PayPal Holdings Inc (PYPL) — Q4 2016 Earnings Call Transcript

Thank you, Karen. Good afternoon and thank you for joining us. Welcome to PayPal Holdings’ earnings conference call for the fourth quarter and full year 2016. Joining me today on the call are Dan Schulman, our President and CEO; John Rainey, our Chief Financial Officer; and Bill Ready, our Chief Operating 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 certain historical year-over-year comparisons, we have chosen to present non-GAAP pro forma metrics because we believe that these metrics provide investors with 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 non-GAAP 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 first quarter and full-year 2017. 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, January 26, 2017. We disclaim any obligation to update the information. With that, let me turn the call over to Dan.

Thanks, Gabrielle. I’m pleased to report that PayPal ended 2016 with another solid quarter of financial results. I’m proud of all the accomplishments that the PayPal team delivered, yet in so many ways we were just scratching the surface of the market opportunities in front of us. Payments are rapidly digitizing. Mobile is redefining the phase of retail. And with the worldwide adoption of smartphones, consumers have all the power of a bank branch in the palm of their hands, which will no doubt transform the way they manage and move money. We believe all of these secular trends play into our strengths and leave us well positioned to drive our future growth. In the face of a noisy competitive market, we extended our industry leadership by growing our active account base by 18 million with greater engagements than ever before. We introduced a host of new innovations across our merchant and consumer value propositions. We took the clear lead in online conversion through One Touch. We now offer a full suite of products and services to our merchants on an integrated platform that supports 100% share of processing and textual commerce API and toolsets, rewards integration and credit. And we bring to our merchants an increasingly active and growing base of consumers who are ready to transact across online, in-app, and in-store environments. In the past year, we significantly increased our market opportunity through a series of transformative strategic partnerships with the networks, financial institutions, tax companies, and mobile carriers. We accomplish this by putting our customers first in everything we do. We call this being a customer champion, and this philosophy guides our every action. At the end of a landmark year for PayPal, we feel well positioned to deliver sustainable and profitable growth in 2017 and beyond. Let me start with a quick recap of our results, and John will provide more details in his remarks. As I mentioned, we delivered a solid fourth quarter. We reported $0.42 of non-GAAP EPS at the top end of our non-GAAP guidance of $0.42. We delivered $2.981 billion in revenues, an increase of 19% on an FX neutral basis. This is at the high end of our guidance of 16% to 19% growth, and we generated $771 million in free cash flow. For the full year, we delivered $1.50 of non-GAAP EPS, which came in at the top of our initial full-year guidance of $1.45 to $1.50. Our revenues grew 21% on a pro forma FX neutral basis above our initial 2016 guidance of 19%. And despite the increased size of our revenue base, we grew faster in 2016 than in 2015. We ended the year at $10.84 billion of revenue and we generated $2.5 billion in free cash flow, well above the initial guidance we provided. Perhaps more importantly, the underlying drivers of our revenue growth saw continued strong performance throughout 2016. We ended the year with 197 million active customer accounts, adding 5.4 million new accounts in Q4, our highest organic total in two years. Customer engagement in the fourth quarter increased to 31 transactions per active account, up from 27 a year ago, and 30 last quarter. Our growth in Q4 came from across our global platform, and we benefited from a notable shift in consumer behavior. Holiday shoppers increasingly bought gifts online and with their mobile devices through convenient omni-channel shopping experiences. For PayPal, this helps drive a 25% increase in payment volume, resulting in $99.3 billion of payment volume in the quarter. According to Internet Retailer, Black Friday 2016 was the largest mobile shopping day in history. Between Thanksgiving and Cyber Monday, PayPal processed more than $2 billion in mobile payments. Mobile accounted for a third of our overall payment volume during the quarter. Mobile is becoming an increasingly important competitive differentiator for PayPal. More than half of our active account base transacted on the PayPal platform using their mobile device over the last 12 months. The scale and reach of our platform clearly separates PayPal as one of the world's leading FinTech companies. In 2016, we processed 6 billion payments, an increase of 24%. This represented a total payment volume of $354 billion flowing through the PayPal platform, of which more than $100 billion was mobile payment volume, an increase of 55%. We saw strong growth in peer-to-peer payments, with P2P payment volume growing 57%, more than $64 billion for the year. Braintree ended the quarter with 428 million cards on file, and PayPal has well over a billion financial instruments on file. Venmo was one of Time magazine's best apps of the year and one of Fortune's 10 breakthrough brands. In Q4, Venmo processed $5.6 billion in volume, an increase of 126%. In December, for the first time, Venmo passed the $2 billion mark in monthly payment volume further demonstrating its rapid growth. As you may recall, Venmo processed $1 billion in monthly TPV for the first time just last January. For the full year, Venmo processed $17.6 billion, up 135%. It’s been several years since we expanded our mission to be more than a button on the website. We have evolved to become the platform and payments partner of choice for merchants around the world, as they move towards a multichannel retail experience driven by the mobile phone. For example, with Braintree's commerce infrastructure tools, we are creating simpler ways for merchants to install for contextual commerce experiences that transform the way consumers shop and pay. For our entries forward API, which merchants securely share payment data with other sites and apps, allowing customers to purchase from multiple merchants in a single convenient and secure experience. This capability was initially deployed to support interest viable pins and is now being used by merchants across the world, including global travel site Skyscanner and by Yelp for their new product, Yelp cashback. One Touch has redefined online checkout. Simply put, it produces the best conversion rate in the payments industry by making it faster and simpler for customers to pay with a single tap. Its adoption has well exceeded our projections. We ended the year with over 5 million merchants offering One Touch to more than 40 million consumers. PayPal has the unique distinction in the corresponding benefit of having a deep and trusted relationship with almost 200 million merchants and consumer accounts through our two-sided network. This means we can deliver new payment experiences like One Touch for the speed and impact that is truly differentiated. eBay and PayPal have always enjoyed a close partnership. eBay CEO Devin Wenig and I are committed to further strengthening what is already a strong relationship. We are working closely to create better payment experiences for their buyers and sellers. For example, our teams collaborated this past year on new customized checkout experiences that help to reduce card abandonment, increase loyalty, and help buyers seamlessly transact on eBay's platform. As we look to 2017, we see even greater opportunities to work together. In the quarter, we were also proud to welcome several great brands to our platform. These include auto.de, the second-largest retailer in Europe; Crate and Barrel, which now offers PayPal as a payment option on its web and mobile sites, and on the CB2 and Landed Not cite for their global customers. Squarespace, an all-in-one website publishing e-commerce platform, now has more than 1 million paid subscribers who seamlessly integrate PayPal into their online stores. To give you an idea of the demand for PayPal, within the first 24 hours of launching, we saw hundreds of Squarespace merchants integrate into PayPal, and that demand continues. Finally, consumers can now create a campaign on GoFundMe on behalf of their favorite charity. By doing so, they take advantage of the PayPal giving funds facility to receive and process donations and avoid the complexity of having to handle the funds themselves. Last year highlighted our commitment to putting our customers front and center. That led to our decision to offer greater customer choice in our payments experiences. This, in turn, has recast the competitive landscape for PayPal and enables landmark partnerships and alliances that continue to expand and extend our opportunity for growth. These partnerships are focused on giving consumers the freedom and flexibility to use PayPal anywhere they want, in stores, in apps, and online, ensuring a consistent, convenient, and secure experience. Following the announcements of our strategic partnerships with Visa on our Q2 earnings call and MasterCard in Q3, in the fourth quarter, we announced our first partnership agreement with financial institutions. These include agreements with Citi, the largest global credit card issuer, and Fidelity National Information Services known as FIS, which represents thousands of financial institutions. This is just the beginning. Our conversations with almost all leading financial service players are warm and welcoming. Earlier this month, we announced a strategic agreement with Discover Financial Services. This partnership allows the PayPal wallet to be closely linked with Discover cardholders and merchants. It will allow PayPal credit customers who link their Discover cards to purchase online, in-app and in-store at contactless-enabled merchants in the U.S. And for the first time, PayPal customers will be able to use their Discover cash back bonus to pay for purchases at the millions of online and mobile merchants that accept PayPal. We expect that the reward points will become an easy, convenient, and alternative source for customers of PayPal and our financial institution partners to pay for online and mobile shopping due to the PayPal platform. As mobile and digital payments continue to provide new opportunities for bringing cost consumers and companies closer together, we're partnering with other market leaders across a variety of industries. In the fourth quarter, we entered into extended partnerships with cellular carriers, software providers, and leading consumer brands. One prominent example of this is the global partnership agreement we announced with Intuit. Building on successful regional agreements, we are now deploying our express checkout to more than 1.5 million QuickBooks small businesses and self-employed customers worldwide. The PayPal and Intuit partnership provides business owners with simpler and faster ways to accept invoice payments and significantly accelerate the fees with which they can collect funds. Based on our rollout in Australia, we found that merchants who offered PayPal payments in their QuickBooks invoices get paid two times faster than those who do not use PayPal. This meaningful improvement in cash flow is crucial for the SMB market. We are proud to bring this benefit to Intuit’s customers. Our partnerships with Facebook, Google, American Mobile, Vodafone, AliExpress, and other financial institutions and major retailers continue to grow as our platform and capabilities expand. 2016 was a transformative year for PayPal. Our separation from eBay afforded us an opportunity to sign a unique, meaningful, and expansive mission for our company. I believe our expanded focus and value proposition allowed us to widen the distance from our competitors. We upgraded our platform, invested significantly in our global compliance capabilities, improved our developer tool sets, and drove our scale and engagement through a unique and enhanced value proposition. We are inspired and focused on the opportunities in front of us, and we look forward to providing ever more value to our customers and our shareholders. Before I conclude my remarks, I’d like to just take this opportunity to publicly welcome the newest member of PayPal’s Board, Belinda Johnson. Belinda has an impressive track record at Airbnb. She has been a key architect in their growth and has helped to chart new business approaches and innovative customer experiences. She’s already proving to be a great addition to our board, and we look forward to her valuable contributions. And with that, let me hand it over to John.

Thanks Dan. I also wanted to thank all of PayPal's customers and employees worldwide for making 2016 a great year. Since our founding in 1998, this is the first full year that PayPal has been an independent public company, and we achieved many significant milestones that set us up for success for many years to come. We are strategically positioned to deliver sustainable and profitable growth. Our comprehensive partnership strategy and focus on mobile-first product innovation prioritize our customers in everything we do while giving us access to multiple developing channels across the digital payments ecosystem. Before I go into details on the quarter, I’d like to provide a few highlights for the full year. Revenue for the year was $10.84 billion, growing 21% on a pro forma currency neutral basis. Non-GAAP EPS grew 17% on a pro forma basis to $1.50. Free cash flow grew 36% to $2.5 billion, and during the year we returned $1 billion to shareholders. For the fourth quarter, total payment volume was $99 billion, up 25% on a currency neutral basis. Excluding the year-over-year impact of Xoom, currency neutral TPV growth would have been similar to the third quarter. In Q4, U.S. payment volume grew 23%, and international volume grew 27%. Our merchant services volume grew 30% on a currency neutral basis to $84 billion. Merchant services now represent approximately 84% of our total volume, with our eBay volume representing approximately 16%. In the fourth quarter, we added more than 5 million active accounts, ending the year with 197 million active accounts, representing growth of 10% from Q4 last year. Active account growth was driven by our PayPal core business as well as Venmo. The number of payment transactions per active account increased to 31, up 13%. Each quarter since separation, we have seen double-digit growth in both active accounts and engagement. Growth in these two metrics resulted in a 23% year-over-year increase in payment transactions to $1.8 billion. In the fourth quarter, we generated revenue of approximately $3 billion, representing growth of 19% on a currency neutral basis and 17% on a spot basis. Transaction revenue increased 18% on a currency neutral basis in the quarter, driven by our core PayPal and Braintree businesses, both of which continued to perform very well. Included in transaction revenue were hedge gains of $50 million in the quarter. In addition, revenue from other value-added services grew 26% on a currency neutral basis, driven predominantly by credit. For Q4, our total take rate was 3%, and our transaction take rate was 2.63%. As we moved through 2016, we saw diminishing pressure on transaction take rate. The decline in transaction take rate has improved for each of the last three quarters, and in Q4 the rate of decline on a year-over-year basis was the lowest since separation. The primary factor contributing to the year-over-year decline in take rate is the performance of our P2P business; strong growth from Venmo and our core P2P continue to impact the rate. While these contribute to the year-over-year change in take rate, they also strengthened our value proposition and support higher levels of engagement across our consumer base. Our fourth quarter results demonstrate that we can invest in our long-term growth opportunities while managing the take rate decline. Transaction margin in the fourth quarter was 57.7%. Our volume-based expenses were up 27% in the quarter. Transaction expense was $954 million, up 27%, driven by fund index. To date, the impact of our consumer choice initiatives has been well within the range of outcomes we previously contemplated. Transaction loss in the quarter was $184 million or 6% of revenue. Loan losses in the quarter were $123 million. The consumer net charge-off rate was 7% in Q4 and 6.4% for the full year. The overall performance of our credit products in Q4 was consistent with our expectations entering the quarter. Across consumer and merchant credit, we ended the year with a gross receivables balance of $5.7 billion and a total reserve of $336 million. This year we increased the reserve to reflect the growth in our home portfolio, as well as our loss experience in later stage delinquency buckets. Other operating expenses increased 7%, the lowest rate of growth since separation, driven by strong expense discipline. Excluding Xoom, other operating expenses only increased 6%. We completely offset the decline in transaction margin through leverage from other operating expenses. Looking forward, we see disciplined cost performance across every area of our business. We are in the early stages of a journey that we expect will transform our business into one that scales more efficiently, and we are encouraged that we are already seeing results. In the fourth quarter, non-GAAP operating margin was 20.8%, consistent with last year. Non-GAAP operating income grew 16% year-over-year to $619 million, resulting in non-GAAP EPS of $0.42 in the quarter. Capital expenditures were $152 million, or 5% of revenue. In addition, we generated $771 million of free cash flow in the quarter, up 37% year-over-year and representing $0.26 of free cash flow for every dollar of revenue. For the full year, we returned $1 billion to shareholders, and we ended the year with cash, cash equivalents, and investments of $6.5 billion, including approximately $1.5 billion in the U.S. Now I’d like to discuss our guidance for 2017, as well as provide context for our priorities and expectations for the year ahead. For the full year 2017, we expect revenue between $12.45 billion and $12.65 billion, representing currency neutral growth of 17% to 19%. We are pleased to be raising this outlook relative to the guidance we provided in October because of the momentum we are seeing across our business and initiatives. At the same time, since we last spoke with you, we are seeing the currency markets move against us with a further strengthening of the U.S. dollar. Since November, we have seen pressure from several of the currencies to which we have exposure. Notably, the euro and the Australian dollar have weakened by 5% and 7% respectively. This is on top of the already sharp decline we saw on the pound last year. We are a global company operating in more than 200 markets with close to 50% of our revenue and a greater mix of our earnings coming from outside the U.S. Our hedging program is designed to reduce earnings volatility, and we selected a basket of currencies to which we have the greatest earnings exposure. Given the timing of how we build our hedge positions and recent movements across a broad range of currencies that affect our business, we expect FX headwinds throughout the year. We anticipate a greater impact in the first half and will continue to update you on currency exposure as we move through the year. At current exchange rates for the full year, we expect currency translation to impact revenue by approximately 200 basis points, resulting in spot growth of 15% to 17%. We expect our non-GAAP operating margin in 2017 to be flat to slightly up, or approximately 20%. Given that many of our initiatives will ramp throughout the year, we expect to deliver greater operating income growth in the second half relative to the first. We anticipate our non-GAAP effective tax rate to be between 18% and 19%, and we expect non-GAAP EPS to be between $1.69 and $1.74. Our business continues to generate significant free cash flow. For 2017, we anticipate free cash flow to exceed $2.7 billion, including CapEx of approximately 5% of revenue. For the first quarter, we expect revenue to be between $2.9 billion and $2.95 billion, and we expect non-GAAP EPS to be between $0.40 and $0.42.

Great, thank you, good afternoon. Just, maybe can you be a little bit more specific on what’s driving the upside to your fiscal 2017 guidance versus the outlook you provided last quarter, and is there any material contribution from customer choice, for example, in your guidance? Thanks.

You're talking about the increase in our revenue guidance?

Correct. Versus what you gave last quarter for fiscal 2017.

So we are raising our revenue guidance on an FX neutral basis, and the reason we are doing that is there is a tremendous amount of secular tailwinds that we are seeing right now. As I mentioned in my remarks, we are seeing money digitizing, a big move to mobile, and online payments picking up in stores where commerce is really just becoming commerce. I mean a great example of that is this was the best retail holiday season in five years, but you saw in-store sales actually drop and online move up to almost 17%, 18% or so. As we look at these secular tailwinds behind us, we see the performance of things like One Touch and its clear advantage that we have now in mobile and the scale we have, as well as the increased engagement we are seeing. New market opportunities, frankly internationally, that we are beginning to see and have a platform now that we can extend to many more markets of Venmo. We see the beginning of monetization as we come into this year. We are seeing the beginnings of some in-store volumes based on tokenization and our partnerships with both the networks and financial institutions, and we’ve got a tremendous number of new partnerships, whether it be with Facebook, Intuit or financial institutions really around the world right now that is growing exponentially since we've announced our network agreement. So there are a host of reasons right now that our confidence has improved in terms of our top line growth rate, and that’s also lacking 200 million of Xoom. So think about that as you consider the revenue guidance we gave. We think the prospects ahead of us are good, and we are very focused on those opportunities and we are comfortable with that guidance. John.

Thanks, good afternoon. So, a question on transaction and loss expenses growth. Can you segregate that into transaction growth in loan loss? I might have missed that. In view of the other expense leverage you are getting, can you provide details on what sort of actions that are leading to this and the sustainability of those actions?

Yes, Ashwin, you cut out a little bit on the first part of your question. I will answer what I think you asked related to the transaction and loan losses, but I think I want to take the second part first because that’s the big story, and I think it’s worth repeating that we completely offset the transaction margin decline with the operating leverage that we have in our business. It’s not just one area of the business; it’s really across the board. It’s probably hard to pass through our P&L and identify that because there is noise related to the year-over-year comparisons from separation, but this really covers every aspect of what we do. What I would encourage you to think about all of this is it’s not a one-time cost take-out opportunity. We are rewiring the way that we work and do business in a manner so that we can grow and scale at the rate that we've identified, but do it in a very efficient way. Whether it’s where our real estate footprint is or how we buy things, how we market to customers, we're even getting down to the very product development aspects of our business to do it in a way where we can roll out our products in a much grander fashion rather than doing it in small product rollouts one country at a time. It’s changing the way that we operate, and this is not easy work to be clear. This is requiring us to really step back and reexamine ourselves, but I think you probably quickly see that cost performance is expected to continue when you look at our guidance in 2017 that enables us to keep our operating margin flat to growing. In terms of the transaction expense and transactional loan losses growing, we did see an uptick in transaction expense on a unit basis by 4 basis points or 5 basis points during the quarter, and that’s really related to the mix of our business. Some parts of our business are growing faster than others, which may carry higher transaction expense.

Got it. Thank you.

Good afternoon. Just wanted to ask on the move to announce a light strategy, how could you guys potentially limit the EPS dilution hit from a move like that? And then secondly, John, just on the hedge gains, just curious if there is a number we can get for the quarter and what’s the expectation for hedge gains in fiscal year 2017? Thanks so much.

Bryan, it’s Dan. I’ll take the first part of that, and then I’ll wisely let John take the next part of it. So let me just back up a little bit. As you know, and everyone on the call knows, credit is and will continue to be an important flywheel for us. Credit gives flexible payment options to both our margins and to consumers. It reduces card abandonment, and it increases basket size for our merchants and consumers. When someone uses credit, they do two times the spend on our PayPal network than someone who doesn't. When we do PayPal working capital, on average, those that we lend to see their sales go up 20% plus, and so it’s a tremendous flywheel for us. It is a small part of our business and it’s likely to remain so as well. We don't need to chase growth here; we can be very responsible in who we lend to and how much we lend to them. We have great amounts of data and really I think world-class modeling around this. That said, there is no reason really to use our balance sheet or the receivables, and there are, as we've mentioned before, a lot of benefits of being asset-light. Obviously, we tie up a lot of our free cash flow in receivables, which leaves free cash for other capital allocation that we might do, and we have reduced exposure. We still have a differentiated proposition to use our data and our modeling with our partner to bring back a differentiated proposition into our phase, and there are very attractive economics to share. As we've seen right now, from people who are very interested in partnering with us, our portfolio is very effective. The size of our basement doesn't have credit, and the ability to expand that is very attractive, and the risk involving capabilities we have are also very attractive, and so there are a lot of economics here to share. We believe that we can significantly reduce our risk exposure, but maintain strong economics for the business. That is a working hypothesis as we are going through this. We are in the early process of looking through this right now because it is a very competitive process out there as people look to potentially partner with us. We’ll make a decision as we digest and sort through all the different proposals that we’re seeing. That said, we are very much looking forward to how we do this, but it's likely to be a back half of 2017 event, but clearly there is a lot of demand and a lot of benefits for us moving towards being asset-light, and we think as I mentioned, you reduce risk and maintain strong economics for the business.

And Bryan, with respect to hedges, I said in my prepared remarks that we expect about 200 basis points of headwind in 2017 from foreign currency, and that’s actually net of the hedge position that we have. To fill in more detail on that, in the quarter, in the fourth quarter, we had a $50 million hedge gain. In our report that’s released here in the next couple of weeks, we had about $120 million in hedge gains for the year. That makes our current position today about where markets are. That’s about what we are expecting for 2017. I think maybe if there has been a moment to talk about our exposure because, as you know, more of our customers are international than here in the U.S., and a significant portion of our business is outside of the U.S. Just to use round numbers, as we said before, half of our revenue is outside of the U.S., and on a $12-ish billion base that’s $6 billion. Of that $6 billion, about three-quarters of it is denominated in currencies other than the U.S. dollar or that aren’t tied to the U.S. dollar. That gives us about $4 billion of the basket that we’re exposed to. You can do quick math and recognize that a 1% change in the U.S. dollar relative to the basket of currencies on our revenue basis for us is about $40 billion annually. So we're pretty sensitive to those movements, which is why we hedge the way that we do. We hedge to mitigate earnings volatility, not necessarily revenue. If you work your way down from that $40 million for a 1% change and you take the transaction margin on that and then overlay the operating expenses that we have that are denominated in other currencies as well as their hedged, then the impact to operating income is much less than that. You will see when we release our report that we were able to mute a lot of the impact of the currency movements in 2016 with that hedge position.

Hi, good afternoon guys. You did not, I don’t think, call out in your prepared remarks any metrics around Braintree. I think historically you said that Braintree was running at more than 100% volume growth year-on-year. Is that somewhat reflective of what you are seeing now? Also, can you comment on the transaction expense uptick you’ve seen in 2016, which I think has also been driven a bit by Braintree, and just what the outlook is for both of those looking out into 2017?

Sure. I’ll start and allow Bill to jump in if he chooses. We continue to see great performance out of the Braintree part of our platform. It’s probably worth noting that as we look at the sequential year-over-year change in the third quarter compared to the year-over-year change in the fourth quarter, I highlighted in my prepared remarks that some of that was a result of Xoom, and that for the same point in time in the fourth quarter of last year, 2015, it was a quarter where we had exceptionally large growth for Braintree, which presented a more difficult comp. All that said, Braintree is still growing very much in line with our expectations and continues to be a great and complimentary part of our platform. As I cited in my earlier response to Ashwin, part of the uptick in transaction expense is related to the mix of our portfolio, specifically Braintree tends to be more card-based and as we’ve seen that growth, that’s the transaction expense that’s driving the fourth quarter.

This is Bill. I would like to add that not only is the Braintree business itself doing well, the Braintree API that brings together the 100% share to checkout that Braintree processes, as well as PayPal’s best experience including One Touch and PayPal Credit, all these elements. We are seeing that become a preferred way for merchants to integrate to pay now and get access to the full breadth of our experiences. It’s a big part of our mobile-first strategy and it’s driving PayPal's presence in many of the most interesting new commerce experiences out there. So, you heard us talk about what we are doing with interest buy buttons, Facebook Messenger, and other commerce experiences for companies like Uber and others. Those experiences are all running through our Braintree platform. We are seeing the strategy of Braintree and 100% share of checkout driving great growth for our business while getting our best experiences out there to more merchants, creating interesting margins, and new commerce experiences available to our consumers as they encounter these new commerce experiences. So, we've been quite pleased with that and see that momentum continue to build in terms of Braintree as a key enabler of those interesting commerce experiences out there.

Next question.

Hi, just two quick ones. Just on the regulatory environment, anything you can provide on how you're thinking about this year as you look at Durbin and other regulations? Also, on mobile, I know it is up 53% this quarter, and we saw the step-up in 2016 versus 2015. As we anniversary One Touch and Xoom next year, what’s the magnitude of the step down that we should expect? Thanks a lot.

Let me try and address those two questions. So let me start with mobile. Mobile is driving growth in the industry right now. More than half the sales that are going online are being driven by mobile. Mobile is blurring the distinction between in-store environments and online environments, where commerce is just becoming commerce. Truthfully, mobile is the biggest competitive differentiator for us. If we think about mobile, the real problem that merchants have with mobile is that when a browser begins the shopping experience on mobile, between 65% and 74% of the time, there is card abandonment because it’s such a small screen, it’s difficult to enter payment information, etc. So, with One Touch we have an 87% conversion on mobile. 87%. The next closest is 51%. The industry average is around 44%. So, we are at almost double the industry average in terms of the mobile experience that we see, and mobile is exploding across the world. As I mentioned in terms of why did we take up our revenue guidance—it’s because we see opportunity globally, predominantly driven by mobile. As for the regulatory environment, I wish I had more perspective to share with you. There’s a lot of talk about changes, but it’s early days and very uncertain.

The only thing I would add to that is that because you mentioned lapping effect on some aspects, we’ve demonstrated with PayPal One Touch that we can roll that out to millions of merchants and millions of consumers, without them having to make changes. One Touch is the first of many generations, and that’s a real competitive advantage for us that others in the industry are trying to convince merchants to integrate new experiences. We are simply showing up and solving the problem for them without them having to work. As you think about playing that forward, we expect as many generations to continue to improve the mobile experience, and uniquely we can do that without merchants having to make changes on their end because we control the foreign experience. We expect that to continue because of these secular trends we’re seeing.

Let me talk about the change in administration and how we think about it in terms of the impact on our business. First, it’s incredibly early days, and there’s a lot of talk about different things; however, we are yet to see specifics around that. From a regulatory perspective, obviously people are talking about changes to Dodd-Frank and potentially other regulations, but the first and most important thing is we are completely focused on complying with any and all regulatory environments that are out there. We believe that what regulators want and what we want are completely aligned, and we are investing a tremendous amount of resource—people, development, platform, human resource perspective—to assure that we are as compliant as we possibly can be regardless of regulation shifts here in the U.S. and obviously across the globe.

Thank you very much.

Yes, hi. A question first on One Touch. I was just wondering if you could provide a bit more detail about adoption within the 40 million consumer accounts in terms of maybe the penetration of the addressable TPV that they are actually using that product and what the friction points are for growing that penetration rate from here against the other 150 accounts that haven’t yet adopted the product? Thank you.

So we have 14 million of approximately 40 million users that are on One Touch already, and that's happened really in the course of just over a year. The adoption there is more rapid than anything that PayPal ever put out, and we see that adoption continuing. We think there is a lot more left there in terms of the 40 million that have opted into it versus the nearly 200 million total users that we have. The same goes for margin; we have more than half of the internet retailers at 500 accepting One Touch and a cost of 5 million of our 15 million merchants accepting it, but we have more growth left as well and we are working through those pretty rapidly. All that to say, we think there is great momentum with One Touch, but we think that continued exposure will come as we make it a level for our merchants and as more consumers get exposed to it. As Dan mentioned in his remarks, more than half of our active users have engaged in mobile transactions with us, so we know there will be good demand.

And if I could follow up on a different topic. Sorry, Dan, did you have a comment on that?

No, I was thinking it could be!

Okay, and we are just on a different topic, so feel free to expand on that, but just wondering, John, if there is some indication in the market that you didn't reiterate the three-year guidance. My assumption is it is not something you're going to be doing every quarter. You raised 2017, if you can just kind of address that that would be great, thanks.

Sure. You are exactly correct, Scott. We are not going to get in the habit of updating three-year guidance every quarter. There is no change to the guidance that we provided previously last quarter.

Thanks guys. Can you just touch on what’s included in your guidance regarding Venmo monetization or pricing, and then just also on the margin side, it seems your guidance were flat to just improving margins despite the headwinds, and I think you called that in Xoom, so what has been the impact? If you would have backed those items out, can you give us some more color on the driving forces behind the increase? Thanks a lot guys. Nice job.

I will start off a little bit, and then you can jump in. So, like I say in terms of Venmo monetization pricing very little actually built into our guidance for 2017. We fully intend to roll out Venmo monetization in a much broader basis in 2017. We will see some impact in that, but really the big impact on that happens in 2018 and 2019. When we talk about feeling well positioned for profitable growth in 2017 and beyond, it’s because what we're seeing right now are things that we clearly see here and now, and we've got a ton of things that we think we can monetize and fully intend to do, but let’s model them more in the 2018 timeframe. Not much is built into that. Not as much is built into the customer choice piece of it, although I will say we’re pretty encouraged by the initial results that we’re seeing on choice. We rolled that choice through all of North America right now regarding the servicing piece of choice, as well as the onboarding of that—we are just beginning in checkout right now, but as John mentioned in his remarks from a cost perspective, it is well within our expectations in terms of transaction expense and engagement. It is better than we expected in terms of engagement, which by the way is not really surprising. If you give somebody the choice to pay, they become more engaged; the average price that they pay or the basket size that they have goes up, as well—it’s not surprising. We anticipated that, but it’s nice to see those things starting to happen in the market, but we have a ton of that built into our guidance. That said, it’s more of a 2018 or 2019 phenomenon.

And just on a couple of points regarding hedge and stock compensation. If you look at hedge impacts in total in the fourth quarter, it had a rather immaterial impact on our overall results when you consider the offset we have from other operating expenses denominated in foreign currencies as well. That wasn’t a big driver. With respect to stock comp, we had $127 million of share-based compensation in the quarter, relative to $90 million last year. It’s important to point out a couple of things related to that. When we separated from eBay, we basically did a lift-and-shift with respect to our compensation programs, and we changed that in 2016 to make those compensation programs appropriate for PayPal. As part of that, we changed the vesting period related to our long-term compensation from four years previously to three years now. That element, combined with just the natural increase in employees, resulted in almost the entirety of that change year-over-year. I will say that we are big believers in share-based compensation for our employees. We think it aligns their motivations with our shareholders, which we would all agree is a very good thing, and if you look broadly across the industry and our comparables, virtually any measure—take share-based compensation as a percent of revenue, for example—we are in the lower quartile, the better quartile related to our peer group, and there are various other ways you can look at that. We compare very favorably in all of them.

All right that’s helpful there. Thanks.

It's Dan. I just want to thank everybody for joining us on the call. We know how busy all of you are, and we look forward to seeing you at our investor conferences and talking to you on our next earnings call as well. So, thank you very much for your time.