PayPal Holdings Inc (PYPL) — Q1 2017 Earnings Call Transcript

Thank you, Andrew. Good afternoon and thank you for joining us. Welcome to PayPal Holdings’ earnings conference call for the first quarter 2017. 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 commentaries. 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. We will discuss some non-GAAP measures in talking about our company’s performance. In discussing certain historical year-over-year comparisons, we have chosen to present non-GAAP pro forma measures because we believe that these measures provide investors a consistent basis for reviewing the company’s performance across different periods. You can find a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures 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 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 most recent 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 26, 2017. We disclaim any obligation to update the information. With that, let me turn the call over to Dan.

Thank you, Gabrielle. I’m pleased to report that PayPal began 2017 with an exceptional quarter. This continues a string of consistently strong performance since our separation from eBay in July 2015. We delivered solid operating and financial results this quarter. PayPal gained 6 million net new active accounts, a 35% increase from the 4.5 million net adds in Q1 a year ago. This represents the largest organic quarterly increase in this important metric over the past three years. We ended the quarter with 203 million active accounts. We expect that our net adds will increase by more than 20 million in 2017, and once again, our transactions per active account increased, growing in Q1 to 32, up from 28 a year ago. We reported $2.975 billion in revenues, an increase of 19% on an FX neutral basis, above the high end of our guidance, driven predominantly by stronger core PayPal growth. PayPal delivered $0.44 of non-GAAP EPS, which is $0.02 above the high end of our guidance as we are beginning to realize the sustainable benefits of our scale, and we generated $603 million in free cash flow. This strong customer result clearly demonstrates our progress towards becoming the world's leading open digital payments platform. We continue to build on our strategies of reimagining and democratizing the management and movement of money for our consumers. Helping drive the global transition from cash to digital payments and positioning our millions of merchants to benefit from the noble revolution at the move to an all-digital cross-context retail environment. Our powerful two-sided network engages both consumers and merchants, and as our scale increases, the stronger our network effect becomes. We have made meaningful progress in advancing merchant adoption of PayPal in the quarter. At the end of March, the number of active merchant accounts on our platform increased to 16 million. The size of our merchant base is a formidable competitive advantage and is extraordinarily difficult for others to replicate. We have partnered with several new brands on the PayPal platform, including online fashion retailer Vente-Privee in France, Papa John’s and Groupon in the U.S., leading Mexican department store chains, Coppel and Liverpool, and we made meaningful strides in the travel and tourism vertical in India with the addition of access rooms, Vista Rooms, and MakeMyTrip. Additionally, over 5 million merchants and 75% of the IRR 100 now offer our industry-leading One Touch checkout solution on their mobile and desktop shopping experiences. We expect the number of merchants accepting One Touch to increase noticeably throughout the year. We finished the quarter with 53 million consumers opted into One Touch. We couldn’t be more pleased with this transformative product experience and the engagement it’s driving with our customers. One Touch provides a powerful connection between our merchants and our consumers in a mobile-first world. In the quarter, 32% of our payment volume came through mobile devices, and mobile payment volume increased 51% over the same period last year to approximately $32 billion. In the quarter, we also continued to innovate and transform how people send money to each other through P2P and remittance services. We continue to expand the functionality of our global remittent service Xoom. In the quarter, we launched the Xoom service within the PayPal mobile app in the U.S. and plan to increase spending limits to $10,000 per transaction in the second quarter. We opened up the Japanese market in Q1, making Xoom now available in 56 different countries around the world. In the quarter, Venmo continued to transform how millennials manage and engage with their money. In addition to being named one of Fast Company’s most innovative brands, the social P2P app processed $6.8 billion in payments in the quarter, more than double the volume processed a year ago. Importantly, beginning in Q2 we plan to significantly enhance the social P2P payment experience that has made Venmo an environmental phenomenon. PayPal made Venmo available as a payment option on the brand three platform. We have the opportunity to test and learn while preserving the unique nature of Venmo as we move the experience into new contexts. Today, we are announcing the opening of our data for select U.S. PayPal merchants who accept Venmo as a mobile payment option. We anticipate the ability to pay with Venmo will be widely deployed across millions of our U.S. PayPal merchant base by the end of this year. Investments we have made in our platform architecture now allow us to enable Venmo as a payment method for our PayPal merchants without any additional integration work on their end, mirroring the approach we used to successfully roll out One Touch. While we continue to drive innovation inside PayPal, we are also always looking to acquire innovative companies that can bring great product experiences and technology talent to PayPal, like we did with Venmo, Paydiant, and Xoom. In the first quarter, we announced our agreement to acquire Tio Networks, which will expand our two-sided network by adding bill payment as another key service to drive engagement and value for our consumers. On April 10th, Tio shareholders approved our transaction and we expect to close the transaction in the second half of 2017. Tio is a leading multichannel bill payment processor in North America and processed more than $7 billion in bill payments in its fiscal 2016. The company’s digital platform and physical network of agent locations make paying bills simpler, faster, and more affordable. Importantly, for consumers who may not have access to digital financial services, the ability to easily migrate cash into a digital network enables them to benefit from the convenience and speed of digital bill payments. With its network of 10,000 supported billers, Tio will meaningfully expand our ability to offer digital financial services to tens of millions of underserved consumers. Reinventing the management and movement of money for people across the globe creates opportunities for close partnerships with companies across our ecosystem. We continue to strengthen and forge additional strategic alliances with leading brands around the world. We just announced the partnership agreement with Wells Fargo, adding another strategic issuer to the growing list of companies working with PayPal to expand our services at the point of sale. As a result of this partnership, Wells Fargo customers will be able to use their debit and credit cards to make contactless mobile payments at millions of in-store merchants. This expands our longstanding relationship with Wells Fargo and builds on the product capabilities made available to PayPal as part of our strategic partnership. We also extended our partnership with Visa into the Asia-Pacific region, and in January we finalized a comprehensive strategic partnership with Discover. Along with Citi and FIS, these partnerships will make it easier for PayPal customers to find and choose the preferred financial instruments inside the PayPal Wallet and use the PayPal account in multiple contexts. Our conversations with other leading issuers continue to be positive and constructive. Over the past nine months, we have rolled out consumer choice across our onboarding, servicing, and checkout experiences. Millions of our consumers have already opted into choice and have formatted the payment option best suited for their particular checkout experience. Consequently, we now have additional visibility into the early results of choice and we are very pleased with what we are seeing. First, choice is having a notably positive impact on our net active adds. Second, it is driving higher spend per customer. Third, we are experiencing a reduction across our customer service centers, leading to cost reductions in our global operations. Finally, the impact of choice on our transaction margins is well within our expectations. In summary, we couldn’t be happier with our strategic move to choice and the corresponding benefits we are seeing. We plan to roll out choice in the United Kingdom, Canada, and Australia beginning in Q2. We also announced a meaningful expansion of our growing relationship with Google. PayPal will be available within Android Pay in the United States and will be accepted as a way to pay both in-app and at the millions of retailers that accept Android Pay at the point of sale. We are pleased to offer our customers another exciting way to pay with PayPal, further expanding the choices and contexts within which they can use their PayPal Wallet. We expect that our relationships with technology companies like Google and Facebook will continue to grow and expand into additional contexts as we move through the next several quarters. 2017 continues the strong efforts we have undertaken to create strategic partnerships across multiple ecosystems. We have seen the transformative power of these partnerships across our business. It’s hard to overstate the difference in the relationships we now have with companies across multiple sectors who were previously viewed as potential competitors. We are now collaborating as strong and supportive allies to create value for our mutual customers. As this quarter’s results clearly demonstrate, we are executing against our vision in a disciplined fashion. We operate in one of the world’s most exciting and dynamic industries, which energizes and inspires our entire team. We still have much to accomplish, but I would like to take a moment and thank the entire PayPal team for another quarter of dedication and hard work on behalf of our customers. It is making a real difference in the value we can drive to consumers, merchants, and to our shareholders. And with that, I will turn the call over to John.

Thanks, Dan. I also want to thank all of PayPal’s customers and our employees worldwide for making this another great year. We outperformed in the first quarter on both revenue and earnings, building on our momentum from 2016. Solid growth across active accounts, payment volumes, and revenue demonstrates that our customer-first strategy coupled with our strategic partnerships are yielding results. Before I go into the detailed financial results, a few highlights for the quarter: Revenue was $2.98 billion, growing 17% on a spot basis and 19% on a currency-neutral basis. Non-GAAP EPS grew 19% to $0.44. We generated $751 million of operating cash flow and $603 million of free cash flow, and we returned $517 million to shareholders during the quarter. For the first quarter, our total payment volume was $99 billion, up 25% on a currency-neutral basis, including U.S. payment volume growth of 27% and international volume growth of 23%. Our merchant services volume grew 30% on a currency-neutral basis to $84 billion. Merchant services represent approximately 85% of our total volume in the quarter. Volume associated with eBay represented approximately 15% of the total compared to 16% in the prior quarter and 18% in the first quarter of 2016. In the first quarter, we added 5 million net new active accounts, ending with 203 million active accounts, representing growth of 11% from Q1 last year. Active account growth was predominantly driven by our PayPal core business. The number of payment transactions per active account increased 12% year-over-year, and continued solid growth of customer engagement in active accounts resulted in a 23% year-over-year increase in payment transactions to 1.7 million. In the first quarter, 17% revenue growth resulted from a 60% increase in transaction revenue and a 23% increase in revenue from other value-added services. Transaction revenue was driven by core PayPal and Braintree businesses, and revenue from other value-added services was predominantly driven by credit. For Q1, our total take rate was 3%, and our transaction take rate was 2.62%, reflecting a sequential decline of approximately 14 basis points from a year ago. Continuing a trend, our P2P businesses contributed meaningfully to the take rate decline in the quarter. Again, I would like to point out that the growth in our Venmo and our core P2P platform increases our ubiquity, strengthens our value proposition, supports higher levels of engagement, and reduces levels of churn across our consumer base. These businesses are important to our long-term success, and we remain committed to both investing in and monetizing these high-growth opportunities. Our volume-based expenses were up 28% year-over-year. Transaction expense was $987 million, up 31% year-over-year, driven primarily by increased funding costs across our core PayPal platform, as well as business mix from strong growth in Braintree. Regarding choice, we are in the process of rolling this experience out to all of our customers here in the U.S., and as Dan articulated, we are pleased with the early success of this initiative. To date, the increased card-based costs have been well within our expectations. Transaction loss in the quarter was $171 million, or 5.7% of revenue, representing 40 basis points of leverage. In the quarter, loan losses for both the consumer and merchant credit finance were $129 million, or 4.3% of revenue. Our consumer credit portfolio continues to perform in line with our expectations. The net charge-off rate was 6.9% in the first quarter. We ended the quarter with an aggregate gross receivable balance, including both principal and interest, of $5.7 billion in our consumer and merchant loan portfolio, and a total reserve of $360 million. Other operating expenses increased 4.5% to $1.05 billion, or 35% of total revenue, representing 420 basis points of operating leverage year-over-year. This marks the lowest favored growth in operating expenses that we achieved as an independent company. We are very encouraged by the early progress of our initiatives to operate more efficiently. Looking forward, we will continue to seek opportunities to drive sustainable efficiencies and cost discipline while, at the same time, fostering innovation, reducing complexity in our processes, and improving our service to our customers. We are positioning PayPal to operate and scale more profitably over the long term. Associated with these initiatives, we recognized a $14 million restructuring charge in the first quarter, primarily related to strategic headcount reductions across our global organization. Less than 3% of our global workforce will be affected, and based on current plans, we do not expect a net decrease in headcount for the year. We expect to realize annualized savings of approximately $75 million, the majority of which will be reinvested in our growth initiatives. We believe the changes we are making to how we organize and run the business will allow us to deliver sustainably stronger results. Non-GAAP operating margin in the first quarter was 21.6%, an increase of 50 basis points versus the same period last year. This is our best operating margin performance since separation. In addition, non-GAAP operating income grew 20% year-over-year to $643 million, resulting in non-GAAP EPS of $0.44 in the quarter. I would now like to spend a moment discussing how changes in foreign currency impacted our results in the quarter. While we recognized hedge gains of $40 million in the first quarter, these gains were more than offset by the translation effect of the strong U.S. dollar. The effect of translation, net of our hedge gains, created a revenue headwind of approximately $16 million. Our hedging program is designed to minimize the operating income effect from changes in the currencies to which we have the largest exposure. On an operating income basis, fluctuations in foreign exchange rates were immaterial to our results in the quarter. We ended Q1 with cash, cash equivalents, and short-term investments of $6.3 billion. We generated $751 million of operating cash flow in the quarter. Capital expenditures were $148 million, or 5% of revenue, resulting in $603 million of free cash flow in the quarter, representing $0.20 of free cash flow for every dollar of revenue. In addition to an already strong balance sheet, our balance generates substantial free cash flow. Effective capital allocation is an additional leverage to drive long-term value creation. We take a comprehensive view of our sources and uses of cash to ensure that we allocate resources and capital to what we consider to be the highest return alternatives. We are fortunate to have many great options for the use of our free cash flow. Part of that is how we deploy the capital on our balance sheet to the highest returning investments. We currently have $5.1 billion of consumer credit receivables on our balance sheet and are exploring different options, including asset sales and partnership opportunities to free up cash for higher returning investments. In the first quarter, we returned $517 million to shareholders in the form of stock repurchases. We now have approximately $500 million remaining on our buyback authorization, further reinforcing our ongoing commitment to capital return and disciplined capital allocation. Today, we are announcing a new buyback authorization in the amount of $5 billion. We are confident that the cash generating potential of our business will continue to allow us to invest organically, be acquisitive, and return cash to shareholders. We are pleased that we are positioned to increase the repurchase authorization and view this as the next step in providing a more comprehensive longer-range plan for capital allocation. Consistent with the execution of our existing authorization, we plan to repurchase shares to offset the dilution from stock-based compensation and use the remainder for opportunistic repurchases. I would now like to discuss our guidance for the second quarter and updated guidance for the full year 2017. For the full year, we are raising our revenue guidance and now expect revenue between $12.52 billion and $12.72 billion, representing currency-neutral growth of 17% to 19%. We are pleased to raise this outlook relative to the guidance provided in January because of the momentum we are seeing across our business and initiatives. 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 are also raising our full year EPS number and now expect non-GAAP EPS to be in the range of $1.74 to $1.79. We expect the sequential trends in our quarterly revenues and earnings to be very similar to 2016. For the second quarter, we expect revenue to be between $3.05 billion and $3.1 billion, and we expect non-GAAP EPS to be between $0.41 and $0.43. In closing, we have started 2017 from a position of strength. We delivered strong results in the first quarter and executed successfully across our plans to achieve important goals both operationally and financially. We see substantial opportunity in the markets we are currently serving and those that are part of our longer-term addressable market. We will continue to expand and build on our market leadership position and remain focused on balancing investments in growth with profitability and disciplined capital management, creating shareholder value for the long term. With that, let me turn it back over to the operator for questions. Thank you.

Thanks guys. Thanks John. It's great to see more operating leverage in the model. Just wanted to be clear first, John, the $40 million in restructuring is more one-time nature? And then, perhaps, you can give us a bit more detail on moves you are making to improve that operating expense growth. I think you mentioned, you said 5% in other expenses; where can that get you here? I mean, clearly showing more of a past due in operating leverage this quarter than in the past? Thanks.

Yes. Thanks, Darrin. Good question both. The $40 million restructuring charge is a result of a very targeted initiative here which actually goes into your second quarter that is really designed to help us move forward in a very efficient manner as we scale our business. It is not what I would describe as your typical headcount reduction. It’s a targeted reduction that really drives towards the efficiency of the business and in doing so is in a very customer-centric fashion. So we don’t expect that in the future to be necessarily a one-time effect. With respect to operating leverage, you are right; you could go back and look at the last several quarters, and you have seen sequential declines in our operating expense growth rate each of those quarters. And to your point, we grew 4.5% this quarter, and even if you look at that on kind of an incremental margin basis, for every dollar of revenue that we brought in this quarter, our operating expenses increased 10 cents, and that’s the best performance that we have ever seen as a company. You can go back to prior years, and that number would have been as high as 50 cents in some cases. So this is a demonstration of how we are going to operate moving forward, and it really is across all aspects of our business. It’s not specific to what you may think of generally as overhead. It’s how we build sales groups and product development, how we build our product, and how we sell to our customers. So it’s a muscle that we are developing, and we certainly hope that we can share more of these results going forward.

All right. Nice job guys. Thanks.

Thank you for the results. Just want to ask on the acceleration in active accounts and also in the U.S. payment volume metric looks like acceleration as well. Is that the result of customer choice or are there other factors to consider? Just trying to segregate customer choice from the rest of the business if possible?

Yes. Tien-tsin, thanks for the question. I think there are a couple of things that drove overall results. And I think one of the things is around these things. It is the result of a cumulative effect of lots of actions that we have been taking. Certainly, customer choice is being very helpful. We are seeing not only an increase in onboarding but a reduction in churn, which to me is a great checkmate for what we were trying to do with the choice. But that’s still early days on that. We are really seeing momentum across all regions right now. I think a lot of that is because over the past 18 to 24 months, Bill and his team, the risk teams, and others around the company have really looked at our core value proposition. Things that you may not think about, like availability and performance of our network uptime, we spent a tremendous amount of energy and resources to make sure that our platforms perform the way that our customers expect from us. We obviously couldn’t forget things like One Touch. One Touch is driving more engagement, and more engagement typically means lower churn, which is held for our net adds. I think, if you look at our noble performance, it’s arguable that we are only now not global checkout experience right now. I look at things like our consumer app we put out, the merchant app we put out, new invoicing things, smaller things that have the ability to recover passwords more easily. All of these things are starting to hit the marketplace in quite an impactful way. And I would say we are just beginning on this as well. If you think about choice for the first time, we are actually beginning to see banks that we have even mentioned in our remarks, our press announcements, that see our marketing paying off for their consumers because if they can put their debit or credit into the PayPal Wallet, they know they are going to drive additional digital spend by doing that. We have a lot more that we have planned in the funnel, whether that’s additional functionality for Venmo users, whether that’s international expansion, upticks in our consumer value proposition, or all of the things we are doing with multiple partners across the world; that’s also helping to drive our net adds. So as I mentioned in our remarks, we are now expecting more than 20 million net adds for the year, which is a substantial step up from where we are, and hopefully, we will continue to see that momentum moving forward. We are certainly encouraged by what we are seeing.

Hey, guys. Solid results. Just kind of a two-part question, I guess, what came in better than previous guidance that caused the revenue and EPS guidance raise from fiscal year '17? And then just secondly, on the Android Pay partnership announcement, that seems like a unique deal. My understanding is PayPal will generate a fee on all transactions at the point of sale regardless of tender types, so even if it is a credit card. So maybe you can help us understand the economics that PayPal earns on those transactions? Thanks so much and congrats on the quarter?

Thank you, Bryan. I will address the first part of your question and then pass it over to Bill for the information on Android. This has been a quarter where we performed exceptionally well. Looking at the top of the funnel, we gained 6 million new users, the highest we've seen in several years. As we analyze further down, our revenue across all regions surpassed our expectations for core PayPal. Additionally, as I mentioned earlier, we are very satisfied with our cost management discipline. We are transforming how we operate as a company, which is part of Bill’s evolution, and we are thrilled to start seeing the results of our potential.

Yeah. The Android Pay is probably just the thing we are doing there, I mean, it’s good to sort of take a step back a little bit and talk about some of the broader partnerships that we are doing. Be more specific to your question on Android; hey, Bryan. What you are seeing happen on mobile is that our two-sided platform is allowing us to connect consumers and merchants very efficiently across many different contexts. We are seeing people in the ecosystem partner with us, because we can help line up new experiences that they want to create for their customers, and so that’s across a number of partnerships that we have. With Android Pay and PayPal becoming a payment option inside of Android Pay, number one, we are going to give the consumer great ability to access mobile app to pay transactions by being able to sign up with One Touch to have a frictionless onboarding experience into that. We have a great customer journey into mobile app to pay. And then at the end of that, the economics of that we are starting with PayPal balance only, and for those, we will make money on those transactions, much like we would on any other transaction. As we work through other payment methods, we will use Visa and Mastercard tokens. And this is one of the interesting things about the deal we did there; that the tokens that we import from Visa and Mastercard – when we token out the estimate of an issuer, we will pass through card-present rates to the merchants. The merchant is card-present, and we only cost on those things. It also means that we are not necessarily generating revenue on all those transactions, but we don’t have costs either. That lets us have some of our transactions where we will make good margin on those, while others are basically zero revenue and zero costs for us. The benefit of that is that we can drive engagement across our consumer base, and you see that across other parts of our business, where take P2P as a good example; we did tremendous volume on P2P, and in many situations, those are free transactions. But those consumers that engage with us on P2P are more engaged overall, and we find that some of our most profitable customers because we have higher engagement with them overall across other transactions where we monetize. We think about in-store in a very similar way; with Android Pay, it’s similar in that we will have some of those transactions that we monetize directly, while others are pass-through for us. But we expect it will drive overall engagement higher as we have more and more opportunities to engage with our PayPal users.

Yeah. Just to build on that response, though, one of the long-term aspirations we have with consumers is that we first started this that they were transacting with us one to two times a month. We are now approaching almost three times a month. That’s what we can say it for us that our long-term aspiration is that a PayPal consumer will engage with us one to two times a week. As Bill mentioned, the way to do that is to be much more involved in the everyday management and movement of money for the consumer, which means that we want to give them this optionality of not only what instrument they want to use and how they want to spend, but where they want to spend. So whether that be international remittance, bill pay, or a tax pay in app or in store, we are trying to open up the PayPal Wallet through these partnerships in multiple contexts and multiple different functions for our consumers to be much more engaged with the PayPal Wallet, and we are beginning to see the early payoffs of that.

Hey, guys. Thanks. Good afternoon, everybody. John, I guess on just on the guidance, does that include any contribution from Venmo or Tio? Just on Tio can you talk a little bit about margin profile, growth rate or anything just to help understand that? The way that business looks a little more? Thanks.

Sure. As Dan alluded to in his remarks, we are beginning to expand pay with Venmo and we have got some improvement in the contribution assumed there, but I wouldn’t by any stretch of the imagination suggest we are overly dependent upon that for our results this year. We are going to be measured in this, as Bill has said many times before; this is something where we – it’s too precious to get Venmo, and we want to get the experience just right. So if that requires us taking a more measured approach, then that’s absolutely fine with us. So we are – we do expect to have improving economics with Venmo as we go forward, but I wouldn’t describe our 2017 guidance as dependent on the comp that is going to happen within that.

Yeah. As I mentioned in my opening remarks on the Venmo side, we are really trying to take the same approach with One Touch. We have now been able to engineer our platform just like with One Touch recently got such quick merchant acceptance as the merchants have to do no work on their part to be able to accept our One Touch transaction. We have that initial on Braintree with automobile customers, and we tested Venmo to see if we could take that experience, that’s a social experience of payments, and move it into a social experience for purchases as well. And we now have the platform to be able to turn on PayPal merchants, which obviously is the vast majority of our base here in the U.S., to accept payment from Venmo as an option. That will roll out over the year, but that will roll out more towards the back half of the year, and so we will begin to see improvements with Venmo this year. And as John said, we will start to see that improve as we look forward in our medium-term guidance.

On Tio, Tio is a publicly traded company right now; you can see the results. They did about $80 million or so last year in their past quarter that they just reported. Obviously, we will look at what synergies are there; we are quite excited about having Tio come in. Bill payment is a very sticky solution. We are really trying to build out how we can help underserved consumers manage and move their money, and that can be done in a very profitable way for us and a very consumer-friendly way for consumers as well. So we are really excited to close that acquisition. Again, we expect that to close in the second half of the year. But in our overall results, it’s a pretty small number in general.

Thanks. Dan, you mentioned discussions with other banks continue and you have some good experiences. I guess, what’s holding some other announcements up when you have your discussions with banks? And then, just one for John, as part of the asset life strategy, is there any sense of timing? Thanks.

We are announcing the various issuers and banks we are collaborating with, even though they don’t necessarily make public announcements, and we don’t require them to. There are many adjustments being made in this area. Working with some of the larger banks takes time. Currently, we are engaged in a conversation that I feel optimistic about, with both parties aiming to finalize a deal. These large banks have unique circumstances, and we need to navigate lengthy documents with each one. It’s important that when we partner with a bank, the product flows are accurate, and the experience is aligned to ensure it benefits both our customers. It simply takes time to work through these matters.

Sanjay, on asset life, I want to start by reminding everyone that we have no intention to start offering a credit product. Credit today compliments a holistic suite of payment offerings that we provide for our merchants and consumers, and they find great value in that. What we do want to do, though, is put that credit offering in a less capital-intensive manner than what we do today so that we can free up that cash potentially, as much as $5 billion, for higher returning investments. We have different options there; some are more partnership-like opportunities, others are pure asset sales, some combination of the two. Our preference, to your question on timing, is to do something sooner, but we are not going to err on the side of experience that means giving us a suboptimal deal for PayPal. So we are not under a self-imposed timeframe. We are going to take our time and be measured and do what is best for creating long-term shareholder value for PayPal.

Thank you. Good afternoon. Dan, I know you have said that you are pleased with the consumer choice results that you have seen so far, but can you give us a little bit more detail around what’s driving your confidence level over being able to continue to offset the increase in transaction margin compression with TPV growth and operating leverage? And John, separately for you, could we see the growth rate in other expenses turn negative for a time or is the goal just to keep other expenses growing more slowly than revenues? Thanks.

Yes. Thanks for your question, Bill. So, I'll just take one step back on choice. We wanted the choice because we really felt that to our long-term goal of being the ultimate customer champion company focused on customers and what their pain points are, what they need; that offering them optionality of how and where they want to pay, giving them flexibility and transparency, and empowering them was essential for us to remain the market leader in digital payments. And it also had the benefit, which was great, enabling us to team with networks, financial institutions, carriers, and tech companies to drive digital payments; we are all aligned and want to do that. And then remember that the partnership arrangements that we had enabled us to get certain things that we didn’t have before: cost certainty, elimination of digital wallet fees, which was something that was hanging out in the market. We got access, as Bill mentioned, to industry-standard tokens, card present rates. We have network volume discounts that came back to us, because we obviously drive a ton of volume over the various networks and we had instant access to funds coming off of the platform, which we obviously have in our P2P product. We filled all of those gaps with this field. So we assume right now that we have now rolled out basically into our onboarding, servicing, and our checkout experiences. And we are not now looking at tens of thousands of data tests and after tests for hundreds of thousands of early adopters; we are looking at multiple millions of consumers that have opted into choice, and the results we are seeing are frankly very pleasant. As we see them, we plan to see an increase in net adds, and a notable part of that is going to be driven through choice, and we are just beginning on that piece of it. Our order sizes are up as people can figure out, and this order allows them to use our debit or credit cards; this transaction they wanted to use their ACH or debit card. So people can now talk about finding the most value in choice right now, and that is driving engagement and higher order sizes. We see our costs coming down, as we expected, because people were confused about funding choices and we had expected a reduction of calls coming into the call center, and that’s exactly what we are seeing. And that’s sustainable cost reductions for us. And then the transaction costs are well within the expectations, so we have well within that, and so we had modeled all of these reasonably conservatively when we looked at our guidance and our medium-term guidance; we are quite pleased with what we are seeing, and we are just getting started with marketing for the banks.

Hey, Bill, the second part of your question in terms of whether we would expect to see OpEx turn negative; I would reemphasize that this is not a one-time cost takeout approach on cost. We are reengineering the way we work. So from one quarter to the next, we certainly have seasonality in our business; we may invest more in certain quarters versus other quarters, but at the end of the day we are a growth company, and we are going to continue to add costs where we think it generates value for us. And we don’t overly rotate towards one metric, like other operating expenses or like transaction margin. The thing that drives us is being a customer champion and creating shareholder value. We are going to make decisions, whether it would be around revenue or costs, that we think results in strong performance in both of those metrics.

I would say, senior leadership shifting, though, there has been a tremendous amount of focus on how we do that in a way that enables us to make decisions quickly, to innovate more rapidly, to do so in a much more efficient way. So when you think about costs, this is not necessarily taking costs out but it’s eliminating costs. For instance, in global ops, our global ops growth has come forward. The reason for that is predominantly call center savings. That means calls are not coming into our customer care because our product experience is better since we have choice. Those are sustainable benefits that we have as a result of actions we are taking. We are very focused on being both focused on what customer pain points are and how we solve it. How we keep our lead in the marketplace is by operating in a very efficient and effective way.

And Bill, I would add to that maybe it's better to think about the cost trajectory going forward with other operating expense as mid-single digits growth.

Great. Thank you both for the very detailed responses. That’s very helpful. Thank you.

You bet. Thank you.

Thanks. Hi, Dan, John, Bill. Solid quarter. Congratulations on that. My question is, now we have had obviously a number of initiatives, one is consumer choice, you both acquired Xoom, contextual commerce, almost there sort of a kind of design to increase the size of the funnel, you draw more transactions and accounts onto the PayPal platform. You are having good payment and banking other relationships. I guess the question becomes, are you done building what you could be building in terms of pulling transactions in? Is it going to become an execution story from now on? I mean, what else could you be adding to the platform here strategically?

Hi, Ashwin, it’s Bill. One of the things we really think a lot about is how rapidly the consumer is moving into new contexts with MA transactions. The interesting thing about PayPal — we talked about this previously — is that we are one of the only players who operate on both the consumer and merchant side of the payment ecosystem. We do so globally and control the experience end-to-end. What that means is that every time consumers emerge and start to meet one another in new contexts or consumers want to transact in the new context, we are able to light those up oftentimes in far better late than what others could. On one hand, we are constantly evolving the platform to make sure that as those new contexts emerge, we can serve customers. However, we have a structural difference in our company that naturally allows us to be a primary player enabling those transactions, because of the way we operate on both the consumer and merchant sides of the payment ecosystem. You see that happening in what’s going on in the ecosystem; you see it in terms of mobile commerce, at $32 billion in volume this quarter, more than $100 billion last year, and what we are doing with the One Touch rollout and with 5 million plus merchants and 75% of the IRR 100. You are seeing that increasingly our consumers, our merchants, and others in the ecosystem are looking at us as the preferred partner to light up these types of experiences for them. So your question was around how much we are building; we continue to think about building for those new contexts, but we also have our platform really set up to be a great way to connect consumers and merchants whenever they meet one another in new contexts. Then on the consumer side, Dan talks a lot about things that we want to do and become a part of the way people manage and move their money every day. Those are places where we are just beginning our endeavors and looking at the kind of growth you’re seeing. Dan touched how we are approaching three transactions a month, while we had great growth overall. We think there is so much more in the consumers' overall experience and we can help them with, and the industry is moving towards us. You are seeing more transactions moving towards e-commerce and mobile, and we are increasingly a preferred partner to our consumers, our merchants, and others in the ecosystems as that happens.

I just like to add to that that if you think about the merchant side, and you think about our strategy around the merchant side, as we move fundamentally over the last three or four years from predominantly being a button on our website to really now being a fundamental underlying platform provider to merchants as they think about how to take advantage of mobile, and that means that we are offering a host of services across a common platform that we never did before: full checkout type of capabilities, credit capabilities, contextual commerce toolsets, rewards integration through API sets, and the list goes on and on — invoicing capabilities. If you think about the mission of PayPal on both the consumer side and the merchant side, it is a much more expansive mission and vision than we have ever had before. I think that we can obviously grow in a couple of different ways going forward. This is fully what we expect. One is we are going to cross-sell more products and services to existing customers; we have a whole suite both on the consumer side and on the merchant side that can tremendously expand the amount of services we provide to each and every customer. The second thing, though, is we are just beginning on this journey and we are beginning to see acceleration of our net ads as consumers recognize sort of network effect, and we have merchants beginning to see that, and we have huge international expansion opportunities that can be better performed on that side. So it’s not just a matter of newcomers; it’s a matter of taking what we have and being able to cross-sell into existing as well. That combination of these two things gives us a lot of excitement about our growth prospects as we look forward.

Hi. Thanks. Just one quick one; does your guidance contemplate any kind of incremental marketing expense to build awareness on the pay with Venmo side as we progress with that? I guess is the look towards at the end of the year is what?

Hi, James, thanks for the question. First of all, I think, one of the areas that we have seen a bunch of fundamental efficiency and improvement is in our whole marketing spend. We took what were previously very disparate marketing functions in each of our regions either in headquarters; we put them all together, and that group is both regions and I think central, looking at our spend, figuring out how do we spend that in the most efficient manner. We have a ton of data and analytics around if you look at things both through an ROI perspective; we are not just more efficient but way more effective on our marketing spend, and I can’t say enough good things about what that team has done. By being more efficient, we are actually getting more spend out of the existing dollars that we have. With Pay with Venmo, for all of our growth initiatives, you heard John talk about how we are going to take the money that we are saving and reinvest it back into our growth initiatives; Pay with Venmo is a part of that and gets additional investment for us.

Yeah. I would just add that while, as Dan mentioned, we have great efficiency around marketing and billing, considering the ability to assist; Pay with Venmo is marketing, the $6.8 million a month we did in the quarter and 114% year-over-year growth came with almost no marketing for Venmo. It’s a product that has been inherently viral. So we certainly think about how we will support the product going forward, but it is a great place to be when you have a product that customers truly love and is inherently viral and grows without having to go through tons of marketing dollars. That is something we think about with that as we build Pay with Venmo; the social aspect of that we have kept very much at the core of what we are doing, and we think that can really help to build upon the virality of the core product. So it’s not a product that we have to go support with massive amounts of marketing. It’s a product that is inherently viral and that we can complement with a couple of marketing.

So, James, thank you for that question. And thank you to everybody for joining us today. We really appreciate your time and we look forward to speaking with you soon. Thanks a lot.