, you can tackle the second question.

Let me address the question about SEO and structured data. Looking back at our history, we have developed as a marketplace that traditionally views the world through listings instead of products. While listings provide us with a significant selection advantage, which enables us to offer the most items for sale compared to any other marketplace, they are also fleeting; they appear and disappear. Listings lack link equity and integrating content with them is challenging. Historically, eBay has experienced a series of SEO disruptions from various search engines. Currently, we believe that our business and technology allow us to sustain the advantages of our marketplace model while incorporating a structured data catalog. This will enhance the persistence and link equity of our sellers' inventory, making it more discoverable both on and off eBay. Our approach involves a comprehensive transformation that will take multiple years. We are tackling this by category while also targeting specific verticals where we can create the most early impact. We're off to a positive start, but it is still early, and the transformation will take time. However, we have observed that the items we have structured and cataloged are more easily discoverable on eBay, more persistent, and generate increased traffic through search engines and other digital platforms. We are confident in our strategy, though it is not a quick solution.

Thanks Devin. Dan?

Yeah, thanks for the question Carlos, appreciated. So you are right. It is a very exciting opportunity in front of us with an addressable market that is expanding dramatically for us. Cash is digitalizing, the world of money is digitizing. The way consumers manage and move their money is transforming technology platforms and fundamentally redefine that and merchants are moving towards digital commerce where they can use mobile to get ever closer to their customer, drive engagement, drive incremental sales. And I think that PayPal is very well positioned to take advantage of those opportunities. There are several assets that we bring to that site from our brand to our scale, to our platform, to our service and I can talk about that in more detail later. So what we have said is that we will grow our segment margins this year by 1% to 2%. We feel very comfortable with that. We feel very comfortable that with the operating leverage that we have in this business and the cost action that I took earlier this year, reducing headcount to really focus our costs, as well as increased economies of scale as we grow larger, are going to allow us to grow free cash flow in a disciplined fashion and yet still have the investment dollars to invest in the opportunities that we see ahead. As opportunities can be increased investments in our platform to speed up our ability to deliver capabilities, enhance capabilities, which you will see us rolling out even this quarter, going forward in new markets that we move into. And so we feel as we look at our model, that we have the operating level to maintain consistent margins and invest to take advantage of the opportunities that we see in front of us and I feel comfortable with that as investment dollars. I’d also point out one other thing that Bob mentioned. He said PayPal is going to be extremely well funded on its balance sheet as we go forward with perhaps around $6 billion of funding of cash on our balance sheet, enabling us to look at not just organic growth but inorganic growth as well. And so when I look at all those things together, I feel very comfortable with the guidance that we've given and the investment opportunities we see.

Thank you.

Thanks for taking the question. Just one. You made quick mention of it. But I too want to deal with the deeper in the rationale for the PayPal Paydiant transaction. When we think that delivers long-term in terms of merchant relationships? What some of the ancillary benefits might be lower term in terms of credit and how far that asset might expand the PayPal footprint today in terms of playing a role in somebody’s lives? Thanks so much.

Dan?

Yeah. Eric, thanks for the question. We are very excited about the Paydiant acquisition. Paydiant is not necessarily a name that a lot of people recognize from a brand perspective, but very leading merchants in the country sure do recognize it. But it is a mobile-based platform that provides merchants who want to write their own applications to engage and connect with their customers, to use that underlying platform to power those applications, whether that be through rewards, through payment processing, or through QR codes at the point of sale. When you combine the Paydiant platform with our platform at PayPal, you have probably in my estimation the world’s leading mobile payments platform and as I mentioned as the online and the offline world continue to converge together, driven by the confluence of mobile at the heart of that. The Paydiant acquisition enables us to move much more aggressively into that converged space, so into that offline space. It also provides on the consumer side the ability to utilize things like private label cards and rewards. So it’s kind of a host of capabilities that supplement what we had on the PayPal platform. So for both merchants and consumers, it was an acquisition that enabled us to more aggressively and more quickly address that expandable market.

Thanks so much.

Yeah, you bet.

Thank you for taking my question. I wanted to ask you, Dan, about the progress of your technology, specifically the important mobile technologies currently being deployed. In the context of card-present transactions, I'm referring to Venmo and One Touch, and how you plan to implement Venmo-inspired One Touch more widely among retailers using fingerprint readers. When do you expect these technologies to be mature enough and fully integrated into your products for deployment? Additionally, when will you feel confident about NFC adoption on phones and terminals to move forward with that? Also, Devin, I might have missed it, but what impact do you foresee from the recent Google algorithm changes regarding mobile? Isn’t it a significant advantage for you in terms of prioritizing mobile-ready websites, considering yours have been ahead of the competition for quite some time?

So maybe I can start and turn it over to you, Devin. So the first thing that I'm just going to take one step backwards and tell you, as you probably have seen, is we've kind of reorganized PayPal around merchants and consumers. And when we did that, we put Bill Ready in charge of the merchant segment. Bill, as you know, was the CEO of Braintree and what we really did by putting that together is really combine the Braintree platform and the PayPal platforms much more closely together so that we are able to bring things like One Touch not just on full-stack integrations and on mobile, but into the PayPal base. We think that the world is moving increasingly towards mobile payments that we have with the combination now of Paydiant, Braintree, and the PayPal platforms, the leading mobile payments platform in the world. We did over 1 billion mobile payments transactions last year. You heard that this quarter we’re up 40% year-over-year. We are taking things like One Touch and we want to put it right into our merchant onboarding process that we have for PayPal. And so we are taking the things that we've learned through both Venmo and Braintree, putting them together with some of our other acquisitions to provide to our PayPal embedded base, not only the services that you see now, but services that we will introduce even as of this quarter that will take us to a whole different level as a result of that integration together. That’s question number one that you asked and I feel really good about that and excited about it. Number two was on NFC and I don’t feel like NFC is embedded enough to go after. We are obviously doing trials around NFC ourselves at this point. But I think the real key and the thing I believe in is that any great open technology payments platform has to have at its heart this idea of being technology agnostic at the point of sale. Even though NFC is beginning to gain some momentum, it’s still probably 2% to 5% of the point of sales terminals out there in the marketplace, maybe more on a transactional basis. But it’s a small part. And I have seen many times where we think one technological standard is going to emerge and is eclipsed by something else. And so what I would like the PayPal platform to be and what we are building towards and have a lot of capabilities already, is the ability to utilize your mobile phone, but not just via NFC, but QR codes, Bluetooth, HCE. It really depends on what the merchant has upgraded towards. I think if you bet on a single technology, it’s a risky proposition and it takes a lot longer to move into the marketplace. The second thing is I'm a big believer that you don’t want to just enable a form factor change. We don’t want to just substitute a card swipe for a phone tap; you really want to think about what is the value proposition change that you are going to do. How can you, with that phone tap, enable a merchant to get ever closer to their consumers through rewards, loyalty, couponing offering, and associate that with the payment choice of type a consumer wants to pay with, whether it be a debit card, credit card, private label, Bill Me Later, whatever it may be, that's what we want to provide. And so you are seeing us look at our platform and our goals are to be the world’s largest open digital payments platform. And to do that we have to build with those tenants in mind.

And Gil, to your question about a sea of algorithm changes, we find out along with everybody else. We've heard what everyone has heard, which is that recent changes will favor mobile-optimized sites. All I would say is that it's a recent change, so it’s too soon to know fully what will happen. But I would say that we've been a leader in mobile commerce for multiple years. We've been working on optimizing our sites, our apps, and our mobile properties for years. And a huge percentage of our business now, close to 40%, is mobile. That's $8 billion this quarter. So you would hope that any change that favors mobile-optimized properties would ultimately help us.

Great. Thank you.

Great. Thanks. Bob or Devin, can you give us a sense of what contra revenue was from Marketplaces this quarter? And how a level of that now compares with the levels since you started using those promotions more aggressively following the breach in algorithm changes? And then one just quick one from Dan. Dan, I know you touched on offline a bit here. But I'm wondering if you could just give us a sense of how important offline is for your vision of PayPal? Sort of where it ranks in the opportunities and how you see the strategy in front of PayPal differing from the one that the company has been pursuing offline for the last couple of years?

So, Heath, how are you? Regarding contra revenue, there has been no significant change in how we utilize it year-on-year. As you can see, we have a two-point gap between GMV and revenue, and there are no major changes in our take rate over time. Therefore, contra revenue continues to help drive traffic and engagement among our users, but there has not been a significant change in its magnitude year-on-year.

Maybe I will just add quickly, Heath, philosophically we are very rigorous about how we deploy contra revenue and when we do. It is not part of driving any e-commerce if you use your balance sheet. It is hard to create value. And we are very tough on ourselves about when we deploy contra revenue, when we deploy deals, when we spend to acquire customers. It has to be because there is a customer lifetime value that makes sense that will get that second or that third sale that is not subsidized. So contra is a lever it will continue to be a lever. But we are not spending simply to drive growth. We are spending to drive value and acquire in a healthy manner new customers.

Got it.

Doug, if you are there, you are on mute. So…

All right, we will go to the next. We will just go to the next. Operator, let's go to the question that is the last question.

Thank you. I guess I have a couple of questions for Dan on PayPal. First, just as far as PayPal credit is concerned, moving forward is the expectation that you guys are going to use the capital markets or use your balance sheet to fund those loans? And I guess secondly on the regulatory side, two questions, one is, all the stuff that's happening in Europe, how does that really affect the PayPal business model? And secondly, could you just give us an update on the CFPB CID?

That last question contained three parts. Regarding PayPal credit, we operate as a technology-enabled lender because it enhances the value we provide to our merchant partners, helping them to achieve more sales. When we offer PayPal working capital, it allows merchants to grow their businesses, which significantly boosts our customer satisfaction scores. This leads to increased transaction volumes and reduced customer turnover. It's clearly beneficial for merchants, and consumers are able to complete transactions they might not have been able to finalize otherwise. From our perspective, this transforms a cost into revenue, making it advantageous for the entire ecosystem. We believe that providing credit aligns well with our platform strategy. However, as Bob mentioned, that doesn't necessitate using our own balance sheet to finance it. While we believe that offering this service is important, we also value the flexibility to decide whether to utilize our balance sheet. An example of this flexibility is how we recently funded our loan portfolio using external capital, which resulted in $700 million in cash returning to our domestic balance sheet, enabling us to explore other opportunities. Regarding the regulatory changes in the EU, these are significant and affect various aspects of our operations. Some regulatory developments can impact our cost structure and pricing strategies, and we evaluate these changes on a case-by-case basis in each market. We do not respond publicly to these changes immediately, but rather assess and determine our strategy privately. These ongoing changes are not new, and our strong focus on digital payments equips us well to handle them. We excel in regulatory compliance and maintain a proactive approach to oversight. In collaboration with regulators like the CFPB worldwide, we find that our goals align closely: we are both focused on what is best for consumers. The CFPB’s review of our practices may yield suggestions for improvement, and we work with them to enhance our services and ensure clear, compliant communications. Every quarter, we assess potential exposures and reserve accordingly. I hope this answers your questions.

Thank you. Appreciate it.

Great. Thanks very much, everyone. And we'll see you next quarter.

Thank you.