PayPal Holdings Inc (PYPL) — Q2 2017 Earnings Call Transcript

Thank you, Sherry. Good afternoon and thank you for joining us. Welcome to PayPal Holdings’ earnings conference call for the second quarter of 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 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. We will discuss some non-GAAP measures and talk 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. Please note that as reflected in the reconciliation our GAAP net income and non-GAAP net income in the press release is included in our 8-K filed earlier this afternoon, GAAP diluted net income per share for the six months ended June 30, 2016 was $0.56. In addition, management will make forward-looking statements based on our current expectations, forecasts, and assumptions, which involve risks and uncertainties. These statements include our guidance for the third quarter and full year 2017. Our actual results may differ materially from those discussed on 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, July 26, 2017. We disclaim any obligation to update the information. With that, let me turn the call over to Dan.

Thank you, Gabrielle. And thanks everyone for joining us today. I’m pleased to say that PayPal delivered another strong quarter of financial results, achieving new milestones for the Company on multiple fronts. PayPal generated $3.136 billion in revenue, the first time we've exceeded $3 billion in a single quarter and representing 20% of FX-neutral growth, nearly a 110 basis point acceleration from the first quarter and 70 basis points from a year ago. We've exceeded our guidance and delivered $0.46 of non-GAAP earnings per diluted share, up 27% year-over-year. Our non-GAAP operating margin grew by a 110 basis points year-over-year to 21%. We generated $747 million in free cash flow, up 51% from a year ago. Perhaps more importantly, we had strong performance across our customer metrics. We gained 6.5 million net new active accounts, the largest organic quarterly gain in the past three years and up over 80% from a year ago. We ended the quarter with 210 million active accounts including 17 million merchant accounts, growing our base at 12% year-over-year. Given our first half results, we now anticipate our net new active additions will exceed 25 million for 2017. Engagement once again increased, growing 10% year-over-year; our customers now transact 32.3 times per year, up from 29.4 times a year ago, and 31.7 last quarter. Our growing base and increasing customer engagement enabled us to pass another milestone, as we processed $106 billion in payment volume, exceeding $100 billion in quarterly TPV for the first time. TPV grew at a currency neutral rate of 26% year-over-year, accelerating 75 basis points from last quarter. Our volume growth was driven by our leadership in mobile. In the quarter, 34% of the payments on our platform were made on a mobile device. PayPal processed approximately $36 billion in mobile payment volume in Q2, up 50% year-over-year. This growth is largely driven by the exceptional and differentiated consumer experiences we enabled on mobile devices. One Touch adoption continued to expand in the quarter with over 60 million consumer accounts opted in. Merchant accounts accepting One Touch now numbered just over 5.5 million, growing by 500,000 in the quarter. Venmo users sent and received $8 billion in the second quarter, representing a 103% increase from this time last year, as we continue to achieve increasing network effects in the millennial markets. Based on the strong trends we're seeing across the business, we're once again raising guidance for revenue and EPS for the full year. John will share more details about our results and guidance in his remarks. Our performance is driven by the cumulative effect of multiple incidents. We have fundamentally retooled our technology and infrastructure, leading to significant improvements in availability and development productivity. We have meaningfully improved our core experiences and expanded our suite of products. Our overall scale is accelerating due to the network effects of our two-sided platform. It is clearly a macro secular shift toward digital payments and our customer choice results continue to exceed our expectations. We have completed a rollout of choice across our onboarding, servicing, and checkout experiences in the United States and over 13 million customers have opted into choice. We have the data from millions of customers over multiple quarters. We are beginning to see clear trends resulting from our choice initiative. Choice has both simplified and clarified our customer experiences, which has meaningfully reduced the volume of calls into our customer service centers. Despite our transaction volumes increasing by more than 20%, our net call volume into our global operations is down year-over-year. The results of choice, along with numerous other product improvements, have delivered significant OpEx savings over the course of our three-year funding horizon. More importantly, customers who have opted into choice have reported meaningful increases in overall satisfaction. As a result, choice is driving a significant reduction in churn and a meaningful lift in overall engagement. Consistent with last quarter, the impact on our funding cost continues to remain well within our expectations. Based on the success of choice in the U.S., we are pleased to be expanding this rollout into Australia, Canada, the UK, and Japan later this year. Choice will also help to expand PayPal's presence in our customers' lives. These opportunities are driven by the landmark partnership agreements we have announced with technology companies, financial networks, wireless carriers, and financial institutions around the world. In the second quarter, we continued to make excellent progress with our partnerships. We expanded our relationship with Visa, and most of you will recall, last quarter, we announced an agreement with Visa that covered the Asia-Pacific region. Consequently, we now work around the globe with Visa. As part of our network agreement announced last year with Visa and Mastercard, we recently announced a new service designed to allow PayPal and Venmo users in the U.S. to instantly transfer money to their bank account via eligible debit cards linked to their PayPal account. Finding faster and more convenient ways for our customers to fund into and out of their PayPal accounts is a key part of our overall value proposition. Throughout the quarter, we saw our relationship with issuers grow increasingly collaborative and productive. For example, we are pleased to see leading issuers including Wells Fargo and HSBC actively marketing PayPal to their customer base, encouraging their clients to link their cards to PayPal accounts. We also announced new strategic relationships with JPMorgan Chase and, as of today, Bank of America to utilize their token services and enable their customers to easily integrate their cards into PayPal and seamlessly create a new PayPal account from their properties. Furthermore, as part of our expanded relationship with Citi and Chase, we will make Citi ThankYou Rewards Points and Chase Ultimate Reward Points available in our PayPal wallet to be used as a funding source for consumers shopping at our 17 million merchants. As I mentioned on last quarter's call, it's hard to overstate the difference in the relationships we now have with companies across multiple sectors that many once viewed as potential competitors. We're confident these partnerships will drive enhanced value to our mutual customers. The accelerating and extensive scale of our two-sided global platform allows consumers and merchants to transact instantly in new contexts, across operating systems, technologies, and platforms, creating a strong foundation that is very attractive to multiple partners. Our open technology platform has enabled expanded partnerships with Google, Apple, Facebook, and Samsung over the past few months. These agreements benefit both PayPal and our partners by creating innovative consumer-focused experiences that connect their combined billions of consumers to new buying experiences enabled by PayPal's powerful platform. In April, Google announced an expansion of our partnership to make it easy for consumers to use PayPal as a payment method in Android Pay wherever it is accepted, in-store, in-app, and online. In addition, Android Pay users on Google's Chrome mobile web will be able to seamlessly pay at the millions of online merchants that accept PayPal, simply by using their PayPal account and fingerprint authentication. Just like the deployment of One Touch, this new checkout experience will be available to millions of PayPal merchants without requiring any integration work from the merchant, further extending the value we bring to our merchant customers. Also in the quarter, Facebook announced additional commerce experiences with PayPal that will be available within its Messenger platform. At F8, Facebook shared that over 1 million joint PayPal and Facebook customers have already enabled our payments experience within Facebook Messenger. Earlier this month, PayPal and Apple announced an expansion of our iTunes integration, which means customers can now buy games, music, movies, and in-app purchases with PayPal on their iPhones and iPads in the Apple App Store, iBooks, Apple Music, and iTunes stores in 12 countries, including the U.S., Australia, and parts of Europe. We anticipate that this integration will expand to more countries around the world in the coming months. This complements our existing integration into Siri and Apple iMessage and marks a growing relationship with Apple. Finally, we announced a strategic partnership with Samsung. Users of Samsung Pay in the U.S. will be able to use PayPal to pay for purchases in stores using Samsung Pay's mag-stripe emulation technology, which is used at the vast majority of merchants that accept cards. The totality of these partnerships reinforces the fact that we're becoming an underlying open payments platform and wallet for many of the leading technology platforms, OEMs, and wireless carriers around the world. We continue to make good progress in rolling out Venmo as a payment option for PayPal merchants. As we shared last quarter, we're not introducing the ability for U.S. PayPal merchants to accept Venmo as a mobile payment option. Venmo users are now able to use Venmo at an expanded number of PayPal merchants such as lululemon and Forever 21, and I'm quite encouraged by the early results. We expect that the ability to pay with Venmo will be widely deployed across millions of our PayPal merchants by the end of this year, and I look forward to sharing more details in the coming quarters. The ability to deliver new consumers and enhanced sales growth to merchants of all sizes is a key benefit of PayPal, especially as the world becomes more global and increasingly digital. As of today, this includes bringing the power and reach of the PayPal platform to the expansive and rapidly growing Chinese consumer market. We're very pleased to announce that PayPal has signed a strategic partnership agreement with Baidu, the leading Chinese language internet search provider with approximately 700 million users. This partnership allows Chinese consumers to pay with their Baidu Wallet and PayPal at our merchants outside of China. Beginning later this year, this partnership will provide Chinese consumers with more ways to discover and buy from PayPal merchants in the U.S. and will eventually expand PayPal's entire global merchant base outside of China. We expect this partnership to drive significant demand and additional cross-border trade over the PayPal platform. Additionally, in helping our merchant customers maximize their opportunities in the age of digital commerce, another key part of our strategy is helping underserved consumers join and thrive in the digital economy. This vision drove our recent acquisition of TIO Networks, which adds bill pay functionality to our two-sided platform, offering consumers the ability to access a digital network and benefit from the convenience and speed of digital bill payments. Last week, we announced that we have closed our acquisition of TIO Network and I would like to take this opportunity to welcome Hamed and the TIO team to the PayPal family. Three years ago, we set off to transform PayPal. Our goal is to create an open platform for digital commerce to deliver innovative mobile checkout experiences that blur the lines between physical, online, and mobile shopping. We set off to create an integrated suite of services, experiences, and APIs that could extend the power of our two-sided ecosystem to our merchants with little to no integration work required. That vision has grown increasingly important to our merchants in today's rapidly evolving retail landscape. Our execution in support of that vision is yielding strong results and expanding our leadership position. Our efforts to place our customers' front and center in everything we do is driving the scale and engagement on our platform. It has opened the door to strategic and productive partnerships that have extended the PayPal experience across multiple contexts in existing and new geographies. But we know we are still in the early stages of our transformation and we are just scratching the surface of the opportunities in front of us. We are fully committed to delivering true core experiences and additional innovative and comprehensive solutions for our customers, helping both consumers and merchants navigate the rapidly evolving and expanding digital payments landscape. With that, I would like to now 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. As Dan discussed, we achieved several notable milestones in the second quarter, including for the first time processing over $100 billion of TPV and generating more than $3 billion of revenue in a quarter. In addition, we saw accelerating growth in customer accounts, revenue, operating income, earnings per share, and free cash flow. Our second quarter financial and operating results demonstrate momentum in our business and build on the strength of our recent performance. Relative to our expectations going into the quarter, our revenue and operating income outperformed. On the top line, we attributed acceleration in our core to strong account engagement growth, enhanced user experiences that make setting preferences and choosing funding instruments intuitive, cross-border initiatives, as well as increased functionality that allows our customers to use our products in additional contexts. In addition, the foreign exchange rates continue to be a headwind in comparison to last year. It provided a benefit relative to our plans going into the quarter. On the expense side, non-volume related expenses grew 4.5%, approximately 25% of the rate of revenue growth. Our team did an outstanding job managing cost, resulting in cost performance slightly better than our expectations. At the same time, we continue to fully fund our key growth initiatives. This level of expense growth demonstrates our ability to scale with minimal incremental cost. Before I discuss the financial results in more detail, here are some highlights for the quarter. Revenue was $3.14 billion, growing 18% on a spot basis and 20% on a currency neutral basis. Non-GAAP operating income grew 25% to $659 million and non-GAAP EPS grew 27% to $0.46. We generated $921 million in operating cash flow and free cash flow grew 51% to $747 million. For the second quarter, our total payment volume was $106 billion, up 26% on a currency neutral basis, consisting of U.S. payment volume growth of 27% and international volume growth of 25%. Our merchant services volume grew 30% on a currency neutral basis to $91 billion. Merchant services represented approximately 86% of our total volume in the quarter. Volume associated with eBay represented approximately 14% of the total compared to 15% in the first quarter of 2017 and 17% in the second quarter of 2016. P2P continues to be a meaningful contributor to TPV, representing approximately 21% of total payment volume. In the quarter, active accounts grew 12% and we ended the second quarter with 210 million active accounts. Active account growth was driven by strength in our core PayPal business as well as growth in Venmo. The number of payment transactions per active account on a trailing 12-month basis reached 32.3, with 6.8 billion transactions occurring on our payment platform over that period. In the second quarter, transactions grew 23% to 1.8 billion. Revenue grew 18% on a spot basis in Q2 and was the result of an 18% increase in both transaction revenue and revenue from other value-added services. The revenue growth in the second quarter represents an acceleration of more than 100 basis points versus the first quarter. Transaction revenue growth was primarily driven by our core PayPal and Braintree businesses, and revenue from other value-added services was predominantly driven by credit. For Q2, our transaction take rate was 2.58%, a decline of 11 basis points from the second quarter of 2016. And our total take rate was 2.95%, down 13 basis points year over year. Seventy-five percent of the decrease in both transaction and total take rate was related to the increase in our P2P volume. Increased stability in our transaction take rate in the second quarter is indicative of the balanced growth and the strength we are seeing across our platform as well as our ability to monetize experiences where we demonstrate a compelling value proposition for our customers. Volume-based expenses were up 29% year over year. Transaction expense was $1.06 billion, up 31% year over year driven primarily by increased funding costs across our core PayPal platform. As Dan mentioned in his remarks, the increased transaction expenses we have seen from choice have been well within our expectations. Further, we continue to see benefit on both the top line as well as cost improvements from lower customer call volumes in servicing costs, validating our initial expectations. We're pleased to roll out these experiences to additional geographies in Europe and Asia. Transaction loss in the quarter was $185 million or 17 basis points of TPV compared to 18 basis points of TPV in Q2 '16. Low losses across our consumer and merchant credit products were $123 million, representing 26% growth in line with the growth of our receivables portfolio. Our consumer credit portfolio continues to perform in line with our expectations. The net charge-off rate was 6.9% in the second quarter. We ended the quarter with an aggregate gross receivable balance including both principal and interest of $6.1 billion in our consumer and merchant loan portfolio and our total reserve of $380 million. Other operating expenses increased 4.5% to $1.1 billion, representing 35% of total revenue, an improvement of 465 basis points of operating leverage versus the same quarter last year. Both general and administrative and product development costs were flat year-over-year and experienced the lowest rates of growth since separation. Sales and marketing expenses grew 10% as we invested to support our brand strategies and choice experiences. For the second quarter in a row, other operating expenses increased only $0.10 for every incremental dollar of revenue, demonstrating the scalability of our platform. Strong revenue and cost performance resulted in a 25% growth in non-GAAP operating income to $659 million. Non-GAAP operating margin expanded 110 basis points to 21% compared to Q2 '16. GAAP operating income grew 16% in the second quarter to $430 million, resulting in a GAAP operating margin of 13.7%. Both GAAP and non-GAAP EPS grew 27% in the second quarter to $0.34 and $0.46 respectively. We ended Q2 with cash, cash equivalents, and short-term investments of $6.4 billion. We generated $921 million of operating cash flow in the quarter and capital expenditures were $174 million or 6% of revenue. This resulted in $747 million of free cash flow in the quarter as we generated $0.24 of free cash flow for every dollar of revenue. Capital return is a fundamental component of our overall capital allocation strategy. Year-to-date, we've returned more than $600 million to shareholders in the form of stock repurchases. We now have approximately $400 million remaining on our original $2 billion authorization. As announced on our last earnings call, our Board has also approved an additional $5 billion buyback authorization. In addition to focusing on enhanced capital allocation strategies, we're also committed to optimizing our capital structure. As we've shared over the past few quarters, we're exploring alternatives to run our consumer credit business in a less capital-intensive manner. We're encouraged by the discussions with potential partners, and based on the progress we're making, the timing and structure of these alternatives are in line with our expectations. While we continue to assess how we can more efficiently manage our balance sheet exposure and consumer credit, we are also assessing strategies that will support the growth of our merchant services and credit products. We continue to introduce and expand financial services and tools to help small and mid-size business customers start and grow their businesses. Since 2013, PayPal working capital has provided in excess of $3 billion in funding to more than 115,000 merchants. PayPal working capital is a strategic offering for PayPal that drives merchants' sales growth, increases processing volume, and reduces merchant churn rates. We will continue to invest in our working capital business to provide innovative financial products to small and medium-sized businesses. I would now like to discuss our updated guidance for the full year 2017 as well as the guidance for the third quarter. For the full year, we are raising our revenue guidance and now expect revenue between $12.775 billion and $12.875 billion, representing currency neutral growth of 19% to 20%. At current exchange rates for the full year, we expect currency translation to impact revenue by approximately 100 basis points, resulting in spot growth of 18% to 19%. For the first half of 2017, non-volume related expenses have grown only 4.5%. We are pleased with this performance, and it's indicative of the type of cost discipline with which we can operate going forward. This level of growth for our non-volume related expenses is sustainable given the manner in which we are scaling our business and the changes we have made to our organizational structure. At the same time, this very measured approach to expense growth gives us the flexibility to be opportunistic and make investments to drive our business going forward. Given our year-to-date performance and our operating plans for the remainder of the year, we expect our full year non-GAAP operating margins will expand relative to 2016. We are also raising our full year EPS outlook by $0.05 at the high end and now expect non-GAAP EPS to be in the range of $1.80 to $1.84. Further, we are increasing our free cash flow outlook and now expect to generate in excess of $2.9 billion in 2017. As Dan mentioned, we recently closed our acquisition of TIO Network and have included an expected impact of $25 million in revenue for the remainder of the year in our full-year outlook with a negligible impact on our earnings. At the high end of the ranges we are providing today, our current full-year guidance represents an increase of $225 million in revenue and a $0.10 increase in non-GAAP EPS relative to the initial full-year 2017 guidance that we provided in January. For the third quarter, we expect revenue to be between $3.14 billion and $3.19 billion, and we expect non-GAAP EPS to be between $0.42 and $0.44. I want to close with a few observations on the quarter and our full-year outlook. We saw accelerating growth across net new actives, TPV, and revenue in the quarter. Net new active accounts grew by 80%, our currency neutral basis TPV grew 26%, and revenue increased 20%. Our merchant services growth has been consistently in the 30% range, demonstrating we are continuing to gain market share. While growing our top line, we expect to maintain disciplined expense growth, which allowed us to deliver 100 basis points of non-GAAP operating margin expansion in the quarter. This performance gives us great conviction in our ability to deliver on our commitments for the year. With that, let me turn it back over to the operator for questions. Thank you.

I had a question around the payment transactions for active accounts. I know they were up 10%, and that’s still a very strong number. It was down a little bit relative to last quarter. I think it was up 12 and then over the last six quarters prior to that, it was up on average 13%. So I would have thought given choice and all of the reduced friction that you guys have had that you might actually see that number accelerating as opposed to decelerating in its growth. Is there any callouts in the quarter we should know about?

Dan, it’s Dan on. Nice to hear you and thanks for the question. So I am quite pleased with our progress on engagement. It is up 10% despite really what is an accelerating day right now, which is kind of the high-class to have. We are seeing tremendous adoptions across merchants and consumers into the PayPal franchise. As I mentioned, we think we’ll exceed 25 million net new actives for the year. In the past couple of years, we’ve taken our active user engagement up almost seven transactions per user across the whole days. If you look under the covers, the news is even better because the majority of our user engagement right now is coming from the core PayPal Wallet and in many cases before it was coming from the growth of Braintree and core PayPal. But now it is being driven mostly from our PayPal core wallet, and that is a great story for us. If you look at our product growth and our core PayPal franchise over the last several quarters, we’ve taken multi-year trends that have been drifting slightly down in terms of their real growth year-over-year, and we have bent these curves across pretty much every single one of our core products and they're now up and accelerating. So, that is a piece of really good news that you probably wouldn’t see from a number in and up itself. It kind of feels like we’re just at the beginning of this. We've got One Touch that is driving engagement, that’s driving increased engagement and it’s accelerating across the base. Choice is still new, but choice engagement and summing up into choice that engagement is up quite substantially, and I am really pleased with what we are seeing from choice. As I mentioned, we're about 13 million plus customers that are in choice now, that will grow and that will impact engagement. We’re obviously just at the beginning of the journey, and you know we’re at basically major agreements with pretty much every major issuer. We’ve got agreement from the financial networks to utilize their tokens, and those start to move us more into an in-store environment as we go into next year, which will also drive engagement. You've got pay with Venmo. Right now, there's no engagement with Venmo; it's P2P, but we don't count that in our engagement. So also you'll see that drive up. TIO just came on. Our new partnerships with Facebook and Google are going to start to kick in, that's really not in our guidance right now. Those things are going to start to accelerate and drive our future growth as we look into '18, '19, '20. So, we still have a goal that would compel consumers to use PayPal twice a week. That is our goal, not to drive it once a week, but to drive it twice a week. I feel that with all the initiatives we've put in place right now and the trending that we're seeing, that over our medium to long term, that’s within our reach too. So, feeling pretty good about where we are on the engagement side.

Yes, that's fantastic. I'm going to ask one more quick one: you've mentioned all these strategic partnerships, and they are plentiful. I'm wondering how you're viewing that from a trend perspective to bring down your customer acquisition costs as we think about the future?

You've broken the first quarter rule with one question, but overall, everything is fine. I appreciate the correlation. One thing I highlighted in my opening remarks is that we're starting to see a highly collaborative relationship with issuers. We're witnessing two specific issuers actively marketing to their customer base to encourage them to link their cards to our PayPal account. This is happening because we can drive growth for them. As John noted, our total payment volume growth outside of eBay is increasing at 30%, and we're the ideal digital distribution channel for financial institutions, especially now that we've introduced choice. Consumers can decide how and where they want to pay. I believe this increase in our new active accounts is coming at a lower cost for us, resulting in a very favorable situation both now and in the future.

I had a question about in-store and your in-store strategy in light of the partnerships that you've signed. Can you kind of give an overall view of in which of these instances like in Android Pay versus Samsung Pay versus using the network tokens in your own wallet you're able to generate revenues for PayPal or envision that over time versus where it's just a strategy of driving more user engagement at the POS even though it's not revenue generating?

This is a great question. And you're exactly right that as you parse apart, there are places where we earn revenue, and there are places where you think about an engagement opportunity. So the places where somebody is paying in-store and using our PayPal balance, those are places where we would make revenue on those transactions. In places where we're enabling the use of an issuer's card directly and we're providing a pass or token, we would earn revenue on those, but we also don't have costs on those, and so we do get great consumer engagement, but without costs on those transactions per se. It's also important to note that in addition to what we are doing with partners like Samsung Pay and Android Pay to drive into the store, we are working with those same partners, particularly Android Pay, not just in-store but to blend that into in-app and online purchasing. There is a lot of blurring in the lines of online and store things like buy online, pick-up in store. These cross-channel experiences are really getting to consumers using a mobile device, but engaging with the retailer and the store. You see us really, really delivering on those types of experiences as well. So we have a broad strategy that can both help the retailer engage across multiple fronts and drive engagement with consumers. We have several those that we monetize directly and some of those that are going to be a pass-through, meaning we will not drive revenue through them, but we also would not generate costs for us. We have many of those that are out there, for instance, paying with your balance, which would generate revenue for us. This is consistent with PayPal's history where we have historically had products such as P2P that were free and then we monetize through other forms. So, this is a strategy that we have employed previously, and we feel very good about where we are in that.

Just to add to that, we saw firsthand how well we spent a lot of time as we started the transition of the Company from being really a single product type of company to being a platform company that offers a suite of services to both merchants and the consumers. Where we found, with a ton of detailed research and analytics on this, is that when we add an incremental service to a consumer or even to our merchants, we see the lifetime value basically double. A consumer adds P2P, we see them engaged more; their use of PayPal goes up, their churn goes way down. It is a gigantic benefit for our flywheel and for our economics. The more products and services and experiences and more engagement we can have with the consumer and a merchant, the better the LTV is for us. That really has played out in different ways through P2P and others. We are also seeing it with in-store as we move forward. We are seeing results where people have used in-store payments with PayPal and we are also seeing their engagement more in-app and online because the distinctions between those things are blurring, especially with mobile. Our ability to engage with consumers and drive that engagement is a good thing for both, for consumers, for merchants, and for the economics of PayPal.

My question is with regards to the rise in active accounts and the acceleration of that, which has gone from 10% to 11% to 12%. Is that a straightforward relationship with consumer choice? Is it possible to estimate? Is there a sort of untapped number of inactive accounts of people who have downloaded PayPal, but didn't use it that can give us some idea of the potential to continue increasing their accounts?

I'll start, then maybe Bill can supplement. I would say, as I mentioned in my remarks, there's no single thing driving the growth of those net new actives. I mentioned I think we'll do in excess of 25 million net new active accounts; that would imply that we’re going to do another on average 6 million or so in the third and fourth quarters. We see continued strength in net new active accounts coming as a result of the great work that Bill and his product and engineering teams have done, and the risk teams have done around improving our core experiences. As I mentioned, we're bending multiyear curves now and we're seeing really nice year-over-year growth in our core experiences. Availability is up; that matters a lot. Availability is down; that matters a lot. We have a new mobile app. We've got One Touch. We have choice coming in. Choice is driving both reduction in churn, which helps net new actives obviously, but it’s also driving additional new adds because the onboarding process is much more streamlined. You also have partners that are now actively marketing PayPal because together we're allies in advancing digital payments and tapping into that growth. So I think there are a number of things. We also have 210 million people now on the platform, and we’re at, maybe at a tipping point of these network effects right now where there's so many merchants on the platforms and so many consumers on the platform that it's a must-have for people, especially if they move into mobile checkout experiences. I think what Bill and the risk teams have done with things like One Touch have really created an unparalleled kind of mobile checkout experience, almost two times the conversion of the industry average. I'll look at a number of things we have done over the course of the last several years, and they are beginning to take hold in the market, driving our results. Bill, do you want to add anything?

I think you captured it really well just on the points there. We have multiple new places that customers are coming in, but as Dan described, we have across nearly every major product area revamped those products over the last few years to where we are seeing, not only do each of those products tend to get more net new actives for us coming in, we're driving increasing engagement across each of those as people come in through those. They become more engaged on those products and also in the combination of products that they can engage with. We are deepening our engagement across the board.

I'll just add one last thing and then we'll be done with your question, Ashwin. We didn't underestimate what can happen with Baidu, I mean we're now tapping into that Chinese consumer marketplace, and that is going to open up a whole new market for consumers to come onto the PayPal platform, interact with our PayPal merchants outside of China and drive what we think could be substantial cross-border traffic. It's not just Baidu; it's Baidu and PayPal that is a little like what we've done with Android Pay where it’s a cobranded experience and allowing sign up to our PayPal account from there. So, there are a lot of things we are working on, a lot of things we still want to implement, but feel good about the current trend right now.

In momentum, I want to ask about maybe the partner pipeline, just maybe big partnerships out there, still designing in 2017, and I need to ask about the acquisition pipeline as well and your appetite to do deals?

We have formed 24 major partnerships over the past 18 months, and you may have noticed last quarter that this trend is starting to pick up speed. This acceleration is happening as partners begin to recognize the value we provide. Our scale is a significant advantage for our partners, and when discussing with various platforms like Baidu, Google, or Samsung, the access to our 17 million merchants is a unique asset that is challenging for others to duplicate, and it continues to grow. Additionally, our other partnerships offer substantial growth potential, particularly in mobile through One Touch or the accelerating TPV. We maintain full control over our value proposition; very few competitors can claim that, as most only manage parts of it. We handle everything, including risk, customer service, and brand reputation. Our business model has also evolved; we now operate as an open platform with a range of branded and unbranded services that is agnostic to any operating system. Notably, we act as a neutral third-party platform, not competing with our merchants or partners, but instead supporting them in advancing digital payments. Our positioning within the ecosystem is robust, allowing us to continue forming partnerships. There are more partnerships on the horizon, and as we collaborate more, the benefits will become clearer. While we've announced a number of partnerships, we have more in store for future announcements, and we are well-prepared in this area. Regarding mergers and acquisitions, we are in a strong position with a solid balance sheet, which includes $6.4 billion in cash equivalents. With our current guidance, we anticipate generating over $2.9 billion in free cash flow this year, providing us with a competitive advantage. We are actively exploring various global opportunities, both large and small, though it's essential that these opportunities align with our vision and help us progress in key sectors or expand geographically. We do consider tuck-in acquisitions for technical or functional reasons, like what we did with TIO, and we always evaluate our options: whether to build, partner, or acquire. The work that John and Bill have accomplished on their platforms, particularly in terms of risk management and infrastructure, has been significant. We've released around 30,000 updates this quarter alone, showcasing impressive innovation and speed in functionality that Bill's team is delivering. Previously, we had to acquire new solutions because our monolithic infrastructure limited our ability to make quick changes to our website. Now, we can innovate rapidly. We also have new opportunities to collaborate that were not available before, which has fostered a competitive yet cooperative environment. We have many resources to share with partners, and often we find ways to collaborate rather than acquire. If that isn’t feasible, we approach acquisitions in a disciplined manner. We possess unique skills and capabilities, so you can expect us to continue pursuing acquisitions thoughtfully while keeping all of this in mind.

I guess Bill, I just wondered if you could give a little more detail on Venmo. What you are seeing as you rolled that out in terms of the way consumers are using it? Are they potentially using a credit card? And then any merchant feedback, and just anything, any surprises or anything unexpected just seems to help us understand where your focus is as you are scaling that product out?

As we discussed in previous calls, we've spent considerable time refining the customer experience to ensure that Venmo stands out not just as a payment option, but as a unique platform for mobile payments and social engagement. With that foundation in place, we've transitioned from person-to-person payments to merchant payments and have been working on this for over a year. We are now ready to leverage our learnings to enhance mobile payments for Venmo and extend those capabilities to PayPal merchants. Currently, we are preparing to allow Venmo users to pay PayPal merchants without requiring additional integration on the merchants' part, similar to how we implemented PayPal One Touch and Android Pay. We are leveraging our distribution strengths to connect Venmo users with these PayPal merchants. We are ramping this initiative up and are optimistic about its progress. We have already demonstrated that Venmo users are interested in utilizing the platform for more than just P2P transactions. We have seen strong performance from various merchants when comparing Venmo to other payment options. Our goal is to expand from the current limited number of merchants to millions of PayPal merchants. We're making strides in that direction and, as Dan mentioned, have begun rolling this out with merchants like Lululemon and Forever 21. There are now thousands of PayPal merchants accepting Venmo, and we anticipate growing that number significantly in the coming quarters. We are excited about these developments, but we are also attentive to consumer preferences and interactions, which we have actively tested in the previous year. Now, we are focusing on scaling this thoughtfully and are pleased with the progress we have made.

Just following up on the acceleration in partnerships, Dan, especially with mega-tech companies like Apple and Google this past quarter. Could you provide more detail about these partnerships? Does this suggest a deeper significance about your position in the payments ecosystem in relation to these companies? There have always been concerns regarding the competitive threat from some of these names compared to PayPal. Are these now more aligned as partnerships? And John, I’d like to ask about the financial aspect. Was pricing a significant driver in the quarter? Is it still a contributing factor or expected to be this year? How much more potential is there in this area? Is there still an impact this quarter? Please elaborate on this further. Thank you again, everyone.

Sure. Darrin, I’ll start, and then kick it over to Dan. As we talk a little bit about this year, pricing is an opportunity for us. We did announce a couple of corridors where we made price increases. Some of that is reflected in our financial results for the quarter as well as our improved guidance for the year. I will say that we’re very focused on really identifying where customers drive value enhancement as part of that experience and then pricing that versus just arbitrarily going out and raising prices for something where there is no incremental value that is perceived by the customers. So, we've had some targeted initiatives we’ve undertaken, and that’s reflected in our results as well as our guidance for the year.

So, I’ll start off, and then I’ll turn it over to Bill. I think there is a real difference now with the partnerships that you mentioned involving major tech platform companies. I think none of them really wanted to go into payments as an end to itself. Payments were a means to an end for them. It could be more engagement on their platform, leading to key metrics they want to move around, like advertising. When we made the shift to being an open, payments platform as opposed to seeing just a button as a checkout experience, and opened up our platform to sophisticated technological upgrades through open APIs with the partnerships we have around tokenization, we were able to become an underlying payment operating system for those tech platforms to enable them to create the experiences they wanted to drive for their end users. That partnership is fundamentally different right now and has evolved greatly over the last several years. I’ll ask Bill to add a color to that, but it's a very different conversation we are having now than we used to have.

Yes, I’ll just add to that, that payments were a means to an end, as Dan described, and what we've demonstrated is that through the unique two-sided platform that we've built and our ability to connect consumers and merchants around the world, do so in a single touch, makes us very unique. We're able to light up those experiences for those partners. Not only did we make the strategic shifts that they wanted in terms of being a more open platform to enable those things, and improve our experiences so that we could do things like One Touch to drive industry-leading conversion levels, but as mobile has matured, many players have been able to see different alternatives in the ecosystem. They see what consumers gravitate towards and they see what drives better conversion rates. We're demonstrating consistently the uniqueness of our two-sided platform and our ability to connect consumers and merchants lets us drive connection between consumers and merchants across all types of consumers and tech ecosystems in ways that others can’t, whether it’s selling more apps or selling more devices or driving engagement with their experiences. We're generally able to connect users to them in those experiences in a lower friction way than anybody else out there. That’s why you're seeing us really start to play a central role there. I think as more and more of these interesting new experiences proliferate, every time that happens, I think PayPal is positioned as a place where of course people want to look given what we've demonstrated we can do on those things.

Just wanted to ask lots of new partnerships; the Chase deal in particular caught my eye, thinking about the ability for PayPal to process through Chase Net. Doesn't that materially lower your funding costs with Chase cards going forward? And then just as a bigger strategic picture maybe Dan with all these partnerships. Are we about to launch a big in-store campaign or opportunity? Or is it going to be more of a trial in your process? Thanks so much.

I'll start off with that. Obviously, we've worked closely with JPMorgan Chase over the last couple of years as we’ve talked about the potential for how we might work together. I’m really pleased with where we came out in this partnership. We both see a lot of value in it; we’re two very strong companies lending what are really impressive assets to create consumer experiences, including as you mentioned processing through Chase Net, which obviously does give us the potential. We are not talking about any deal terms one way or another, but there’s potential for lower costs from that. I’m really pleased with the comprehensive nature of the partnership that we have with Chase because we are working through all the details of it together. But I think both of us are really confident about what we can drive coming out of that.

I would just add to that, again we’re not commenting on the deal terms for any specific deal. The closer working relationship that we now have with the broader financial ecosystem, as you look through a broad lens of how you think about cost, whether that’s customer acquisition or risk and fraud losses, all these types of things, we are one of the largest drivers of middle transactions for banks and issuers. That being a place of the larger growth for banks and issuers, the opportunity for us to collaborate across the number of fronts has many potential positives, we believe. We see that across these partnerships. It’s not just about the cost processing a transaction; it’s how we think about delivering better digital experiences for customers that positively affect customer engagement and customer acquisition costs, and how we view the lifetime value of the customer risk, all these things. The opportunity to collaborate with this ecosystem has many potential positives, and we feel very encouraged by the relationships we’re building.

I think you just think about things like reward points. Discover, Chase, Citi have all decided to utilize the reward points within the PayPal platform to utilize those for purchases at 17 million merchants. That’s a significant differentiation for those financial institutions and their customers who are using their instruments, but also for PayPal because you can now utilize those reward points in a split transaction. You have X number of reward points, but maybe you couldn’t do that full transaction. You can now split that; you can use those reward points to purchase 40% of the transaction and then the other 60% can be done through whatever funding instrument you select as a consumer. That’s a lower cost funding mechanism for us. There are all sorts of things within these relationships that we have; they try to enhance value for our mutual customers and if we parse through them, it’s quite significant and differentiated from where we were certainly a year ago. Now the in-store stuff, we obviously have the ability to use industry tokens from these cards that are linked to these networks, and now we are working with each of the financial institutions to use their tokens for their particular instruments. You will start to see that naturally begin our rollout. There’s not much trial and error per se. We will have the ability for our PayPal customers, if they are opted into one of the bank services that provide token integration, we will use their network tokens with that. Therefore, you will simply be able to use that instrument seamlessly across where it’s accepted now on an Android phone, for instance, across an in-app experience, online experience, or an in-store experience without us having to do bespoke customization of software at the point of sale terminal. It will be a natural rollout utilizing existing POS technology. So, thank you for that last question, Bryan. Thanks everybody for joining us. We really appreciate your time, and we look forward to speaking with all of you soon. Thanks a lot everybody, and thank you operator.