PayPal Holdings Inc (PYPL) — Q4 2017 Earnings Call Transcript

Thank you, Sherrie. Good afternoon and thank you for joining us. Welcome to PayPal Holdings’ earnings conference call for the fourth quarter and full year 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 webcast 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. 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 first quarter and full year 2018 and the expected impact of tax reform. Our actual results may differ materially from these statements. You can find more information about risks, uncertainties and other factors that could affect our 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, January 31, 2018. We expressly 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 on today’s call. 2017 was a transformative year for PayPal with consistently strong and, in many cases, record-breaking results. I'd like to highlight a couple of areas in particular. First, we achieved record net new actives and engagement on our core platform, by increasing our reach and relevance with both consumers and merchants. Importantly, we anticipate this elevated level of net new actives to continue in 2018, as we experience increasing network effects from our scale. Second, we continue to grow our market share through our increasing leadership in mobile and by introducing a suite of new and innovative services and project experiences for our customers. Third, we meaningfully strengthened our competitive positioning due to the rollout of customer choice. The combination of customer choice and our move towards an open platform architecture enabled strategic partnerships with many of the world’s leading companies, several of which had previously been perceived as potential adversaries. The partnerships have opened new avenues of growth from geographic expansion to in-store payments. Fourth, we announced a new long-term strategic partnership with Synchrony Financial, which will result in PayPal receiving more than $6 billion in cash proceeds at closing. The deal also frees up more than $1 billion in free cash flow each year, which we will allocate to higher yielding organic and inorganic growth opportunities. Finally, we did all this while delivering consistently strong financial results. I'll discuss the first four areas in more detail in a moment, but I want to start with our financial results for Q4. I am pleased to say that Q4 was our strongest quarter of the year, capping off a landmark 2017. Payment volume grew 29% on a currency neutral basis to $131.4 billion, generating revenue of $3.71 billion. Revenue grew by 24%, and this is our third consecutive quarter of accelerating revenue growth. The strong revenue performance combined with disciplined OpEx management drove non-GAAP EPS of $0.55, which was up 30% year-over-year. Our customer metrics were particularly strong. We drove a record 8.7 million net new active accounts. And we ended the year with 227 million active accounts, adding more than 29 million net new actives for the year. And it’s worth noting that we now serve 18 million merchants on our platform. Importantly, engagement was once again higher at 33.6 transactions for active account. I think it's important to note that our accelerating net new active growth hides the true underlying growth of engagement. If our total net new ads had grown at the same rate last year, our growth in engagement would have increased 11% to approximately 34.5%. It’s particularly encouraging that our net new active cohorts acquired in 2017 are showing an acceleration in engagement versus similar cohorts from 2016. The net takeaway is we are bringing on record net new actives with higher engagement than ever before, and that obviously bodes well as we look ahead. Our partnership with Synchrony Financial accomplishes every goal we set out for our asset life strategy. The transaction substantially reduces our overall risk profile, provides us the opportunity to double down on our innovative credit experiences for our merchants and our consumers, while sharing in the profit growth. And as I said earlier, it frees up approximately $1 billion in annualized cash flows and more than $6 billion in cash. If we combine this cash windfall with the ability to repatriate these funds due to the recently passed tax reform bill, we dramatically increase the flexibility of our cash position, enabling us to more efficiently allocate our capital to higher yielding opportunities. John will be sharing more detail later in the call about the strategic benefits of our Synchrony partnership and will discuss the impacts of the Synchrony transaction on our Q4 results and our expectations for 2018. This past year, we saw strength in our leadership position in digital payments and we substantially expanded our opportunities for future growth. We introduced a host of new product experiences, and they are driving further differentiation from our competitors. Customer choice is essential to this effort and continues to be an important element in the evolution of PayPal. In the fourth quarter, we completed the rollout of choice in the United States, the UK, Australia, Canada, and Japan, with 30 million consumers now opted in. In the United States where choice has been live for more than 12 months, we continue to see a meaningful lift in engagement in payment volume and a significant reduction in churn. And consistent with previous quarters, our transaction expenses remain well within our expectations as evidenced by our increasing operating income margin. Across the globe, contact rates into our customer service centers continue to decline. In fact, in the fourth quarter of this year, we experienced lower overall call volume into our customer service centers than we did in Q4 of 2014, despite our base increasing by 65 million active accounts and billions of additional transactions. I attribute our reduction in call volume to not only choice, but to the tremendous strides Bill and his team have made in enhancing our core experiences from improved availability to decreased latency to increased feature functionality and reduced friction across our platform. This quarter was particularly significant in the number of new and notable large merchants who joined the PayPal platform. Merchants are increasingly choosing PayPal for our ability to deliver the tools they need to compete and thrive in an increasingly competitive global and mobile environment. If you combine that with the value of the 209 million engaged consumers we bring to their omni-channels, you can see why we have such a strong and compelling value proposition for merchants. This quarter, we signed a global agreement with the Walt Disney Company. We welcome Dillard's, which ranks among the nation's largest fashion retailers. QVC has agreed to make PayPal available to their customers. The QVC Group is the number three in e-commerce in North America and number three in mobile commerce in the U.S. according to Internet Retailer. In Europe, ePRICE, which is the largest Italian marketplace, began accepting PayPal payments and Dell began offering PayPal credit in the UK. In India, PayPal is available as a way to pay on BookMyShow and MakeMyTrip, the largest online entertainment ticketing platform and the largest online travel company in the country. This holiday season clearly demonstrated the powerful trends that are reshaping retail and driving new consumer behaviors driven by the increasing penetration of smartphones. These trends drove strong mobile engagement on our platform over the busy holiday shopping season. PayPal processed $48 billion in mobile payment volume in the fourth quarter, which was a 63% growth year-over-year and 36% of our quarterly TPV. For the full year, mobile represented 34% of overall payment volume on our platform, with total mobile payment volume growing 52% to $155 billion for the year. Our leadership in mobile is continuously driven by the exceptional experiences we're able to deliver. We continue to drive fast, frictionless and engaging consumer experiences with our One Touch product. We ended the fourth quarter with over 80 million consumers opted into One Touch, up from 40 million a year ago, and the number of merchants offering One Touch now totaled more than 80 million compared with 5 million a year ago. Venmo continues to define digital payments for a generation of passionate users here in the U.S. For the first time in the quarter, Venmo surpassed $10 billion in payment volume with $10.4 billion processed in Q4, an increase of 86% year-over-year. For the full year, Venmo's volume increased 97%, with almost $35 billion in payment volume processed. We also experienced another very strong quarter of net new accounts added to Venmo and added the largest cohort of annual net new actives to Venmo in its history. We continue our rollout to pay with Venmo, providing our Venmo users with more ways to pay with the service they love and giving our merchants access to this coveted demographic. While we're still in the early stages of monetization, we're very encouraged by our initial leads on engagement. In fact, the adoption of services that we're able to monetize on Venmo is tracking above the P2P adoption Venmo experienced at a similar point in its history. Given our experience this past year, we believe our future opportunities are extensive and compelling. We’re riding the powerful and accelerating tailwinds created by two global trends: the digitization of cash and the mass adoption of mobile devices. We're actively positioning ourselves to take full advantage of these trends and strategically moving our business into areas where we believe these transformations are creating the strongest opportunities. Throughout 2017, we redefined our competitive position in our ecosystem and formed strategic partnerships with many of the companies leading the digital mobile transformation around the world. We are now in the process of implementing productive and expansive partnerships with Visa, MasterCard, Discover, Bank of America, and China UnionPay. We are working closely with over 20 of the largest credit card issuers in the world, the majority of which have kicked off campaigns to encourage and, in many cases, incentivize customers to engage with PayPal. For example, we are working with both Citi and FIS to create experiences that are driving enhanced consumer engagement and activation. With Citi, customers can provision their Citi cards to new or existing PayPal accounts directly from Citi's online property. With FIS, the ability to link accounts directly to PayPal is now available to all of FIS’s banking customers. We signed an agreement with Bank of America to enable PayPal as a way to disburse payments on behalf of their corporate clients. This year, we will integrate credit card reward points from major issuers into our PayPal Wallet as a funding source for consumers to use when they purchase at PayPal merchants. We will also begin to rollout the use of industry-standard tokens to pay in-store wherever NFC is accepted. In the quarter, we expanded our partnership with Facebook Messenger, adding a contextual commerce experience that allows sellers to send invoices to buyers as well as adding PayPal as a way to fund P2P transactions within Messenger conversations. In China, where mobile payments are a thriving part of everyday life, our relationships with strategic partners have the potential to substantially increase our opportunity. PayPal is now used by tens of thousands of Chinese merchants on the AliExpress website in order to transact seamlessly with PayPal consumers outside of China. We are also purely looking forward to the upcoming launch of our Baidu partnership. In November, we announced the launch of our domestic operations in India, opening another substantial market for PayPal. While we have been supporting Indian merchants for years by helping them sell to international buyers, we are now able to work with key merchants to sell domestically as well. We plan to aggressively expand this program to more merchants in India throughout 2018. India is a market in which the government is actively working towards demonetization and building a modern digital economy, and we view India as a strong and compelling opportunity for PayPal. With well over a billion digital consumers and a thriving online merchant community, deepening our engagement in China and India will continue to be a priority for PayPal in 2018. We believe these markets offer significant opportunities to drive substantial scale. I would also like to comment on our relationships with eBay. We have a very close partnership and a long history with eBay. This is governed by an operating agreement that runs for another 2.5 years through July 2020. The operating agreement lays out a thoughtful transition and allows for a smooth migration from jointly owned entities to independent companies through the five years following separation. The agreement allows for eBay to eventually become the merchant of record and play a more direct role in managing the payment experience on their platform, and we’re actively partnering with eBay to help with their implementation of merchant of record capabilities. The operating agreement also allows for eBay to work with alternate payment service providers over time as a transition to merchant of record. As part of that, I am very pleased to announce that PayPal and eBay have signed a term sheet to provide our branded services at least through July 2023. Both our 2018 and our medium-term guidance already includes the anticipated economic impact of the eBay transition, which is quite manageable over a multi-year period. As such, we see no need to change our medium-term guidance. Given our long history with eBay, both Devin Wenig and I believe a manageable transition and sustained relationship is in the best interest of our mutual customers. I am very pleased we have agreed to extend our partnership and look forward to building on the strong relationship we've established since separation. As I said at the beginning of my remarks, 2017 was a landmark year for PayPal on multiple fronts. We entered 2018 with strong and accelerating trends, supporting our increasingly differentiated and expanded value propositions and scale. We’ve expanded our branded PayPal relationship with eBay through July 2023, which was one of our primary goals in 2017. These accomplishments set us up for sustainable and predictable growth over the foreseeable future. Before we understand the need to work even harder to live up to and deliver on the value our customers and shareholders expect from us. We have a substantial opportunity to shape the future of digital payments over the next decade, and we are looking forward to another strong year in 2018. And with that, I will turn the call over to John.

Thanks, Dan. I also want to thank our PayPal customers, partners, and employees for making 2017 a great year. We achieved many significant milestones in 2017 and are well-positioned to continue delivering on our commitments and executing against our strategic plans. Before I go into details of the fourth quarter, I would like to provide a few highlights for the full-year. For 2017, active accounts grew 15% to 227 million and acceleration of 500 basis points over the 2016 growth rate. Payment volume grew 27% on a currency neutral basis to $451 billion. Approximately 34% of this volume was mobile, where we saw 52% volume growth for the year. Revenue for 2017 exceeded $13 billion, growing 21% on a currency neutral basis. For the full year, revenue related to eBay marketplaces grew 7%, while our merchants' service revenue grew 24%, more than three times the rate of our legacy eBay marketplace business. For the year, non-GAAP earnings per share grew 27% to $1.90, and we returned more than $1 billion to shareholders. I'd first like to discuss the impact of tax reform. We believe the modernization of the U.S. tax code is a significant step forward for PayPal and its shareholders. The ability to work efficiently and strategically allocate capital is an unmitigated benefit. The full value of which we expect to utilize over the medium and long term. I would note, however, there are still a number of open items that require clarification and we may refine our estimated impact in future quarters as further information and interpretation become available. Our fourth quarter GAAP results include a one-time charge of $180 million related to the deemed repatriation of undistributed earnings on foreign subsidiaries and the revaluation of deferred tax assets and liabilities. We expect our non-GAAP effective tax rate to be in the range of 17% to 20% over the next three years. We will tighten this range as we provide more clarity. I would now like to review the items included in non-GAAP results from the reclassification of our U.S. consumer credit receivables portfolio to held for sale, relating to our November agreement with Synchrony Financial. These changes reduce comparability to prior periods. For relevance to our discussion, I will provide normalized results to adjust for these changes. Following the closing of the transaction, which we expect to occur in the third quarter, the U.S. consumer credit portfolio will no longer sit on our balance sheet, and we will no longer incur any costs related to the charge-off of principal or interest. First, other value-added services revenue benefited by approximately $26 million in the quarter as a result of no longer recognizing reserves on interest receivables for the U.S. consumer credit portfolio. Second, transaction and loan losses benefited by approximately $74 million for no longer recognizing reserves on principal receivables for the U.S. consumer credit portfolio; and third, non-transaction-related expenses were negatively impacted by $92 million from the recognition of incurred charge-offs of principal and interest. There is also a GAAP earnings impact from the transaction consistent with our prior quarters related to the agreement, which will be noted in the investor update closer to that time. Moving to our results, for the fourth quarter, our total payment volume was $131.4 billion, up 30% on a spot basis and 29% on a currency neutral basis. Merchant services volume grew 33% on a currency neutral basis to $114 billion, representing 87% of our volume in the quarter. Volume associated with eBay represented 13% of the total, compared to 16% for the fourth quarter of 2016 and 19% two years ago. P2P volume, which is a component of merchant services, includes volumes across core, Venmo, and Xoom and grew 50% to $27 billion, representing approximately 20% of total payment volume. During the first quarter, growth in active accounts was 15%. We ended the quarter with 227 million customer accounts. We added 8.7 million active accounts in the quarter. This marks the fourth consecutive quarter where we have experienced an acceleration in the growth of active accounts, and in each of the last five quarters, we've added a record number of net new customer accounts. Account growth in the quarter was primarily driven by our core PayPal business, followed by strong growth in Venmo accounts. Revenue grew 24% on a spot basis in Q4, with 23% growth in transaction revenue and 32% growth in other value-added services. Transaction revenue growth was primarily driven by our core PayPal and Braintree businesses. Normalizing for the effect of held-for-sale accounting, revenue growth from other value-added services was driven by strong credit growth from the consumer side, as well as the acquisition of Swift Financial. Both total and transaction take rates are affected by our hedging program, as we recognize hedge gains and losses in international transaction revenue. In the fourth quarter, we incurred a hedging loss of $29 million, compared to a $50 million gain in Q4 of 2016, resulting in a $79 million headwind in the period. For the fourth quarter, our transaction take rate was 2.45%, a decline of 18 basis points from the fourth quarter of 2016, and our total take rate was 2.82%, also down 18 basis points year-over-year. Growth in our P2P businesses, led by Venmo, and the impact from the hedging loss resulted in approximately two-thirds of the take rate decline, with the remaining 5 basis points decline resulting from the business mix effect of lower eBay growth in conjunction with strong Braintree growth. Volume-based expenses grew 26% in Q4. Normalizing for the effect of held-for-sale accounting, these expenses would have grown in line with volume growth. Transaction expense was $1.3 billion and represented 96 basis points of TPV, consistent with the expense rate in Q4 2016, and in line with our expectations that we would see less pressure in the back half of the year relative to the first half of the year. Increased core PayPal funding expenses were offset by lower funding costs from growth in P2P. Transaction loss in the quarter was $248 million or 19 basis points of TPV, flat from the same period last year as well as Q3 2017. Loan losses were $75 million, down nearly 40% from the fourth quarter of 2016 as a result of the effect of held-for-sale accounting on the income statement. We estimate that this change in accounting designation benefited loan losses by approximately $74 million. Due to the change to held-for-sale accounting, we no longer maintain reserves for losses and are reflecting incurred losses in the line item called restructuring and other charges on our income statement as part of our non-transaction-related expenses. Our consumer credit portfolio continues to perform in line with our expectations. Transaction margin in dollars was $2.1 billion, growing 23%. Adjusted for the impact of held-for-sale accounting, transaction margin was $2 billion, representing 17% growth versus last year. This represents the highest rate of growth since separation. For the quarter, transaction margin as a rate was 57.1%. On an adjusted basis, transaction margin was 54.8%. Non-transaction-related expenses or other operating expenses grew 19% in the quarter. Normalizing for the held-for-sale accounting adjustments, these non-transactional-related expenses would have grown approximately 10.5% resulting in a 385 basis points operating leverage. Further adjusting for the acquisitions of Swift Financial and TIO Networks, we would have seen non-transactional rate of expenses grow at approximately 6% for the quarter. Relative to Q4 ’16, in this fourth quarter this year, sales and marketing expenses grew 25%, product development costs increased 10%, and customer support and operations costs grew 7%, consistent with the cadence of discretionary spending that we have previously discussed. In the quarter, there were incremental costs related to our acquisitions of Swift Financial and TIO, which we expect to grow our sales and marketing and customer support costs. Additionally, we launched marketing campaigns for our P2P businesses and supported the global launch of our choice initiatives. In product development, we invested in our India domestic payments business, Pay with Venmo, and in improving our core merchant and consumer experiences. After adjusting for held-for-sale accounting treatment, non-transactional-related expenses increased by $0.17 in Q4 for every incremental dollar of revenue. After backing out incremental revenue and costs associated with our acquisitions of Swift Financial and TIO, these expenses increased only $0.11 for every additional dollar of revenue. For the full year, these expenses increased only $0.10 for every dollar of increasing revenue, indicative of the underlying leverage and scalability that enhance our operating model. In Q4, operating income grew 30% to $807 million on 24% top-line growth, resulting in 100 basis points of operating leverage. Non-GAAP earnings per share grew 30% in the fourth quarter to $0.55. Q4 capital expenses were $180 million or approximately 5% of revenue. As a result of changes from the designation of our U.S. consumer credit receivables portfolio, net new loans of $1.3 billion reduced cash flow from operations in the quarter. Prior to this change in designation, this amount would have been recognized in cash flows from investing activities. As a result, cash flow from operations in the fourth quarter was negative $147 million with free cash flow in the quarter of negative $327 million. On a normalized basis, we would have recognized approximately $972 million in free cash flow, generating approximately $0.26 free cash flow for every dollar of revenue. We ended the quarter with cash, cash equivalents, and investments of $7.7 billion. In 2017, we returned $1 billion to shareholders in the form of stock repurchases, buying back our stock at an average price of $51. Our business generates significant free cash flow. In addition, tax reform, in conjunction with the expected proceeds from the Synchrony transaction and its implications for our forward cash requirements, position PayPal with meaningful liquidity, flexibility, and optionality regarding capital allocation decisions. We expect to continue to deploy a disciplined and balanced approach to capital allocation to preserve this flexibility and make strategic investments to deliver durable increases in shareholder value and long-term growth. In 2018, we plan to continue investing organically, pursue acquisitions and partnerships, and increase our level of stock repurchases. We are currently executing on tax planning strategies to serve our long-term business objectives. The consequences of these strategies, in conjunction with regional regulatory and liquidity requirements, may affect our cash repatriation plans. We continue to move toward a more optimal capital structure to support capital allocation decisions and maximize value. In the fourth quarter, we announced a new $3 billion unsecured credit facility and drew down $1 billion at the end of December. I would now like to discuss our guidance for the first quarter of 2018 and the full year. For the full year 2018, we expect revenue between $15 billion and $15.25 billion, representing currency-neutral growth of 14% to 16%. This is in line with the guidance update we provided in mid-January and incorporates the expected impact of approximately 3.5 points from the sale of our U.S. consumer receivables. Our guidance contemplates modest expansion in our non-GAAP operating margin in 2018, and we anticipate a non-GAAP effective tax rate to be between 17% and 20%, and we expect non-GAAP earnings per share of $2.24 to $2.30. For 2018, we anticipate free cash flow to exceed $4.5 billion. This is higher than normal due to the sale of our credit receivables next year, the proceeds of which will be split between operating and investment activities on our cash flow segment. For the first quarter, we expect revenue in the range of $3.58 billion to $3.63 billion or 20% to 21% growth on a currency neutral basis. We also expect non-GAAP earnings per share of $0.52 to $0.54. In closing, we are pleased with 2017 and the progress we have made across many fronts. We focused our efforts on building great experiences for our customers, which led to record consumer engagement patterns and an acceleration of revenue and earnings growth. We've demonstrated the solid improvements to our cost structure and significantly de-risked our business with the U.S. consumer credit transaction with Synchrony. We look forward to the opportunities we have in 2018 to continue this progress and further increase shareholder value. With that, I'll turn it over to the operator for questions. Thank you.

Dan and John, there seems to be a disconnect between how eBay is presenting the new partnership or expansion and how it's being interpreted on this call and in the press release. The main difference appears to be the Adyen partnership that eBay is now referring to as their primary partner, with plans to transition most of their marketplace customers to this new payment experience powered by Adyen. Can you help clarify this for us and connect the dots between these two perspectives? I understand you've mentioned that there isn't expected to be a significant financial impact as we approach the end of the original 2020 date. How might that change?

I'll start off by just saying that eBay and PayPal have had a close relationship and a long history together. I’m really pleased that we're expanding that partnership on the branded side through July 2023. As I think most people on the call know, there is a five-year operating agreement that governs our separation, and we're halfway through that. We've got another 2.5 years left until the end of July 2020. With this announcement, there are no changes to any of the terms. The operating agreement was meant to assure both a thoughtful and smooth transition for both companies post-separation. It assumes, as have we, that eBay will gradually transition to become a merchant of record (MOR). Consequently, all of our numbers, all of our plans have always included that assumption. So as we've given our medium-term guidance, that’s a part of our assumption. As a result, this announcement does not change our medium-term guidance or the way that we think about our long-term outlook. Let me give you some facts around that because we strongly believe that the eBay transition to MOR is quite manageable for us. As of today, eBay, as John mentioned, is about 13% of our TPV (total processed volume), which is down about 900 basis points in the last 2.5 years. Let’s just assume the exact same thing happens over the next 2.5 years. If we assume no acquisitions ourselves, which, as you know, we are acquisitive and aggressive in that regard, we are coming in with a large cash balance. If we do not make any acquisitions, eBay becomes approximately, at the end of the operating agreement, about 4% of our TPV. That’s assuming the same trends over the next 2.5 years. They contribute less than 10% of our revenues. eBay has followed the example that we actually have great insight because we see what happens to marketplaces as they go to MOR, as we have worked with a number of marketplaces. Where marketplaces go to MOR, it typically takes several years before the majority of them move to MOR. In our experience, we still retain about a 50% share at checkout, and it takes several years post the end of the operating agreement for the majority of customers to move to that, based on our experience in the real market. Thus, we think this is going to be a very manageable transition over multiple years post the end of the operating agreement. Lastly, the primary reason we renewed the branded relationship with eBay is because it is by far the most profitable element of the relationship and it’s the most important to our mutual customers. Furthermore, we will be able to save substantial costs by doing the unbranded piece of it. We will still have the branded relationship, which represents the most profitable part of our business today. As the operating agreement also restricts PayPal from partnering with the largest and fastest-growing marketplaces in the world as an MOR, we have been limited in that capacity. We strongly believe this is an opportunity for PayPal and we’re now well-positioned to continue our strong growth both on the top line and the bottom line.

I would like to follow up on that. My understanding is that in 2020, you will no longer be the Merchant of Record. Looking ahead, I think PayPal will still be a preferred option, but won't handle some card payments. I'm trying to understand the financial implications of no longer being the Merchant of Record and how it will affect the profit and loss statement.

It's a great question. One of the things to understand is that as we work with many other retailers out there, they are the merchants of record as we work with them, and as we are able to command a premium relative to card processing. We do that because we deliver greater customer acquisition, higher conversion rates, and so on. We do this across much of our business with the merchants or marketplaces that are operating as merchants of record. So, as Dan was commenting on earlier, we have a lot of insight into exactly how this plays out, and that has informed our plans during the separation. We know how that works for other marketplaces and small business forums when they have moved to merchant of record or started out as the merchant of record.

Bryan, this is John. I would add to that maybe that I think what you're getting to is sort of the economic impact overall and there's a couple of things that point you to. First, as Dan has suggested in his prepared remarks, eBay's contribution to our TPV has been declining by about 900 basis points. Over the last couple of years, and during that period, we've actually been able to keep margins flat to growing. If you look at the 10 quarters that we've had since separation, the average revenue growth for our eBay-related business has been 4%. If you look at the other 87% of our business, that has grown 23%. So, if you take those numbers and project them through to mid-2020 at the end of the operating agreement, that would suggest that in 2021, our revenue growth each year will be roughly 50% larger than the entire eBay business at that point in time. The other thing I’d point out is that we actually incur quite a cost to support eBay today. So, when we look at things like our losses or our call volume into the operations center, those disproportionately skew towards eBay relative to their percentage of the TPV. We've built our plans around what we know, and we’re confident in our ability to continue to grow our top line and bottom line after we operate it.

A couple of follow-up questions to that. I am not sure if you could share how much of your profits come from eBay today? But does your ability and your confidence to maintain your midterm guidance require any sort of unusual remediation efforts like cost-cutting or share repurchase? Just curious if it requires any extra remediation efforts or even the assumption of new marketplace wins? And if I could just tack on one more, is it fair to think that your checkout share, the 50% number is helpful. But is it fair to think that your checkout share would be higher longer term just because of how integrated you’ve been with eBay after all these years? Sorry for all the questions.

So Tien-tsin, I’ll start. The assumption that we have going forward is that we will continue to realize the benefits from our scale and our leverage going forward. This does not require massive restructuring or layoffs to continue the performance that we have seen; as I suggested, we’ve been doing this for two years. We expect this to continue. If you go back to my answer to Bryan’s question, and you think about losing some share of that business going forward, we’re talking about a few points of impact to revenue growth and profitability, and that can easily be backfilled going out and looking at inorganic opportunities. This doesn't also address the fact that with the operating agreement in the mid-2020s, we now have the ability to go out and partner with the largest marketplaces in the world, the largest and fastest-growing marketplaces. All of these give us opportunities to backfill what we might have as we transition to this next chapter with eBay.

Yes. And I think I’d also say that our guidance assumes this. We knew this was going to happen and we've built it into our models. We feel very confident that we can continue to grow without any unusual restructuring. Therefore, we wouldn’t have given that guidance if we didn’t believe we could deliver on it. We’d love to partner with other marketplaces as we are seeing growth and engagement across our merchants and consumers.

I’ll also add that it's reasonable to expect our checkout share to increase over time. Given our long history with eBay, our engagement is increasing, and consumers are using PayPal more frequently. Thus, we see that our preference for PayPal is also increasing. This bodes well for all marketplaces we work with in the future.

Just on that point on these other partnerships that you could have with marketplaces. How many discussions have you had with some of the larger ones that are potential opportunities? And how significant economically could those be relative to what you have with eBay? Additionally, just thinking about the transaction cost element of being a lesser merchant for the networks, does that have any impact on your interchange expenses?

We've had conversations with other marketplaces, but as part of the operating agreement, we're prohibited from offering MOR services to the largest competitors in our marketplace. This has been part of the operating agreement and remains in place until its conclusion. As such, while we have spoken with them sincerely, we are respecting the terms of this agreement, just as eBay does as well. Therefore, we will have more opportunities to discuss these potential partnerships closer to the end of the operating agreement.

I wanted to ask a more qualitative follow-up question on eBay. And I'm just wondering how we should think about then what maybe you had to agree to give or give up to secure the extra years of presence as checkout on eBay and next? So that you would have a presence there through 2023? And I guess as part of that, I'm curious why agree to whatever now instead of waiting to see if there were some additional services that PayPal can deliver to eBay to improve your positioning in a long-term relationship there?

Yes. James, when we thought that within the operating agreement, this year coming up versus the first year, it permitted eBay to experiment with MOR capabilities. It’s laid out in the agreement that they can choose two countries and do up to 5% of the volume on an MOR solution. It was the right time, and we’ve always thought that we’d never do all these negotiations at the very end. We both feel like we’re going to be partners for a long time, and we looked carefully at all parts of this deal, both the unbranded and the branded. We felt the unbranded piece of this was not something that made sense for us. We were reducing engagement in a profitable area, and what we saw was an important opportunity to grow our other revenue streams. This partnership allows us to continue to pursue strategic objectives without limiting our ability to work with the largest marketplaces.

From a services side and given the ways that we've operated with leading multi-channel retailers over the years, we have successfully positioned ourselves as a preferred payment option, a role that we intend to continue in the future. We believe this approach will not only support our ongoing relationship with eBay, but also significantly expand our capacity in other markets and options as we look forward.

I would like some clarification. I understand that eBay is starting this process with Adyen. Could you tell me when you will no longer be restricted from exploring partnerships with other marketplaces? Also, on a different topic, you mentioned industry-standard tokens in the point of sale setting. Could you provide a bit more detail on that?

We have the ability to partner with many marketplaces as you probably know. PayPal is the underlying payment platform for Uber, for Airbnb, and for others. However, there were a set of eBay competitors carved out in the operating agreement, in which we could not serve them as an MOR. That restriction goes away at the end of the operating agreement in July 2020. Until then, eBay has the ability to experiment with alternative payment service providers, beginning this year, by doing up to 5% of volume in two countries of their selection. They can also expand to 10% in the last year of the operating agreement. This allows them a chance to experiment. Just as we are now able to engage with the leading marketplaces out there once this agreement concludes. This makes sense for both of us as we separate from eBay.

So for in-store, what we were really excited about is the continuation of our implementation of Visa and MasterCard standard tokens around our in-store offering. As we discussed previously, we work with GooglePay and with others on our in-store efforts, and we’re continuing to roll out our deployment of these standard network tokens consistent with our partnerships with Visa and MasterCard.

Can you provide insights into the trends in both merchant and consumer engagement? Additionally, I have a related question regarding the payment transactions and revenue per active account, which have increased, while the payment transactions per active account have slowed down. Would your response be different if we consider eBay versus non-eBay merchant engagement? I apologize for the multi-part question, but I wanted to understand better.

So in terms of the overall engagement, which grew by 8%, in my opening remarks I noted that if you normalize that, the deceleration is because we're bringing on so many net new actives in comparison to the year before. When new customers come on, they typically take time to ramp up to the engagement levels that someone who has been here for a year or two has reached. For instance, if we take a look at our cohorts from 2017 that came on board, they showed a significant improvement in engagement compared to cohorts from 2016. As we start seeing those large cohorts of net new actives engaging more on our platform, it will positively impact our engagement levels. Hence, if we normalize against the increase in net new actives, we would see a double-digit increase in engagement. I think it’s also to note that we’ve seen an acceleration in the number of merchants coming onto the PayPal platform, with now 18 million merchants onboard. That is an additional positive growth trend as we see our consumer engagement rise as well.

Look, I know you're describing the eBay contribution to be relatively minor, but this rolls off, obviously giving you a lot of opportunities. One, other things you mentioned was deploying capital to help diversify further. I guess I just wanted to hear more given you now post Synchrony deal tax reform, there should be a ton of cash available for you guys, like a considerable sum of unlevered cash. So can you give us more color on potential thoughts around incremental buybacks like the way you've done before? And then what kind of M&A are you considering, given it's been a while since we've seen material-sized M&A?

It's John. So, in terms of our priorities for capital allocation, those haven't changed. Our top priority is always to invest for profitable growth. That can mean both organic opportunities and also include looking at the M&A landscape. We certainly do have much more flexibility to be aggressive now, given our cash balance and our ability to deploy it across borders. We rigorously evaluate and explore all opportunities out there, but we remain disciplined to ensure the right returns that will create shareholder value. You can expect us to be active in this regard. At the same time, we fundamentally believe returning cash to shareholders is valuable. However, we don’t feel pressured to do that immediately to show accretion. Instead, being measured and thoughtful creates opportunities that could pay off significantly more in the long term. The decision to allocate towards stock buybacks needs to balance against investing in strategic acquisitions, and we’ll address both in a prudent manner.

I want to second John’s point that we are very satisfied with our existing assets and capabilities. Our robust product pipeline positions us well to compete effectively in the market. We are planning from a position of strength. With our $7 billion in cash and another $6 billion on the way from Synchrony, along with strong free cash flow, we intend to be a consolidator in our industry. We analyze hundreds of opportunities every quarter, from small investments to larger acquisitions, based on our strategic vision, mission, and the need to accelerate progress. Expect us to be active contrarily while maintaining discipline.