PayPal Holdings Inc (PYPL) — Q2 2016 Earnings Call Transcript

Thank you, Keith. Good afternoon and thank you for joining us. Welcome to PayPal Holding's earnings release conference call for the second quarter of 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 full year 2016, we have chosen to present non-GAAP pro forma metrics because 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 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, July 21, 2016. We disclaim any obligation to update the information. With that, let me turn the call over to Dan.

Thanks, Gabrielle. Good afternoon everyone, and thank you for joining us on the call today. I'm pleased to say we had another strong quarter, with our financial results at the high end of our guidance, and in many cases exceeded our own expectations. And of course we announced earlier a multiyear partnership with Visa. But before I discuss our results, I'd like to point out that it's been one year since PayPal became a publicly traded company for the second time. In many ways, our listing last year was a full circle moment for PayPal. It allowed us to return to the core mission of our founders, the mission they were pursuing when they took PayPal public in 2002. Even with the Internet in its infancy, they saw the opportunity for technology to democratize money. Today our purpose is the same, but our opportunity is much greater, with the digitization of money accelerating and the adoption of mobile devices continuing its rapid pace globally. PayPal's total addressable market has grown to include all of digital commerce and digital money, a $100 trillion opportunity. Today's announcement with Visa brings us closer to capitalizing on that opportunity. The mission of PayPal is clear. We're striving to become an everyday essential financial service for underserved customers. And for our merchants, we want to provide a full-service solution and platform that enables digital commerce. We are making tangible and consistent progress towards achieving these twin goals while consistently delivering strong financial performance. I'm proud that Q2 was another strong quarter for PayPal, both financially and strategically. Our partnership with Visa will help drive consumer choice and provide enhanced value to the larger payment ecosystem. But first let's look at the financial metrics we delivered this quarter. We grew revenue at 19.5%, delivering $2.65 billion on the top line. Given the challenging comps from Q2 last year, this exceeded our internal forecasts and guidance. We processed $86.2 billion in total payment volume, an increase of 29%. And our merchant services volume expanded 36%. Our mobile payments volumes continued to accelerate, up 56% this quarter, accelerating for the third straight quarter. And we hit a record of over $24 billion in mobile TTV in the quarter. In the last 12 months we've added 19 million net active accounts, finishing the quarter with 188 million customer accounts transacting on the PayPal platform. And even as we add new active accounts, our transactions per account continue to expand, reaching 29 this quarter, up from 26 a year ago. We generated $495 million of free cash flow in the quarter, giving our business tremendous flexibility to continue to reinvest in our growth. In the first six months of 2016, we produced $1.1 billion of free cash flow, on track to meet our guidance of more than $2.1 billion for the year. And finally, we delivered $0.36 of non-GAAP EPS versus our guidance of $0.34 to $0.36. I'm proud of the PayPal team and they worked hard to deliver these strong results. I’d like to now spend some time talking about the partnership announcement we made today with Visa and the progress we are making towards enabling our strategy of being a true customer champion. Being a customer champion company is not just words for us. In order to be a great company over the long term, we need to provide the very best experience for our customers. We believe that means giving our customers full choice and optionality in where they want to pay and how they want to pay. This change in our business model positions us to better serve our customers and is fundamental to the long-term growth and success of PayPal. While we expect this to drive incremental expense, we now have evidence to support the assertion that customer choice will benefit both our business model and our customers over the medium term. Our improved onboarding experience, which we began rolling out last quarter, gives customers more choice when opening a PayPal account and has already resulted in lifting our activations. In the coming quarters, we will be rolling out account setting and checkout experiences that also deliver enhanced customer choice. We believe these new experiences will result in improved engagement and a reduction in customer churn, all very good things for both our customers and for PayPal. But we are already seeing another significant benefit. By making customer choice a priority for PayPal, we are opening up new opportunities for partnerships within our ecosystem. Today PayPal and Visa announced a strategic partnership to further expand our longstanding relationship. This agreement will allow both companies to offer greater choice to merchants and consumers and increase value to Visa issuers and PayPal customers. The benefits of this partnership include our ability to gain access to Visa's tokenization services, starting in the United States, for in-store PayPal transactions. This will allow customers to pay with their Visa instruments and the PayPal wallet at the millions of retail locations where they see the Visa contactless logo. Importantly, retailers can expect to pay fees that are consistent with other contactless transactions they accept today. We will provide greater accessibility for Visa payment instruments and the PayPal digital wallet. PayPal will also provide Visa, their issuers, and their cardholders additional visibility into each Visa-funded transaction, providing greater transparency and enhancing payment system security. The agreement affords PayPal certain economic incentives, including Visa incentives for increased volume and greater long-term Visa fee certainty and removes the threat of any targeted pricing actions. This deal has the potential to be transformative for PayPal, Visa, and the industry. We believe it provides us the flexibility and the capabilities to execute against our customer champion vision, to partner with issuers and others who share our vision and to accelerate PayPal's in-store access in new and profitable ways. We also believe it provides more options for growth and the ability to partner with others to mutually cross-sell our various current and projected services to consumers and merchants around the world. All of these will take some time to come to fruition, but this agreement opens up a new chapter for PayPal. Giving customers choice in how and where they want to pay provides a pathway over the long term from our goal of two transactions a week from our current engagement of just over two per month. It's also important to say that we welcome the opportunity to work with more partners like Visa to share our vision and we are in discussions with a variety of players in our ecosystem. This is a new PayPal, one that is actively partnering across the digital payments landscape. For example, in the quarter, we also expanded the European rollout of the Vodafone Wallet we talked about last quarter. Consumers in Spain and Italy can now tap-and-pay in stores with PayPal and Visa, another example of how PayPal is opening our platform to a slew of new partnerships. Our partnership with Facebook continues to expand, as do our efforts with Google, Pinterest, Alibaba, and eBay. I'm pleased with the quarter's results, but we still have much to execute through the back half of the year. We need to continually innovate and deepen customer engagement in order to maintain and further widen the distance between our value proposition and that of our competition. And in keeping with that focus, Q2 saw significant progress in consumer and merchant engagement on the PayPal platform. We are making steady strides in our efforts to become an everyday essential financial service for underserved customers. In the second quarter, transactions per account increased to 29, and we processed 1.4 billion transactions, a new milestone for PayPal and an increase of 25% from the same period last year. Deepening consumer engagement is no accident. It is driven by our innovative products and an increasingly robust platform, designed with our customers and their needs in mind. Our aim is to deliver transformative products that make payments easier, faster, more reliable, and more secure online, in mobile, in-app, and in-store. One Touch, our contextual commerce services, Venmo, and Xoom are all perfect examples of this. One Touch is the most rapidly adopted product in PayPal's history. As of the second quarter, over 25 million consumers have opted into One Touch, and I'm pleased to say that we now have over 2 million merchants offering this innovative way to pay. With a market-leading 87% conversion rate, we continue to see increased engagement and conversion with the use of One Touch. We are continuing to invest and innovate in contextual commerce. Last year Pinterest launched its first foray into buyable buttons. Braintree powers 80% of the Pinterest launch merchants. Building on this infrastructure, we are now powering Pinterest's new shopping bag functionality that lets shoppers pick items from across the web, collect them in a shopping cart, and make a single purchase. This brings over 10 million unique products to pinners for an even richer and more convenient in-context shopping experience. And Venmo continues its rapid growth. In the quarter, Venmo processed over $4 billion in P2P payments, an increase of 141% year over year. We are very focused on making steady progress with our Pay with Venmo pilot. We've added eight more next-generation apps beyond Munchery and Gametime. These include Parking Panda, Priv, Wish, Box, App Market, and Poshmark. We have also further expanded the Venmo pilot from 1 million to 3.5 million Venmo users. We expect to add many more merchants and all of the Venmo consumer base later this year. Xoom's U.S. customers can now send money to loved ones in 53 countries, and it continues to redefine global remittances through mobile technology, ending the quarter with more than 70% of transactions originating on a mobile device. We continue to see the benefits of our integration efforts, with Xoom adding more than double the number of net new actives this quarter versus a year ago. I'm pleased to say we're executing on how to position business case, and I have high hopes for what Xoom can offer to PayPal consumers in the years ahead. All of these innovative new experiences are driving PayPal's leadership in mobile payments. As I mentioned, PayPal processed over $24 billion in mobile payment volume, an increase of 56% year over year, and mobile now represents 28% of our total payment volume, up from 26% in the first quarter. Mobile is arguably the most competitive arena in the digital payments ecosystem, and PayPal continues to widen its lead and gain share. Two quarters ago we grew our mobile volumes 45% year over year, last quarter 54%. And despite a substantially increased base of mobile transactions, we grew 56% this quarter. We also continue to make substantial progress in acquiring new merchants and now have more than 14.5 million merchants transacting on our platform. An increasing ability to provide a suite of innovative services for merchants is not only accelerating our competitive differentiation but enabling us to be seen as a true full services partner. PayPal's merchant services payment volume was $71.3 billion in the quarter, increasing 36%. Leading merchants continue to choose PayPal, including Ikea in multiple countries, the world's leading cruise brands of Carnival Corporation, including Carnival Cruise Line, Princess Cruises, Holland America Line, and Seabourn. Russia's Vkontakte, Europe's largest social media network with 360 million users. Women's fashion brand Talbot's. Cathay Pacific. And Eventbrite, the world's largest self-service ticketing platform, has now launched with Braintree full-step processing. And Braintree continues to gain momentum, rapidly adding new merchants, ending the quarter with 309 million cards on file, an increase of 101% from the same period a year ago. Finally, PayPal working continues to be an important way we engage our small business merchants and support their growth. In Q2 we exceeded $2 billion in originations since our launch. We've now funded more than 90,000 small business merchants in the U.S., U.K., and Australia. Our working capital merchants see an almost $0.50 increase in payment volume for every dollar of working capital expended to them by PayPal, clearly a powerful tool for our merchants. Finally, I'd like to mention a few accolades we've recently received to highlight the strong progress we've made in the past year as an independent company. First, our financial performance has earned us a place on the Fortune 500 list at number 307. Importantly, we are now being recognized for our leadership in innovation. Recently InformationWeek named PayPal the 11th company in the country in terms of technology innovation. And the value of our brand is also on the rise. The Financial Times recently came out with the BrandZ listing of the top 100 most valuable global brands. PayPal was one of the top 10 brands that increased its value most in 2016, gaining 35% and rising from number 88 to the 65th most valuable brand across the globe. And finally, and perhaps most meaningfully to many of us, consumers in the United States recently ranked 180 top brands across the world in terms of social impact and doing the most good in the world. PayPal was ranked among the top five companies across the globe. We've made strong progress in the 12 months since becoming public. We have a lot of work ahead of us, but the opportunities are coming into sharper focus and are now clearly within our reach. We remain focused on executing with both discipline and excellence for our customers and for our shareholders. I'd like to now turn the call over to John.

I also want to express my gratitude to all of PayPal's customers and our employees globally for contributing to another successful quarter. In the second quarter, we made significant strides in achieving our objective of being an integral part of our customers' financial lives, solidifying our position in the ecosystem, and enhancing our value proposition as a customer champion company. I'll now highlight our second quarter results. On a currency-neutral basis, total payment volume reached $86.2 billion, a 29% increase. U.S. payment volume rose 27%, while international volume increased by 21%. Our merchant services business grew by 36%, confirming that our strategy of being a customer champion and evolving from a payment button to a comprehensive payment solution for all merchants is gaining traction. We concluded the quarter with 188 million active accounts, an increase of 11% compared to last year. The growth in accounts was mainly driven by our PayPal Credit offering, followed by Venmo. The number of payment transactions per account rose to 29, a 13% year-over-year increase, accelerating from the first quarter. Combined with the rise in active accounts, this led to a payment transaction growth of 25% year over year. In the second quarter, we generated revenue of $2.65 billion, a 19.5% increase on a currency-neutral basis and a 15.6% increase on a spot basis. Our revenue for Q2 surpassed expectations, driven by robust performance in our core business and Braintree. Despite facing tough year-over-year comparisons due to adjustments in our Synchrony co-branded credit card agreement and the sale of part of our credit receivables portfolio last year, as well as larger currency hedging gains in Q2 2015, we are pleased with our strong top-line performance and ability to navigate these pressures. Transaction revenue rose 23% on a currency-neutral basis this quarter, which was an acceleration from the first quarter. This growth was fueled by large merchants in our core business and the strength of Braintree. Consequently, the transaction take rate was 2.69% for the second quarter, a decline of 22 basis points year over year, primarily due to decreased currency hedging revenue compared to last year, the growth of our P2P business including Venmo, and a shift toward Braintree and larger merchants. Revenue from other value-added services remained flat compared to last year, impacted by the amendments to our Synchrony agreement and the sale of our credit receivables in Q2 last year, though it was offset by solid results from our credit products. Transaction expenses and losses associated with transactions and loans increased by 28%, aligning with the growth in total payment volume. This led to a transaction margin of 59.8%, down from 63.8% in Q2 2015. The year-over-year decline in transaction margin was largely due to strong performance by Braintree, which has a lower take rate and higher transaction expenses, along with the effects of our Synchrony agreement amendment and the sale of credit receivables, as well as high-margin hedge revenue recognized in Q2 2015. Other expenses grew by 10%, significantly lower than revenue growth, leading to 185 basis points of leverage. Excluding the acquisition of Xoom, other expenses rose by about 7%, indicating effective cost management. We remain dedicated to maintaining strict control over expenses. The scale of our platform enables us to manage the growth of these expenses carefully, even as our revenue increased by nearly 20% on a currency-neutral basis. We still see opportunities to manage costs effectively over time. In the second quarter, we delivered operating income of $528 million. For the first half of 2016, operating income rose by 10% to $1.1 billion. The operating margin for the second quarter was 19.9%, a decline from last year primarily due to the previously mentioned factors impacting revenue, namely the amendments of our Synchrony agreement and the sale of our credit receivables, both of which had direct effects on the bottom line. Our acquisition of Xoom also contributed roughly 40 basis points to this decline. However, without these factors, the operating margin would have expanded by approximately 100 basis points year over year. We reported a non-GAAP EPS of $0.36 per share for the quarter, at the top of our guidance range. For the first half of 2016, non-GAAP earnings per share grew by 19% to $0.73. Second quarter capital expenditures totaled $201 million, about 8% of revenue. Free cash flow for the quarter was $495 million, translating to $0.19 of free cash flow for every dollar of revenue. During this quarter, we also returned about $300 million to our shareholders by repurchasing an additional 8 million shares. Year to date, we've returned approximately $900 million to shareholders, having repurchased 25 million shares at an average price of $36.34. We ended the quarter with $6.2 billion in cash, cash equivalents, and investments, including around $1.3 billion in the U.S. I would like to address the U.K.'s vote to leave the European Union. We're still early in this process, and it will take time to see the full effects. Europe, especially the U.K., is vital to our business, and we plan to continue serving these markets. In the second quarter, about 12% of our revenue came from the U.K. Given our global business model, we've generally found a counterbalance when any currency significantly fluctuates. This is particularly evident in key corridors like the U.S. and Canada, and the U.K. and E.U. due to their proximity and currency dynamics. In the medium term, we will closely monitor the economic landscape and its impact on customer behavior. From a currency perspective, the euro and the pound are where we have the highest exposure. Thus, we have hedged both currencies, and our translation exposure in 2016 is minimal. Critically, our E.U. operations are managed through our Luxembourg bank, allowing us to passport our banking license throughout the E.U. The U.K.'s choice to exit the E.U. will influence the regulatory framework we operate under. Since the referendum was announced, we've been evaluating the implications of a Leave vote, and once clarity on the U.K. and E.U. relationship regarding financial services emerges, we will act accordingly to continue serving our customers effectively. I would also like to update you on our credit portfolio. Our credit products enhance our platform, bolstering our digital payments offering for consumers and merchants alike. Credit creates a positive network effect for our business, driving increased volume and engagement. Credit currently accounts for roughly 2% of our total payment volume, and we anticipate this contribution will stay consistent in the medium term. Furthermore, we are actively exploring asset-light strategies to support and expand our credit offerings. The performance of our credit portfolio remains in line with our expectations. In the second quarter, we observed improvement in our delinquency rates and most credit quality metrics. However, there has been an uptick in late-stage delinquent consumer credit balances moving to charge-off, resulting in a charge-off rate of 6.3%, slightly up from 6.1% last quarter, which we attribute to recent changes in our collection strategies. We are taking measures to address this concern in the latter half of this year. As Dan mentioned, our agreement with Visa, along with our broader strategy to enhance customer choice, presents significant opportunities for our customers, shareholders, and partners within the payment ecosystem. This partnership will facilitate the digitization of payments both online and offline. The integration of offline and online worlds through digital payments is becoming increasingly prominent. Our agreement with Visa is a key step towards fully engaging in this significant trend, supported by our mobile-first approach alongside Visa's in-store capabilities. We envision PayPal as a regular part of our customers' financial activities. Empowering our customers to choose where and how they wish to use PayPal is integral to realizing this vision. For the remainder of 2016, we don't foresee any significant impact on our results from the transition to customer choice. Starting next year, we anticipate that changes to our funding mix due to customer choice may lead to increased transaction expenses. However, we are confident that expanding customer choice will present future revenue opportunities. The move towards customer choice and our agreement with Visa sets the stage for sustainable revenue growth while ensuring a more predictable cost structure. It is still early in the year, and we have only completed six months. As we approach the end of the year, we will provide more insights into these changes and their implications for our 2017 performance. Lastly, I want to discuss our financial expectations for the third quarter and the full year. Our robust performance in the first half of the year across our core business, Braintree, and P2P, along with the increasing mobile penetration reinforces our strategies and priorities. Therefore, we are raising our full-year 2016 revenue forecast to between $10.75 billion and $10.85 billion, reflecting a growth of 19% to 20% on a currency-neutral basis. We are also refining the non-GAAP earnings per share range to $1.47 to $1.50, indicating growth of 18% at the higher end of the spectrum. Additionally, we are reaffirming our full-year 2016 guidance on free cash flow, capital expenditures, and non-GAAP effective tax rate. For the third quarter, we expect revenue between $2.6 billion and $2.67 billion, or growth of 19% to 21% on a currency-neutral basis. We project non-GAAP earnings of $0.33 to $0.35 per share. In summary, our second quarter results illustrate the progress we continue to make in our operations. Revenue remains strong, and we are successfully balancing this with excellent cost control to maintain healthy margins and robust free cash flow. We continue to allocate resources in ways that enhance shareholder value. Our partnership with Visa has alleviated previous concerns in our business, providing us with greater cost certainty moving forward, enabling profitable engagement in the offline market, and laying the foundation for being a champion for our customers.

Thanks. Good afternoon. Congrats on the Visa deal. I was curious, can we still rely upon your midterm guidance after considering the Visa partnership? I know there's a lot of moving pieces obviously, but curious if the midterm guidance still applies.

Thanks, Tien-tsin, appreciate it. This is John. We'll update that, if it's appropriate, as we get closer to the year-end. Like I suggested in my prepared remarks, we're very early on into this. We're very encouraged by the agreement. We think it's a fantastic opportunity for PayPal. And it's likely to positively affect the way our financial outlook and for the future. But we're not prepared to update that at this time.

Great. Thanks. On the part of the Visa agreement around contactless payments and the enablement of offline acceptance, can you give us a sense of what the process is going to look like for that? Visa mentioned on their call that you still have to get sort of approval from the financial institutions, from the merchants. How do you intend to kind of get more out of this enablement than we saw out of the Discover deal and what's the roadmap look like to get there, particularly from a timing perspective?

Hey, Heath, it's Dan. Thanks for your question. So we're very excited about the partnership with Visa. I think it's very important to understand that, as Charlie said on the Visa call, partnerships like the one we announced today work best when there's alignment for everyone. And we believe that we've designed an agreement that works for PayPal, Visa, and the issuers. We've been in discussions with issuers, Visa has been in discussion with its issuers, and they're excited about the benefit from the volumes that we can bring to them and that we can bring to point of sale. And as Charlie pointed out, this agreement removes many of the concerns, if not all of the concerns, that issuers and others in the ecosystem have about working with PayPal. You know, choice is something that everybody has been talking about. What issuers want, what we want, is the ability for a consumer to make a choice, to have options as to what payment tender type they want to pay with. What that basically means is that, a consumer could pay with their credit, with ACH, with debit, with cash, with P2P, with PayPal credit, any of those, but it's the option of the consumer to make that choice. And then when you add on top of that optionality, the fact that we are very willing and happy to share the same sorts of data that somebody would get with a typical credit card swipe back to the network, back to the issuers and to customers, that's exactly what issuers have been asking for. We actually think that this deal that we have with Visa offers a couple of benefits. Obviously, it offers access to tokens at rates that are comparable to other contactless methods out there, and so we can compete with anybody now at a point of sale, there's no competitive disadvantage to anybody else out there. And we can go offline profitably. Second, we get fee certainty, as we talked about, no targeted actions against PayPal, limits our new fees, even industry-based fees and volume-based discounts. So we have certainty around our cost structure. And very importantly, I think this opens us up to new partnerships: new partnerships with issuers, networks, and others. Choice and data turn us into their friends. And when I think about the partnerships that we have, we're an ideal distribution mechanism to drive more online and mobile spend to issuers. They're an ideal partner to drive incremental net adds in customers into the PayPal platform. That's a win-win for both of us. And this is going to open up a new chapter for PayPal to partner with and for all of us to work together to advance digital payments going forward. And as I mentioned in my remarks and John mentioned, choice also is going to help us drive incremental new net adds. We're already seeing that in some of the changes we've made to our onboarding. When you look at One Touch and you see what our customers do when they're able to default a payment mechanism, their engagement goes up, the conversion rates go up. And obviously, when a customer gets to choose which instrument they want, we're going to see fewer calls come into customer care for us, we're going to see customer satisfaction go up. And typically when that happens, customer churn goes down. So we think this is a very strong agreement that benefits Visa, its issuers, and us, allowing us to work within the ecosystem. And the issuers don't need to sign any unique agreements with us. It's simply an opt-in to participate with us. It's no additional work from them. And our movement to choice, data sharing, plus our commitment to quality, I think puts us on par with others that are using Visa tokens in the ecosystem.

Great. Thanks, Dan.

Hi everyone. Good afternoon. I have a follow-up question regarding the Visa arrangements for activating at the point of sale. In that case, do you continue to be the merchant of record? Does it go through your acquiring platform, or is it more like a pass-through wallet as envisioned?

For the point of sale, we would do kind of pass-through on the token level, so that there'd be transparency on that. We've always said that we are perfectly willing to use the industry tokens and do that on a pass-through basis. And this agreement allows us to do that. It allows us, one, to approach merchants with rates that are comparable to any digital wallets that are out there, so this whole card not present/card present rate structure that people have talked about, this takes away that concern as well. So it's an agreement that our two teams spent a lot of time working with, a lot of time making sure that the issuer population was also comfortable with it. And we think it is a tremendous win for all the parties on that.

Got it. And on those transactions, sorry, just to clarify, though, it's still processing over your acquiring platform?

It is, yes.

Right? Meaning like the merchant will be paying you directly their typical take rate.

That's correct.

Okay. Okay. Terrific. Thanks guys.

You bet.

Hi. I was going to pivot out of the Visa conversation and ask you about Braintree. I think in the past, Dan, you've disclosed, or discussed at least, some of the backlog in Braintree. I was wondering if you could update us in fact quantitatively, what does it take to actually activate the merchant from the backlog from a Braintree perspective? Thank you.

Yeah. So we're making very good progress in terms of our ability to work through the large demand that we have for Braintree. In effect, we try to make it as easy as possible on a merchant. We have ADI sets that make it easy to integrate. It really depends on the extent of the integration that we're doing in any of the customization that we have to do. But I'd say we're making really good progress on keeping up with the demand. Right now the demand is strong, as John mentioned. That's part of the reason why we're taking up our revenue forecast. But I'm really pleased with our ability now to onboard these customers and bring them live.

Thank you.

Yup.

Great. Thanks for taking the question, guys. I was wondering if you can give us a rough sense of how much of TPV now goes through the Visa network both on a credit and debit perspective? And I just want to be clear, there is no initial incentive that is going to be provided to that volume starting day one, right? You'll have to go negotiate that with the issuers.

We have volume-based incentives from Visa themselves. There are also other potential terms that we could do with issuers specifically. Your first question was?

How much volume is on Visa.

Yeah.

We won't disclose specific details, but to provide some context, we currently have approximately $300 billion in total payment volume. If you were to consider the impact of funding shifts on that, it would exaggerate the effect since this agreement pertains only to the U.S., which represents about half of our total payment volume. Additionally, there are variations in funding mix between peer-to-peer transactions and goods and services, which needs to be accounted for separately. Earlier this year, we noted that peer-to-peer transactions constitute around $40 billion of our annual total payment volume. Furthermore, it's important to recognize that many of our customers currently only have one card in their wallet, meaning they wouldn’t face any additional costs by adding or switching to another card. This perspective should guide your understanding of the cost implications.

Okay. That's very helpful.

I'd also add to it, George, that remember, this is about optionality. So, all tender types will be presented to the customer, presented to choose the tender type that makes the most sense for them for that particular purchase. And we've seen that this is a beneficial thing when we offer customers that ability.

Even the early stages of testing some of these experiences with customers, we see really encouraging signs just in things like customer activation where you remove some of the friction from that process. And as Dan alluded to earlier, One Touch has been a great testbed for us as we've seen pretty dramatic increases in engagement after someone activates there.

Okay, great. Just a quick follow-up. John, I think you talked about taking some steps on the PayPal credit side to maybe mitigate some of the increases that you've seen in charge-offs. Can you elaborate on that, what that might mean for the back half of the year?

Sure. So as Dan talked about on the call last quarter, since we've become an independent company, we've really tried to establish ourselves as at least aspiring to be best in class when it comes to compliance. We think that that's really important for us. That's part of being a customer champion. And so we've taken steps across every aspect of our business to improve our compliance. And so, specifically, we changed some of the ways that both we contacted customers, as well as the repayment options for credit. That had some effect that on the late-stage delinquencies. There are other methods that we can do to mitigate that impact and we're going ourselves with those options for the back half of the year.

And I'd also just say, John mentioned, we're seeing some improvements in the underlying credit quality of our base, delinquency write-offs on that. So it's just that one particular bucket that we saw an increase, and so we're taking actions to address that. But in terms of the overall portfolio, we're very comfortable with what we're seeing on that.

If I can add a bit more detail, our total delinquencies have actually decreased year over year. The percentage of our portfolio that is rated prime or above has increased by one point, indicating better credit quality compared to last year. The 90-day delinquency rate has also fallen year over year, and our portfolio's FICO scores remain relatively stable. We are very attentive to concerns in the broader ecosystem and are focused on this issue.

Okay, great. Really appreciate the color.

Yeah. You bet.

Thank you. Good afternoon, Dan and John. Congratulations on getting the deal. Two separate questions. On the Visa-related customer choice, when you say no impact in 2016, is that indicative of your view as to how long it might take to implement specific deals with issuers? I guess that's the first question. And the second is with regards to how does the agreement affect your relationship with merchants, and I guess your weighted average funding cost is an important part of the discussion but not the only factor. If you could comment on those.

So in terms of our guidance for 2016, incorporates any impact that there might be from customer choice. But you're right that this takes some time for this to be implemented and to move forward. So our guidance incorporates any impact that there might be from customer choice. And as John mentioned, we will wait until we get closer to 2017 to give 2017 guidance. First of all, obviously we'll take a look at consumer behavior as a result of this. There are a number of discussions going on in the ecosystem and we want to look at the totality of the landscape before we really talk about what 2017 could look like. And finally, we're halfway through the year, we got a full another six months to execute against and let's see how our momentum takes us before we provide 2017 guidance. And on the merchant side, merchants have been working with us quite closely as we're creating a platform for them to take advantage of digital commerce. And that basically means letting a merchant write their own application. And we power that application through a platform that enables them to extend our value proposition to their customers online, on the mobile, and in-store. And part of that in-store environment, when it comes to the checkout wallet, we did not have tokenization schema, we've used different forms of that. And so from a merchant perspective, the rates now that we can offer on an in-store point of sale transaction are significantly more competitive for them. So it just strengthens our position in terms of working with merchants. No change in our strategy, but certainly strengthens it and opens up a wide opportunity for us. As we talk about the blurring of online and offline coming together, this really opens up our ability to move into any context, whether it be online, in-app or in-store with our digital wallet.

Okay. I guess a quick follow-up if I may. In terms of the online choice, how is Paydiant affected by this, if it is?

Yeah, great question. Paydiant impact. Paydiant is part of our fundamental underlying platform. So when you think about the piece parts that we've started to put together, we had PayPal that was obviously very strong in the online market. Braintree extremely strong in the mobile and in-app marketplace. And Paydiant, very strong in the instore environment. And so all of those are now coming together and being integrated so that we can offer merchants the ability to look across any of those contexts and use our platform to power and enable their move to digital commerce. Then what we've done obviously is, because our base is so large, we take our branded PayPal wallet, which is now available to go into more context, as I've just mentioned, and write up those applications, because we have so many subscribers that we can bring to those merchants. And so you've got a platform play that's really unbranded, that supports a merchant's move into digital commerce, and then a branded wallet. This helps us with our branded wallet to move into that offline space.

That's great. Thank you for that explanation.

Yeah. You're welcome. Operator, I think we have time for one more question.

Thank you. Dan, there are some skepticism regarding the willingness of issuers to promote PayPal. Could you speak to what you think will lead issuers to want to promote their brands on PayPal during the exclusivity period? And maybe give a little more color on what the receptivity has been in your discussions with the large issuers. And finally, what your confidence level is that you'll be able to get some of them onboard.

Yup. So we have a high degree of confidence in that we haven't worked this agreement in a vacuum, nor has Visa worked it in a vacuum. We've obviously been working with the issuer community. We've obviously been very close communications with them. We've been in close communications actually throughout the whole payment ecosystem with quite a number of players. And this move towards choice, our ability to open up our data, is something that issuers have been asking us for for quite some time. I think they are, based on our conversations, conversations that Visa has had with its own issuers, and we've been a part of some of those, there's a lot of excitement about the ability to partner and work together. We think we could be a very strong distribution channel for them. You've talked about that in some of your write-ups, and that's exactly the vision that we are moving towards, and we have a good degree of confidence around that.

Thank you. If I may, a follow-up for John. John, I believe that you made the point at Investor Day that the increase in your transaction expense rate from the shift to consumer choice would be something that you could offset with the operating leverage inherent in the business. Given the partnership announcement and all of the different aspects to it, I guess you guys are saying tonight that that doesn't necessarily still hold, you'll reevaluate over the next couple of quarters when you give 2017 guidance, say whether that's still the case. Or just trying to get a sense of I guess applicability of that statement still.

Yeah. So, yeah, that's not entirely correct, but just talking directionally, I would describe this as very analogous still to like an investment that one would make, an acquisition, for example, where there's perhaps an upfront cost, but there's a revenue stream that more than offsets that to where it's very accretive to the business. With respect to the increase in transaction expense, we'll give more specific guidance as we get towards the end of the year about 2017. But when you look at both the revenue benefit as well as the good demonstrated cost control that you've seen for several quarters now, just look at the over 180 basis points of leverage this quarter, the fact that our operating expenses, if you normalize for the Xoom acquisition, only went up 7% in the quarter, we continue to demonstrate that we have a laser focused on discipline here, while still not starving the business for investment as well. We're making sure that we're continuing to invest organically. So all that in combination gives us a level of comfort with this, that it's absolutely the right thing to do for the business. But specific to 2017, we'll give you a heads-up on that towards year-end.

Great. Thank you for taking my questions.

You bet.

Thank you everyone for joining us today. We really appreciate your time, and, operator, that will conclude our Q&A session. Thank you.