PayPal Holdings Inc (PYPL) — Q1 2016 Earnings Call Transcript

Thank you, Andrea. Good afternoon and thank you for joining us. Welcome to PayPal Holding's earnings release conference call for the first quarter 2016. Joining me today on the call are Dan Schulman, our President and CEO; and John Rainey, our Chief Financial Officer. We're providing a slide presentation to accompany our commentary. This conference call is also being broadcast on the Internet, and both the presentation and call are available through the Investor Relations section of our website. In discussing year-over-year comparisons, including guidance growth rates for the second quarter and full year 2016, we have chosen to present non-GAAP pro forma metrics. We believe that these metrics provide investors a consistent basis for reviewing the company's performance across different periods. We will also discuss some non-GAAP measures in talking about our company's performance including the non-GAAP pro forma metrics mentioned above. You can find a reconciliation of these metrics to the most directly comparable GAAP metrics in the presentation accompanying this conference call. In addition, management will make forward-looking statements that are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include our guidance for the second quarter and full year 2016. Our actual results may differ materially from those discussed in this call. You can find more information about risks, uncertainties and other factors that could affect our operating results in our annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC and available on the Investor Relations section of our website. You should not rely on any forward-looking statements. All information in this presentation is as of today's date, April 27, 2016. We disclaim any obligation to update the information. With that, let me turn the call over to Dan.

Thank you, Gabrielle. Before I start my remarks, I want to take a quick moment to officially welcome you. We're thrilled to have you join PayPal as our new head of Investor Relations. And I want to thank all of you on the call for joining us. We know how busy your schedules are, so we appreciate your time. I'm very pleased to report that PayPal delivered strong financial results for the first quarter of 2016. In many ways, this was our best quarter since I joined PayPal, and it's gratifying to see the company execute against our goals. The mission of PayPal is clear. We want to become an everyday essential financial service for consumers and provide a full service solution and platform that enables digital commerce for merchants globally. And we continue to make tangible and consistent progress towards that vision. We are showing strong growth across all of our operational metrics. We ended the quarter with 184 million active accounts, up from 179 million last quarter. Our enhanced value proposition is attracting new users at an accelerating rate and in turn attracting new partners and merchants. The larger our scale, the more important and relevant we become in the ecosystem as our network effect becomes ever stronger. Our increased scale combined with continued growing engagement resulted in some of the strongest payment volume and revenue growth rates in our recent history, clearly demonstrating our leadership in digital and mobile payments around the world. Our total payment volume growth, or TPV, accelerated to 31% on an FX-neutral basis. And our merchant services volume grew a record 39%, leading to revenue growth of 23% on an FX-neutral basis. We ended the quarter with over 14 million merchant accounts. I just want to pause on that number for a moment. Our two-sided network with 14 million merchants on one side and over 170 million buyers on the other is one of our key competitive advantages and extremely difficult to replicate. We are proud to have added this quarter popular and influential brands like Crate and Barrel, Sephora, Air France, FreshDirect, Panera Bread, and Woolworths, which is the largest grocery chain in Australia serving more than 28 million customers each week. These brands joined a growing list of companies that are choosing PayPal. As I mentioned, merchant services payment volume grew 39% on an FX-neutral basis, significantly higher than the rate of e-commerce growth. Our increasing ability to innovate and lead transformative change for merchants and consumers is not only accelerating our competitive differentiation, but enabling us to once again increase our share in a dynamic and competitive environment. Each quarter, we measure the success of our business against four key metrics: our top line growth, our net active customer base, our customer engagement, and our ability to generate strong free cash flow. I'm pleased to report we delivered strong performance against each of these metrics. Let me start with revenue. We grew our top line to $2.54 billion, up 23% on an FX-neutral basis, or 19% on a spot basis. This was our strongest quarter for revenue growth in the last five quarters. As I mentioned, we ended the quarter with 184 million active accounts, demonstrating another strong quarter of customer acquisition. All of you know by now that our long-term aspiration is to position PayPal as an everyday part of our customers' financial lives. And increasing the level of customer engagement is one of our primary measures of success in that goal. And despite an ever-increasing account base, I'm pleased to say we grew the annual transactions for active accounts from 25 in Q1 a year ago to 28 this quarter, which resulted in PayPal processing 1.4 billion transactions for our customers during the quarter, up 26% year-over-year. Customer engagement was driven by significant enhancements to our value proposition and by the debut of PayPal's first Super Bowl ad, which drove significant increases in the perception of PayPal in the weeks that followed the commercial's first airing. And last but certainly not least, we generated strong free cash flow of $605 million in Q1, up over 70% year-over-year. I'm obviously pleased with the quarter's results, but we still have much to execute throughout the rest of the year. We need to continually innovate if we are to widen the distance between our value proposition and that of our competition. And in keeping with that focus, Q1 saw the introduction of several strong new product experiences across our global customer base. We launched a fundamentally redesigned PayPal mobile app in 145 markets simultaneously, in 17 languages, across both iOS and Android operating systems. The app is built on an iterative platform so that we can now easily customize and localize new features across all the markets where it's live. The new experience is driving increased consumer engagement, increased send and request money transactions and will enable our consumers to use their mobile phones online, in app or in store with both NFC and QR capabilities. Venmo continues to go from strength to strength, processing nearly $3.2 billion in payment volume in Q1, up over 150% from last year. And its subscriber base continues to grow at an ever-accelerating rate. We made good progress with our Pay with Venmo pilot. Early customer results and feedback have provided strong validation around the demand for Venmo as a way to pay in app. This feedback has helped us to fine-tune our processes, procedures, and value proposition. And we have now widened our pilot to include approximately 550,000 Venmo users. We are on track to expand to more merchants and open the service to our full Venmo customer base in the second half of this year. We introduced PayPal Commerce, a set of tools and APIs which are currently in beta that make it easier for merchants to securely sell across multiple contexts: e-mail, social share, blogs, articles, ads, in-app, and anywhere consumers are online or on their mobile devices. This new offering is the result of the rapid integration of the technology and the team we gained through the acquisition of Modest in August 2015. It is a critical element of the full service suite of capabilities we are building into our merchant platform as we help retailers move fully into digital commerce. Our increased pace and global scale of innovation are fueled by the investments we have made in our core infrastructure and platform. They are designed to drive agility and innovation across our entire software stack. We run one of the largest private cloud environments in the world. We follow industry best practices of agile software development, continuous integration and delivery using open-source technologies. These investments have enabled our developers to push code several times a day, allowing them to iterate new features faster and get instant customer feedback. To drive that point home, the number of production deployments has increased by 200% compared to last year. Our increased ability to innovate on a global scale and deliver on our commitments is a primary reason why PayPal is becoming the partner of choice for companies around the world, including some of the leading tech companies and the largest wireless carriers in Mexico, Latin America, and Europe. Telcel and Claro are implementing our platform to help their 140 million consumers manage their money and make everyday purchases using their mobile devices. These digital wallet offerings are now in trial, and we expect a full rollout in the second half of the year starting in Mexico and Brazil. The app will be available for download for both Android and iOS, and consumers will be able to easily create and manage a new PayPal account using only their smartphones and will be able to pay for basic Telco services including topping up their prepaid phones and purchasing related data plans. Eventually, they will be able to conveniently pay for services from other merchants as well as paying bills and sending money. Our partnership with Vodafone in Europe will have tens of millions of European customers using PayPal as their preferred way to fund their payments. And for the first time, consumers with Android smartphones at Visa contactless terminals will be able to tap to pay in store. We are now live in our first market, Spain, and we anticipate expanding across Europe throughout the back half of 2016. Our partnership with Vodafone delivers what consumers, businesses, and European regulators want: better products, more choice, and greater transparency. In the quarter, we also extended our relationships with both Alibaba and Facebook. Our pilot with Alibaba Wholesaler has been extended, and we will now do a full rollout to include new countries and merchants. And our partnership with Facebook continues to expand nicely, both in the Messenger and Facebook Shop applications and as a key partner across a wide range of their core payments experiences. Q1 also saw us deepen and expand our relationship with commerce platforms that make selling online and on mobile simpler for businesses around the world. We signed an agreement with WooCommerce to make PayPal their preferred payment extension for their platform. We also extended our relationship with Shopify, one of the largest commerce platforms which powers 243,000 businesses in approximately 150 countries to provide all new Shopify merchants with PayPal as their default payment experience. One Touch expanded to merchants in an additional 121 markets across Asia, Europe, and Central America, making it available to merchants in 144 markets, and it's now available to consumers in all 203 markets in which we operate. One Touch is the most rapidly adopted product PayPal has ever launched. It now has some 21 million consumers who have proactively opted in, and we anticipate well over 2 million merchants will have One Touch enabled by year-end. We continue to see meaningful engagement and conversion lift with the use of One Touch, enabling both consumers and merchants to have a more seamless and friction-free checkout experience. In fact, a recent comScore study rated PayPal's conversion rate for merchants at 87%, with the next highest service at 51%. Clearly for merchants and consumers, PayPal is a far superior choice. I'm also very pleased with the performance of our Xoom acquisition and our integration efforts. Global expansion meaningfully accelerated in the first months following the close of the acquisition. So far this year, Xoom has expanded its service to 11 new countries with two more countries coming very shortly. These include Haiti, Nigeria, and Slovakia, and we've also announced an integration with M-Pesa in Kenya. Xoom continues to be a market leader in mobile, with some 70% of transactions in the quarter happening on a mobile device. And Q1 was a record activation quarter, with net new actives up over 70% year-over-year as we begin to see some of the synergies we expected come to fruition. Being a leading global payments provider requires exceptional effort and continued investment in our risk and compliance functions across all of our markets and all of our product areas. There are many reasons to do this. We live in a time where global terrorism and cybercrime are on the rise, and as a result, increasing our focus on compliance is obviously the right thing to do. But we are also investing in these areas because we know that a strong risk and compliance infrastructure is a deep competitive advantage. The more advanced our capabilities in these areas, the greater the trust our customers will have in PayPal and in our ever-expanding value proposition. A great example of this is the relationship we have built with our regulators as it relates to our PayPal Credit offerings. We have seen our Net Promoter Score for PayPal Credit jump to over 70% in March, a clear demonstration that what regulators want and what we want are truly aligned around delighting and protecting our customers. I'll end my remarks with the following reflection. Although Q1 was clearly a strong start to 2016, we still have a lot of work ahead of us in order to deliver on our product roadmap and expand our leadership position. We have an expansive and an important mission. And I can assure you our team is focused on executing, partnering within our ecosystem, and driving new innovative and meaningful value to our merchants and consumers. And with that, let me hand it over to John.

Thanks, Dan. I also want to thank all PayPal's customers and our 17,000 employees worldwide for making this another great quarter. Transactions, payment volume, and revenue growth, all accelerated from the previous quarter. Total payment volume was $81 billion, an increase of 31% on a currency-neutral basis. Of that, U.S. payment volume grew 30% while international growth was 32%. We grew faster than the e-commerce market and continue to gain market share. Our share gain demonstrates that our strategy is working as we focus on being the customer champion and move from being a payment button to an end-to-end payment solution for merchants of all sizes. We added 4.5 million new active accounts, ending the quarter with 184 million. We continue to extend our global reach with 56% of the total active accounts outside of the U.S. The number of payment transactions in the quarter increased 26% year-over-year, driven predominantly by the increasing relevance and ubiquity of our platform, as we continue to have strong growth in our core business and Braintree. In addition, PayPal is driving the growth of mobile payments, and an increasing amount of our business is conducted on mobile devices. During the quarter, we processed $21 billion of mobile payment volume, which was up 54%. With capabilities and services like peer-to-peer, credit, and remittances, as well as strong mobile growth, we are becoming more relevant in our customers' daily lives. As a result, the number of payment transactions per active account increased to 28, up 12% from a year ago. We generated more than $2.5 billion of revenue in the first quarter, up 23% on a currency-neutral basis. Of that, transaction revenue increased by 21%, which benefited from rising engagement as reflected by the increase in the number of payment transactions for active customer accounts. This increase also reflects the growing relevance of Braintree as we move from a payment button to a full-service payment partner where we capture all of the merchants' processing volumes. Revenue from other value-added services grew 38% on a currency-neutral basis, driven by the growth of PayPal Credit as well as the amended contract with Synchrony Financial last year. We continue to demonstrate good control of our expenses. Total expenses were $2 billion, up 20%. Our volume-based expenses, which are transaction expenses and transaction and loan losses, were up 32%, in line with payment volume. Other expenses grew at approximately half the rate of revenue growth as we gained economies of scale. Excluding Xoom, which was not in our results in the first quarter last year, our other expenses increased only 6%. As we stated in the past, our strategy is to expand our presence with large merchants, which increases our relevance with consumers but results in a lower take rate from volume-based pricing. This strategy has driven accelerated volume and revenue growth as well as market share gains. Our fast-growing Braintree platform also provides solutions for large and next-generation merchants and brings with it a higher mix of card payments. As a result, our overall transaction margin for the quarter declined 380 basis points. While large merchants in Braintree contribute to a lower overall transaction margin, they increased our overall operating income dollars. In the quarter, operating margin declined 70 basis points from the same quarter a year ago. Excluding Xoom, however, our margin increased, demonstrating that our core business is performing well and we are doing a good job controlling costs. We are one quarter in after completing the acquisition of Xoom, and we are even more excited about what it brings to the platform. But as I previously stated, Xoom will be dilutive to operating margin in 2016. In the quarter, our capital expenditures were $133 million, or approximately 5% of revenue. Free cash flow in the quarter was $605 million, representing $0.24 of free cash flow for every dollar of revenue. This was higher than we expected from better operating results as well as the timing of certain working capital items. We ended the quarter with cash, cash equivalents, and investments of $6.4 billion, including approximately $1.4 billion in the U.S. And now to guidance, our business is performing great, and we are executing on our strategy and delivering on our commitments. Our strong performance in Q1 reinforces our conviction in our strategy and the opportunity before us. We still have three quarters to execute against for the year, but we are off to a good start. As a result, we are affirming our full-year guidance ranges for 2016. However, I'd like to provide you with some context for how we're thinking about the year. The retail landscape continues to be mixed, and we still face pressure from the movement of currencies relative to the dollar on our international business. We continue to see volume accelerate across our platform, driven in part by strong growth of our newer businesses. The mix shift to these newer businesses where we are investing puts pressure on our transaction margin, which good cost control will help offset. There is still much of the year to play out, but our first quarter performance provides us with increased confidence in achieving our goals. As I stated on the call last quarter, we had some lumpiness in our revenue growth due to several one-time items in 2015. Consistent with our guidance last quarter, we expect an approximate six-point deceleration in year-over-year revenue growth from the first quarter to the second quarter, primarily due to the sale of a portion of our credit receivables, and the impact of the amended Synchrony agreement last year, both of which were virtually 100% margin. For the second quarter, we expect revenue growth on a currency-neutral basis to be between 16% and 18%. We expect non-GAAP EPS to be between $0.34 and $0.36. We plan to return to a more normalized growth rate in the back half of the year. Our business model of strong top line growth, expense control, and low capital intensity gives us the ability to consistently generate strong free cash flow. We have a tremendous opportunity to increase shareholder value with the deployment of that cash flow. We initiated the share buyback program that was announced on our last earnings call and repurchased 17 million shares at an average price of $35 per share. I'd like to take a moment to talk about our credit products, which complement our digital payments platform. Credit represents approximately 2% of TPV and has been relatively consistent at that level over the last couple of years. Credit is a flywheel for PayPal, which benefits both our consumers and merchants. It drives payment volume growth and increases choice for our customers by providing them with flexible payment options and allowing customers to pay over time. But credit benefits PayPal in many ways beyond just a payment transaction. Credit reduces cart abandonment, leading to increased conversion for merchants and an increase in basket size on purchases for the average purchase of a credit customer that is 20% to 30% larger. Additionally, our working capital product continues to gain momentum and helps to deepen our relationship with merchants while helping them grow. We typically see merchant sales increase after receiving our working capital loan. Satisfaction rates are very high, and we experience reduced merchant churn. Beginning this quarter, we designated $800 million of European customer balances held in our Luxembourg banking subsidiary to be used to extend credit to our European customers, which would have previously been funded with our own cash. The use of the full amount of these funds will depend upon the growth of our European credit business. This is a highly efficient source of funding to support our credit business and we continue to explore alternatives to pursue an asset-light model. In closing, we are off to a strong start to the year. As a technology platform leader, operating globally at scale, we are driving the digitization of payments in a large, dynamic, and growing industry. We are focused on delivering shareholder value with our strong revenue growth and cash generation. We're excited about the opportunity ahead and look forward to sharing more at our Analyst Day next month. With that, let me turn it back to the operator for questions.

Thanks. You guys spoke to the decline in the transaction margin, and it was pretty significant year-over-year. I guess two related questions. One is how should we think about the trajectory of that margin going forward in terms of the declines related to mix? And then second, as far as lower European Interchange is concerned, should we assume that the first quarter is fully loaded for that impact? Thanks.

Sanjay, this is John. How's it going? First, with respect to transaction margin, as we've seen for a couple of quarters now, there's definitely pressure there. But I would remind you that's a deliberate part of our strategy as we're trying to increase the ubiquity of PayPal and allow our customers to use PayPal at larger merchants where we're going to see pressure on take rate. Fortunately for us, we have the ability to offset that with the operating leverage in our business. And as a management team, we're focused on our margins, our generation of free cash flow and growing EPS and not getting overly focused on just one aspect of the P&L being the transaction margin. So, you'll continue to see us demonstrate the ability to offset some of that decline. With respect to mix, as we said before, we expected the impact of that in 2016 to be relatively minimal, and our first quarter results actually validated that. It was fairly negligible in the quarter, and we would expect, to your question, a similar impact for the balance of the year.

I'd just add a couple of things.

And my follow-up...

You'll continue to see us demonstrate the ability to offset some of that decline. Regarding mix, we anticipated its impact in 2016 would be minimal, and our first quarter results confirmed this. It was quite negligible in the quarter, and we expect a similar impact for the remainder of the year.

Just around the new account growth, maybe you can just parse out which channels you're seeing the most success in terms of growth? Thanks.

Yeah, let me first jump on a little bit of John's answer and just supplement it. First of all, as we've said all along, the margins in this business tend to want to go up. In fact, if you excluded Xoom from our results in the quarter, our margins would have gone up year-over-year. The take rate is a direct result of the strategy that we're implementing. First thing is we want more ubiquity for PayPal consumers. The more ubiquity there is for them to shop, the more they use us, the more engagements they have, and the more satisfied they are with the service, which gives us a flywheel effect. And as John mentioned, every one of those dollars that come in from our merchants are obviously profitable dollars for us. The large merchants have lower take rates. That's just the way of the world: more volume, more pricing leverage. The second piece is we are trying to become a full-service platform to enable merchants to move into digital commerce. That means we want to do 100% share of their payment processing. We want to be a strategic partner with them. We want to enable their business strategy. And the more we do that, the closer we get to our merchants, the better off that is for us. Churn goes down, and more branded business comes towards us. But of course, as we move more towards that product mix, you also see some margin pressure because that mix of product has a lower margin set as well. But overall, when we include our branded on that, that's a net positive for us. So we're really comfortable with the strategy. It inevitably leads to at least for now because we are penetrating a lot of that larger merchant base, and we'll start to see more normalized outcomes from that. But for now, that is the right strategy for us and it is paying off in all sorts of benefits for us. In terms of net new account growth, we are seeing that throughout the world right now. As John mentioned, over half of our actives are outside of the U.S. So we're seeing good growth across the world. We're obviously seeing very good growth in our core PayPal acquisition as well as in Venmo. So I would basically say we've got good, consistent growth that spans from our newer services to our core business. I think a lot of that has to do with the fact that our value proposition has significantly improved over the course of the last year or year and a half or so, and consumers are beginning to see that.

Thank you.

Great, thanks. Good results here. Just wanted to dig into what's driving the TPV acceleration. I think you called out a mixed retail landscape. So how much of the acceleration is from, say, merchant additions you called out, the backlog of full-service deals, et cetera?

Yeah, I'll take that. I think what's really driving the TPV growth is obviously, and no surprise here, our net new actives have grown by some 19 million, 20 million net new active additions over the past year. Over the last two quarters, you've seen acceleration in the number of net new ads that we put on to the business. Engagement is growing. Engagement is growing because our value proposition is getting better. One Touch is increasing engagement, our new mobile app is increasing engagement, and conversion is also going up because of those value propositions. We obviously are also expanding partnerships right now. All the investment that we've done in the tech stack over the course of the last three-plus years is really paying off in our ability to work with the most technically savvy and sophisticated partners and be able to deliver digital and mobile payment experience that we think is best-in-class. So these new partnerships are helping. The more consumers we get, the more merchants want to come onboard, and you saw some of those in my remarks. But we're now over 14 million merchants. So it's a combination of a better value proposition, more partnerships, and expanded merchants, and then really driving our net new consumers and the engagement per consumer; all of that is adding up to very strong volume growth.

Got it, that's helpful. Just as my follow-up, just on Xoom, I think last call you talked about how you still see a line of sight to that becoming margin accretive. How much of the current drag is driven by your accelerated country expansion efforts and maybe some integration costs that you'll maybe lap sooner rather than later? Thanks.

Yeah, we've said that we expect Xoom to be margin dilutive this year. And I wouldn't expect necessarily the back half of the year to look that much different than the front half. But to your point, as you can see from and hear from Dan's prepared remarks, this is an area that we're investing in, and we would expect it to start generating more significant profits in 2017.

Great. Thank you.

Yeah.

Thank you. Dan and John, I wanted to follow up on your comments about PayPal Credit. You've made it clear that credit is important because it helps fuel growth and has the flywheel effects that you described. But how much do you worry about the lower valuation multiple that the market ascribes to businesses that face credit risk? And is that really the reason why you are exploring an asset-light model to basically identify a partner with a strong balance sheet so that they could help you retain all the benefits of the credit product without taking on the credit risk?

Yeah, hey, Bill. It's a great question. So as we've said pretty consistently, we are not in credit for credit's sake. We are in credit because it drives both consumer benefits and merchant benefits and drives the overall flywheel for PayPal. Any which way you look at it, it drives increased basket size, increased conversion, PayPal Working Capital, significantly increases the volume that we see coming onto PayPal, and significantly increases the NPS scores. So we see a lot of benefit in the overall PayPal ecosystem. But we can do this and will continue to do this in an asset-light manner. Credit is a small part of our overall business. It will likely remain a small part of our overall business. And finding ways to do that in asset-light and capital-efficient manners are a goal of ours. Synchrony, the partnership we have with them, is a good example of that. I think you can expect us to be looking at those kinds of things to become increasingly asset-light. We don't need to do all of this or even a great portion of this necessarily on our own balance sheet. We can work with partners because the important thing to us is the flywheel effect.

I would just add to that, Bill, that another aspect that we look at is the volatility or - and one of the things that we really try to focus on is reducing the volatility of our earnings. And I think it's important that you understand that we have a lot of ways that we can manage any volatility irrespective of whether it comes from credit or other aspects of our business. But to Dan's point, credit is about 2% of our volume today. And if you were to just take 2015 growth rates of credit and the rest of our business, it would take a couple of decades before credit even got to 20% to 25% of our overall revenue. So this is something that, to Dan's point, we want to utilize it because it complements our platform, but I'd like to allay some of the concerns that are out there right now around this because it's not something that I think is going to have any kind of dramatic impact in terms of the volatility to us.

Thank you. I wanted to also follow up on your comments around partnering with other players in the ecosystem. You guys have previously said that steering and data sharing were two issues that were at the center of your discussions with other players, but that those were very solvable. Maybe could you talk about whether there have been any changes in philosophy around how you think about the sharing of data, and perhaps any commentary around the steering issue? It was interesting to hear MasterCard say at a recent conference that they're okay with the notion that PayPal has thrown out around customer choice, and that's something that they could live with. I was hoping - there's a lot there, but just around those topics, just hoping you could give a little bit of color and that's it. Thank you.

Yeah. Sure, of course. So we're in good and meaningful discussions across the entire ecosystem right now. And I'm hopeful that that leads to a win-win for a number of parties. Just take a step back and give a little bit of context. One of the things that we talked about inside PayPal all the time now is how do we become the ultimate customer champion company. And being a customer champion company means providing the very best experience to our customers. And when we think about the very best experience; that means giving our customers full choice and optionality about where they want to pay and how they want to pay. And to us, that just makes a ton of sense, and we've done a lot of work around this as you can imagine and a lot of research and experimentation. And here's what we see. When we do that, we drive a heck of a lot of more net ads than we have in our traditional signup process. And engagement and conversion go up meaningfully. So that obviously drives increased revenues and volumes for us. Funding mix may shift slightly, but the difference between ACH and debit has narrowed substantially over the last couple of years. Different regulatory environments have narrowed a lot of the payment options. So - and we would also expect some trade-off with incremental volumes that we could drive onto networks and pricing that we would receive from potential partners. In addition, we are very willing to share data back with the issuers and the networks. That really is a legacy of the past as best as I can see. And this sort of new model of customer choice of data sharing, and all of us having a common foe in cash transactions, we all want to electronify more and more payments and that's all attractive and additive to the entire ecosystem. And so that eliminates a lot of the previous perceived friction that might have been out in the ecosystem. Furthermore, we want a partner. We think that's the right thing to do. And so we'll see where all this goes, but as I said, it has the opportunity to be a win for all of us in the ecosystem.

Thank you.

Yeah. You bet.

Great. Dan, you've talked in the past and provided some specifics around the state of the pipeline of business or merchants that you're onboarding. Just wondering if you could give us a bit of an update on that, how it compares to where you were back when you last updated in January or the business that you did last year? And then just as we talk through the improved engagement around One Touch, is there any way that you can quantify that for us, either in the amount of TPV that One Touch users are using after they sign up for One Touch or their engagements in a specific period that would provide some additional color around that benefit?

Yeah, yeah. Thanks for the question, Heath. So first thing, in terms of pipeline, we're improving our capabilities as rapidly as we can to onboard live to site that pipeline of sales that we have for Braintree and in our core business. So that's improved quite a bit, but I will say despite the improvement, we are still seeing a large demand and pipeline of additional sales coming in for our platforms. Yeah, I’d say it’s a high-class problem to have. The value proposition of Braintree is, I think, the whole team there is doing a great job in driving that. The core propositions of PayPal are getting better really. They're really starting to execute against this idea of being a full-service platform, really being almost the underlying operating system for digital commerce. And then that is resonating with the merchant population and so we still have a very strong pipeline waiting to go live on site and a strong pipeline of merchants that we're talking to in the middle of the sales process with them as well. In terms of One Touch, we've said from the very beginning that we see meaningful lift in not just conversion vis-à-vis our other products but also engagement in terms of how often a consumer uses PayPal because really, as you can imagine, taking friction out of the checkout experience is just a really positive thing. It's really positive for consumers, and it's really positive for merchants. And seeing that comScore study that basically, as you know, rates our nearest alternative service at 51% and us at 87% can give you an idea of the lift in conversion. The other place that I would point to is you can see kind of where PayPal conversion was before One Touch and other comScore studies, and you can get a sense of some of the lift for that by looking at some of those external studies. But you'll see it's a meaningful lift in conversion overall. That's obviously beginning to help us in our results. And hopefully, as we continue to onboard more and more consumers, we'll continue to help drive some of our future growth.

Great. Thanks, Dan.

You're welcome, Heath.

Hi. Good afternoon, guys. All right, very quickly, can you just illuminate a little bit what drove the couple of basis point uptick in transaction expenses? Is it mix in Braintree, or is it actually underlying card mix in the core PayPal platform? And then similarly, it looked like transaction and loan losses upticked again, even though you said that PayPal Credit is holding steady at 2% of TPV. So can you just give a little color around those drivers? Thanks.

Sure, Lisa. So the first – the answer to your first question about the increase in transaction expense is related to the mix of Braintree. Of course, that being more card-based, but that as opposed to what we're seeing in the core business on the transaction and loan losses, that's actually a result of increased risk pressures that we saw in the quarter as opposed to anything that we saw specific to credit.

Terrific, thanks. And then one real quick follow-up. You've mentioned that you've got some initiatives underway to drive the use of the stored balances in PayPal, so meaning being able to deposit paychecks, et cetera. But it looked like the balance sheet line item there only grew about 6% year-on-year. So can you just give a little color around the usage of stored balances in your initiatives there?

Yeah. First of all, Lisa, welcome to the coverage universe of us, and glad to have you.

Thank you.

Yeah. In terms of additional funding sources, I think is what you're talking about in there. We have not introduced additional funding sources coming in. You can now add cash into your balance at several thousand retail stores across the U.S. But this idea about us opening our platform up to more funding types to be more in the middle of how people manage and move their money is still a future initiative for us. So you wouldn't have seen that in today's results.

Yeah. And with respect to the customer balances, Lisa, recall that in my prepared remarks I suggested that we moved $800 million from our customer balances to our cash to help fund some of the European originated credit.

Yeah. Yes. I got that. I was looking actually at the liabilities line item.

Yeah.

Andrea, we have time for one last question.

Hi, guys. Congrats on the good, solid results here.

Thanks, Bryan.

I just want to go back to the whole question around funding mix since that's a popular one. You guys did mention that there's not a lot of difference between ACH and debit, although to us, we think of ACH as being only $0.02 and debit being a little north of $0.21. So just exactly what do you mean on that? On a funding mix change there, wouldn't there be an extra cost? And then secondly, on credit, there is a worry that if there are more transactions on the network's credit cards that you will make zero money or less money, obviously, if you open it up to consumer choice. Thanks.

Yeah. So we've done - as I mentioned, we've done a ton of experimentation on this, and what we have seen with consumer choice is a much better experience for consumers, much more engagement, much more conversion, and many more incremental net ads to that. And on the mix, when you look at ACH you also need to look into not just the cost of ACH, but when we take from an ACH balance, there's risk associated with that. And so as we look at the environment and we look at the differences in mix shift, we look at the advantages of choice, we look at partnering with the ecosystem, we think this is a net positive not just for us but for other players in the ecosystem as well. And that's what has us cautiously optimistic about this. Any time that you can find solutions that actually provide a win for all players in the system, that's a real positive. And I think that's what we're finding in our conversations. It doesn't mean that things lead to one thing or another but it does mean that there's a lot more understanding and a lot more commonality in what we're trying to do than before.

Okay. And since I'm the last one to ask a question, let me ask the follow-up on just PayPal's new mobile app. What's the change in value proposition for PayPal in-store for both merchants and consumers? Because obviously you guys sound excited about that, and it looks like PayPal in-store could be a big part of this. Thanks so much.

Yeah, you bet. Well, first of all, the mobile app is a fundamentally redesigned app. It really brings us into the mobile world. It puts up front the things that customers want to go out and do; it doesn't clutter it up. It's simple and easy. As I mentioned, it's driving increased consumer engagement. And it also enables us for consumers to now be able to use their mobile phone in-store whether that be through NFC or QR codes. The way that I think about in-store is really in-store, online, in-app, they're all coming together. It's just commerce is the way to think about it. It's all moving towards mobile. And we basically want to be able to utilize this underlying platform for merchants so that we can be their OS, do 100% share of checkout, enable merchants to create their own applications, tie in their rewards into our platform, do things like split tender at checkout, and create a real value proposition change for consumers so that merchants can use mobile to get closer to their customers. And we're trying to power that experience there. We want to be OS agnostic. We want to be POS, point of sale, agnostic as well. And then we want to use our PayPal wallet, which, as we mentioned, is growing quite quickly to basically light up that merchant app. Part of the issue with merchant apps is when they can create a good value proposition, they need somebody to help power that. But then they need volume on that application. And with things like our One Touch technology, our new re-platforming, as long as a consumer opts in, we can credentialize their IDs and make that signing up for that app much more friction-free than previously. So not only can we provide the underlying infrastructure for that merchant, but we can then light up that application with our consumer base. We've had great success with Shell in the U.K. They're doing a trial now in Brazil with Subway, with Burger King, with Dollar General, with Macy's, with Papa John's. We have thousands of retailers that now are part of our order-ahead application on our mobile app where you can just order ahead, pay with PayPal, and then pick up in-store. And so this is what I mean. Basically, you have mobile bridging the gap between online, in-app, and in-store, and we're really pleased with the initial results; it's obviously early on but has a lot of potential for us there. So thank you for that question.

Thank you for that color.

And thank you, everybody, for joining us today. We appreciate your time.