GAAP EPS of
Announces
Financial highlights for second quarter 2018
-
Revenue growth of 23% to
$3.86 billion , or 22% on a foreign currency-neutral (FX-neutral or FXN) basis - GAAP operating margin of 14.8%, with non-GAAP operating margin of 21.3%
-
GAAP EPS of
$0.44 , an increase of 29%, with non-GAAP EPS of$0.58 , an increase of 28% -
Repurchased 6.1 million shares of common stock, returning
approximately
$500 million to stockholders
Operating highlights for second quarter 2018
- 7.7 million active accounts added, with net new active accounts up 18%
- 2.3 billion payment transactions, up 28%
-
$139 billion in total payment volume (TPV), up 29%, or 27% on an FX-neutral basis - 35.7 payment transactions per active account on a trailing twelve months basis, up 9%
"Our customer choice initiatives, partnership strategy and continued
focus on being a customer champion are contributing to our sustained
strong performance. We are pleased to have announced four acquisitions
in the second quarter that advance our merchant value proposition and
geographic reach. Our strategic decision to become an open platform
committed to partnerships has increased the value that
Person-to-Person (P2P) volume grew 50% to more than
Driven by strong mobile engagement on its platform,
During the second quarter
-
In
May 2018 ,PayPal announced the acquisition of iZettle for approximately$2.2 billion in cash. With the acquisition of iZettle,PayPal plans to expand its in-store presence. The acquisition is expected to close in the third quarter of 2018, and is subject to customary closing conditions, including regulatory approval. -
In
June 2018 ,PayPal announced the acquisition of Hyperwallet for approximately$400 million in cash. With the acquisition of Hyperwallet,PayPal plans to enhance its payout capabilities, improving its ability to provide an integrated suite of payment solutions to ecommerce platforms and marketplaces around the world. The acquisition is expected to close in the fourth quarter of 2018, and is subject to customary closing conditions, including regulatory approvals. -
In
June 2018 ,PayPal announced the acquisition of Simility for approximately$120 million in cash. This transaction closed inJuly 2018 .PayPal acquired Simility to enhance its ability to deliver fraud prevention and risk management solutions to merchants globally. -
In
May 2018 ,PayPal announced and closed the acquisition of Jetlore for approximately$16 million in cash. Jetlore is an AI-powered prediction platform used by some of the world's top retailers.PayPal acquired Jetlore to enhance and accelerate PayPal Marketing Solutions, adding new capabilities that continue to expand PayPal's value proposition for merchants beyond the online checkout experience.
Second Quarter 2018 Financial and Operating Highlights |
||||||||||||||||||
Second Quarter |
||||||||||||||||||
(presented in millions, except per share data and percentages) |
2018 |
2017 |
YoY Growth |
FX-Neutral |
||||||||||||||
Total Payment Volume (TPV)(1) | $ | 139,403 | $ | 107,800 | $ | 31,603 | 29 | % | 27 | % | ||||||||
GAAP | ||||||||||||||||||
Net revenues | $ | 3,857 | $ | 3,136 | $ | 721 | 23 | % | 22 | % | ||||||||
Operating margin | 14.8 | % | 13.7 | % | ** | 112bps | N/A | |||||||||||
Effective tax rate | 13.6 | % | 8.1 | % | ** | 558 | bps | N/A | ||||||||||
Net income | $ | 526 | $ | 411 | $ | 115 | 28 | % | N/A | |||||||||
Earnings per diluted share | $ | 0.44 | $ | 0.34 | $ | 0.10 | 29 | % | N/A | |||||||||
Net cash (used in) provided by operating activities(2) | $ | 28 | $ | 921 | $ | (893 | ) | (97 | %) | N/A | ||||||||
Non-GAAP | ||||||||||||||||||
Net revenues | $ | 3,857 | $ | 3,136 | $ | 721 | 23 | % | 22 | % | ||||||||
Operating margin | 21.3 | % | 21.0 | % | ** | 25bps | N/A | |||||||||||
Effective tax rate | 18.0 | % | 18.0 | % | ** | (8)bps | N/A | |||||||||||
Net income | $ | 703 | $ | 554 | $ | 149 | 27 | % | N/A | |||||||||
Earnings per diluted share | $ | 0.58 | $ | 0.46 | $ | 0.12 | 28 | % | N/A | |||||||||
Free cash flow(2) | $ | (170 | ) | $ | 747 | $ | (917 | ) | (123 | %) | N/A | |||||||
Cash, Cash Equivalents and Investments - PayPal's cash, cash
equivalents and investments totaled
Short-Term Borrowings - PayPal's notes payable totaled
(1) All metrics are presented consistent with the
updated definitions in the Form 8-K filed on
(2) Cash flow from operations and free cash flow in
the second quarter of 2018 reflect the impact of held for sale
accounting. Adjusting for the impact of held for sale accounting of
** Not meaningful.
2018 Financial Guidance
Full year 2018 revenue and earnings guidance
-
PayPal raises revenue and non-GAAP EPS guidance for full year 2018. -
PayPal expects revenue to grow 17 - 19% at current spot rates and 16 - 18% on an FX-neutral basis, to a range of$15.30 -$15.50 billion . As previously disclosed, full year 2018 revenue guidance includes an expected impact related to the sale ofU.S. consumer credit receivables to Synchrony Financial of approximately 3.5 percentage points for full year 2018. -
PayPal expects GAAP earnings per diluted share in the range of$1.44 -$1.51 and non-GAAP earnings per diluted share in the range of$2.32 -$2.35 . -
Estimated non-GAAP amounts above for the twelve months ending
December 31, 2018 , reflect adjustments of approximately$1.37 -$1.47 billion , primarily representing estimated stock-based compensation expense and related payroll taxes in the range of$885 -$915 million . - Estimated GAAP and non-GAAP results include the expected impact of completed acquisitions and acquisitions that have been announced and are expected to close before the end of 2018.
Third quarter 2018 revenue and earnings guidance
-
PayPal expects revenue to grow 12% - 13% at current spot rates and 12% - 13% on an FX-neutral basis, to a range of$3.62 -$3.67 billion . -
PayPal expects GAAP earnings per diluted share in the range of$0.31 -$0.34 and non-GAAP earnings per diluted share in the range of$0.53 -$0.55 . -
Estimated non-GAAP amounts above for the three months ending
September 30, 2018 , reflect adjustments of approximately$320 -$360 million , primarily representing estimated stock-based compensation expense and related payroll taxes in the range of$210 -$220 million . - Estimated GAAP and non-GAAP results include the expected impact of completed acquisitions and acquisitions that have been announced and are expected to close before the end of the third quarter of 2018.
Please see "Non-GAAP Financial Measures" and "Non-GAAP Measures of Financial Performance" for important additional information.
Quarterly conference call and webcast
About
Fueled by a fundamental belief that having access to financial services
creates opportunity,
Presentation
All growth rates represent year-over-year comparisons, except as
otherwise noted. FX-neutral results are calculated by translating the
current period local currency results by the prior period exchange rate.
FX-neutral growth rates are calculated by comparing the current period
FX-neutral results with the prior period results, excluding the impact
from hedging activities. All amounts in tables are presented in
As previously disclosed, we have updated our definitions of Active
Accounts and Total Payment Volume (TPV) to capture the diversification
of PayPal's products and services through strategic partnerships, new
products and acquisitions. Prior period metric results for Active
Accounts, TPV, Number of Payment Transactions, and Payment Transactions
Per Active Account have been revised to reflect the updated definitions
of the metrics. For additional details, please see PayPal's Current
Report on Form 8-K filed with the
Non-GAAP financial measures
This press release includes financial measures defined as "non-GAAP
financial measures" by the
Forward-looking statements
This press release contains forward-looking statements relating to,
among other things, the future results of operations, financial
condition, expectations and plans of
More information about factors that could adversely affect
|
||||||||
Unaudited Condensed Consolidated Balance Sheet | ||||||||
|
|
|||||||
2018 | 2017 | |||||||
(In millions, except par value) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 2,840 | $ | 2,883 | ||||
Short-term investments | 2,125 | 2,812 | ||||||
Accounts receivable, net | 283 | 283 | ||||||
Loans and interest receivable, net | 1,803 | 1,314 | ||||||
Loans and interest receivable, held for sale | 6,870 | 6,398 | ||||||
Funds receivable and customer accounts | 19,188 | 18,242 | ||||||
Prepaid expenses and other current assets | 1,075 | 713 | ||||||
Total current assets | 34,184 | 32,645 | ||||||
Long-term investments | 1,369 | 1,961 | ||||||
Property and equipment, net | 1,567 | 1,528 | ||||||
|
4,331 | 4,339 | ||||||
Intangible assets, net | 125 | 168 | ||||||
Other assets | 101 | 133 | ||||||
Total assets | $ | 41,677 | $ | 40,774 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 201 | $ | 257 | ||||
Notes payable | 2,000 | 1,000 | ||||||
Funds payable and amounts due to customers | 20,688 | 19,742 | ||||||
Accrued expenses and other current liabilities | 1,836 | 1,781 | ||||||
Income taxes payable | 84 | 83 | ||||||
Total current liabilities | 24,809 | 22,863 | ||||||
Deferred tax liability and other long-term liabilities | 1,849 | 1,917 | ||||||
Total liabilities | 26,658 | 24,780 | ||||||
Equity: | ||||||||
Common stock, |
— | — | ||||||
|
(4,311 | ) | (2,001 | ) | ||||
Additional paid-in-capital | 14,434 | 14,314 | ||||||
Retained earnings | 4,860 | 3,823 | ||||||
Accumulated other comprehensive income (loss) | 36 | (142 | ) | |||||
Total equity | 15,019 | 15,994 | ||||||
Total liabilities and equity | $ | 41,677 | $ | 40,774 | ||||
|
|||||||||||||||
Unaudited Condensed Consolidated Statement of Income | |||||||||||||||
Three Months Ended |
Six Months Ended |
||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(In millions, except per share amounts) | |||||||||||||||
Net revenues | $ | 3,857 | $ | 3,136 | $ | 7,542 | $ | 6,111 | |||||||
Operating expenses: | |||||||||||||||
Transaction expense | 1,362 | 1,064 | 2,637 | 2,051 | |||||||||||
Transaction and loan losses | 334 | 308 | 639 | 608 | |||||||||||
Customer support and operations(1) | 357 | 335 | 708 | 652 | |||||||||||
Sales and marketing (1) | 313 | 284 | 598 | 522 | |||||||||||
Product development (1) | 255 | 232 | 513 | 446 | |||||||||||
General and administrative (1) | 368 | 282 | 707 | 547 | |||||||||||
Depreciation and amortization (1) | 180 | 201 | 365 | 384 | |||||||||||
Restructuring and other charges | 116 | — | 269 | 40 | |||||||||||
Total operating expenses | 3,285 | 2,706 | 6,436 | 5,250 | |||||||||||
Operating income | 572 | 430 | 1,106 | 861 | |||||||||||
Other income (expense), net | 37 | 17 | 51 | 24 | |||||||||||
Income before income taxes | 609 | 447 | 1,157 | 885 | |||||||||||
Income tax expense | 83 | 36 | 120 | 90 | |||||||||||
Net income | $ | 526 | $ | 411 | $ | 1,037 | $ | 795 | |||||||
Net income per share: | |||||||||||||||
Basic | $ | 0.44 | $ | 0.34 | $ | 0.87 | $ | 0.66 | |||||||
Diluted | $ | 0.44 | $ | 0.34 | $ | 0.86 | $ | 0.65 | |||||||
Weighted average shares: | |||||||||||||||
Basic | 1,187 | 1,202 | 1,190 | 1,203 | |||||||||||
Diluted | 1,202 | 1,215 | 1,209 | 1,216 | |||||||||||
(1) Includes stock-based compensation as follows: | |||||||||||||||
Customer support and operations | 39 | 34 | 77 | 64 | |||||||||||
Sales and marketing | 39 | 33 | 83 | 61 | |||||||||||
Product development | 64 | 59 | 128 | 104 | |||||||||||
General and administrative | 63 | 51 | 122 | 93 | |||||||||||
Depreciation and amortization | 5 | 3 | 9 | 5 | |||||||||||
$ | 210 | $ | 180 | $ | 419 | $ | 327 | ||||||||
|
||||||||||||||||
Unaudited Condensed Consolidated Statement of Cash Flows | ||||||||||||||||
Three Months Ended |
Six Months Ended |
|||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(In millions) | ||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income | $ | 526 | $ | 411 | $ | 1,037 | $ | 795 | ||||||||
Adjustments: | ||||||||||||||||
Transaction and loan losses | 334 | 308 | 639 | 608 | ||||||||||||
Depreciation and amortization | 180 | 201 | 365 | 384 | ||||||||||||
Stock-based compensation | 205 | 176 | 410 | 321 | ||||||||||||
Deferred income taxes | (2 | ) | 49 | 89 | 102 | |||||||||||
Gain on sale of principal loans receivable held for sale, net | (5 | ) | (6 | ) | (10 | ) | (12 | ) | ||||||||
Cost basis adjustments to loans and interest receivable held for sale | 116 | — | 244 | — | ||||||||||||
Other | (31 | ) | — | (31 | ) | — | ||||||||||
Changes in assets and liabilities: | ||||||||||||||||
Accounts receivable | (24 | ) | 2 | 1 | 38 | |||||||||||
Changes in loans and interest receivable held for sale, net | (977 | ) | 6 | (2,268 | ) | 12 | ||||||||||
Accounts payable | 18 | 5 | (17 | ) | 4 | |||||||||||
Income taxes payable | (14 | ) | 4 | (14 | ) | 21 | ||||||||||
Other assets and liabilities | (298 | ) | (235 | ) | (766 | ) | (601 | ) | ||||||||
Net cash provided by (used in) operating activities | 28 | 921 | (321 | ) | 1,672 | |||||||||||
Cash flows from investing activities: | ||||||||||||||||
Purchases of property and equipment | (198 | ) | (174 | ) | (376 | ) | (322 | ) | ||||||||
Changes in principal loans receivable, net | 262 | (491 | ) | 1,000 | (627 | ) | ||||||||||
Purchases of investments | (5,341 | ) | (4,847 | ) | (10,616 | ) | (11,956 | ) | ||||||||
Maturities and sales of investments | 5,378 | 3,953 | 9,669 | 9,536 | ||||||||||||
Acquisitions, net of cash acquired | (16 | ) | — | (16 | ) | — | ||||||||||
Funds receivable | 473 | (170 | ) | 902 | 397 | |||||||||||
Net cash provided by (used in) investing activities | 558 | (1,729 | ) | 563 | (2,972 | ) | ||||||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds from issuance of common stock | 65 | 74 | 78 | 86 | ||||||||||||
Purchases of treasury stock | (500 | ) | (89 | ) | (2,325 | ) | (606 | ) | ||||||||
Tax withholdings related to net share settlements of equity awards | (37 | ) | (23 | ) | (372 | ) | (124 | ) | ||||||||
Borrowings under financing arrangements, net of repayments | (1,076 | ) | (6 | ) | 999 | (6 | ) | |||||||||
Funds payable and amounts due to customers | 213 | 1,086 | 1,078 | 1,638 | ||||||||||||
Net cash (used in) provided by financing activities | (1,335 | ) | 1,042 | (542 | ) | 988 | ||||||||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (56 | ) | 12 | (63 | ) | 23 | ||||||||||
Net change in cash, cash equivalents and restricted cash | (805 | ) | 246 | (363 | ) | (289 | ) | |||||||||
Cash, cash equivalents and restricted cash at beginning of period | 8,727 | 5,584 | 8,285 | 6,119 | ||||||||||||
Cash, cash equivalents and restricted cash at end of period | $ | 7,922 | $ | 5,830 | $ | 7,922 | $ | 5,830 | ||||||||
Supplemental cash flow disclosures: | ||||||||||||||||
Cash paid for interest | $ | 18 | $ | 1 | $ | 26 | $ | 2 | ||||||||
Cash paid (refund received) for income taxes, net | $ | 186 | $ | 25 | $ | 180 | $ | 73 | ||||||||
Unaudited Summary of Consolidated
Net Revenues
We earn revenue from the following types of transactions:
-
Transaction revenues: Net transaction fees charged to consumers
and merchants on a transaction basis primarily based on the volume of
activity, or Total Payment Volume ("TPV"), processed through our
Payments Platform, including our
PayPal ,PayPal Credit, Venmo,Braintree and Xoom products. -
Other value added services: Net revenues derived principally
from interest and fees earned on our loans and interest receivable,
net and held for sale portfolio, subscription fees, gateway fees,
gains on sale of participation interests in certain consumer loans
receivable and working capital loans and advances, revenue share we
earn through partnerships, interest earned on certain
PayPal customer account balances, and fees earned through other services that we provide to consumers and merchants.
Net Revenues by Type | Three Months Ended | |||||||||||||||||||
|
|
|
|
|
||||||||||||||||
2018 | 2018 | 2017 | 2017 | 2017 | ||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||
Transaction revenues(1) | $ | 3,318 | $ | 3,197 | $ | 3,244 | $ | 2,858 | $ | 2,775 | ||||||||||
Current quarter vs prior quarter | 4 | % | (1 | )% | 14 | % | 3 | % | 6 | % | ||||||||||
Current quarter vs prior year quarter | 20 | % | 22 | % | 23 | % | 22 | % | 18 | % | ||||||||||
Percentage of total | 86 | % | 87 | % | 87 | % | 88 | % | 88 | % | ||||||||||
Other value added services(1) | 539 | 488 | 500 | 381 | 361 | |||||||||||||||
Current quarter vs prior quarter | 10 | % | (2 | )% | 31 | % | 6 | % | 3 | % | ||||||||||
Current quarter vs prior year quarter | 49 | % | 39 | % | 47 | % | 15 | % | 19 | % | ||||||||||
Percentage of total | 14 | % | 13 | % | 13 | % | 12 | % | 12 | % | ||||||||||
Total net revenues | $ | 3,857 | $ | 3,685 | $ | 3,744 | $ | 3,239 | $ | 3,136 | ||||||||||
Current quarter vs prior quarter | 5 | % | (2 | )% | 16 | % | 3 | % | 5 | % | ||||||||||
Current quarter vs prior year quarter | 23 | % | 24 | % | 26 | % | 21 | % | 18 | % | ||||||||||
(1) Prior period amounts have been revised to conform to
current period presentation. For additional details, please see
|
Net Revenues by Geography |
Three Months Ended | |||||||||||||||||||
|
|
|
|
|
||||||||||||||||
2018 | 2018 | 2017 | 2017 | 2017 | ||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||
|
$ | 2,150 | $ | 2,023 | $ | 2,045 | $ | 1,743 | $ | 1,690 | ||||||||||
Current quarter vs prior quarter | 6 | % | (1 | )% | 17 | % | 3 | % | 5 | % | ||||||||||
Current quarter vs prior year quarter | 27 | % | 26 | % | 30 | % | 21 | % | 20 | % | ||||||||||
Percent of total | 56 | % | 55 | % | 55 | % | 54 | % | 54 | % | ||||||||||
International net revenues | 1,707 | 1,662 | 1,699 | 1,496 | 1,446 | |||||||||||||||
Current quarter vs prior quarter | 3 | % | (2 | )% | 14 | % | 3 | % | 6 | % | ||||||||||
Current quarter vs prior year quarter | 18 | % | 21 | % | 21 | % | 22 | % | 16 | % | ||||||||||
(FXN) Current quarter vs prior year quarter | 16 | % | 18 | % | 21 | % | 22 | % | 20 | % | ||||||||||
Percent of total | 44 | % | 45 | % | 45 | % | 46 | % | 46 | % | ||||||||||
Total net revenues | $ | 3,857 | $ | 3,685 | $ | 3,744 | $ | 3,239 | $ | 3,136 | ||||||||||
Current quarter vs prior quarter | 5 | % | (2 | )% | 16 | % | 3 | % | 5 | % | ||||||||||
Current quarter vs prior year quarter | 23 | % | 24 | % | 26 | % | 21 | % | 18 | % | ||||||||||
(FXN) Current quarter vs prior year quarter | 22 | % | 22 | % | 26 | % | 22 | % | 20 | % | ||||||||||
|
||||||||||||||||||||
Unaudited Supplemental Operating Data | ||||||||||||||||||||
Three Months Ended, | ||||||||||||||||||||
|
|
|
|
|
||||||||||||||||
2018 | 2018 | 2017 | 2017 | 2017 | ||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||
Active accounts(1),(2) | 244 | 237 | 229 | 220 | 212 | |||||||||||||||
Current quarter vs prior quarter | 3 | % | 4 | % | 4 | % | 4 | % | 3 | % | ||||||||||
Current quarter vs prior year quarter | 15 | % | 15 | % | 15 | % | 13 | % | 12 | % | ||||||||||
Number of payment transactions(1),(3) | 2,327 | 2,214 | 2,240 | 1,941 | 1,817 | |||||||||||||||
Current quarter vs prior quarter | 5 | % | (1 | )% | 15 | % | 7 | % | 3 | % | ||||||||||
Current quarter vs prior year quarter | 28 | % | 25 | % | 25 | % | 25 | % | 22 | % | ||||||||||
Payment transactions per active account(1),(4) | 35.7 | 34.7 | 34.0 | 33.3 | 32.8 | |||||||||||||||
Current quarter vs prior quarter | 3 | % | 2 | % | 2 | % | 2 | % | 2 | % | ||||||||||
Current quarter vs prior year quarter | 9 | % | 8 | % | 8 | % | 8 | % | 10 | % | ||||||||||
Total Payment Volume(1),(5) | $ | 139,403 | $ | 132,364 | $ | 132,515 | $ | 115,224 | $ | 107,800 | ||||||||||
Current quarter vs prior quarter | 5 | % | — | % | 15 | % | 7 | % | 7 | % | ||||||||||
Current quarter vs prior year quarter | 29 | % | 32 | % | 32 | % | 30 | % | 23 | % | ||||||||||
(FXN) Current quarter vs prior year quarter | 27 | % | 27 | % | 29 | % | 28 | % | 25 | % | ||||||||||
Transaction Expense Rate(1),(6) | 0.98 | % | 0.96 | % | 0.96 | % | 0.96 | % | 0.99 | % | ||||||||||
Transaction and Loan Loss Rate(1),(7) | 0.24 | % | 0.23 | % | 0.03 | % | 0.32 | % | 0.29 | % | ||||||||||
Transaction Margin(8) | 56.0 | % | 57.1 | % | 65.1 | % | 54.8 | % | 56.3 | % |
Amounts in the table are rounded to the nearest million, except as otherwise noted. As a result, certain amounts may not recalculate using the rounded amounts provided. |
(1) Prior period results have been revised to reflect
updated definitions of the metrics presented in this table. For
additional details, please see |
(2) An active account is an account registered directly
with |
(3) Payment transactions are the total number of payments, net of payment reversals, successfully completed through our Payments Platform, not including gateway-exclusive transactions. |
(4) Number of payment transactions per active account reflects the total number of payment transactions within the previous 12 month period, divided by active accounts at the end of the period. |
(5) TPV is the value of payments, net of reversals,
successfully completed through our Payments Platform or enabled by
|
(6) Transaction expense rate is calculated by dividing transaction expense by TPV. |
(7) Transaction and loan loss rate is calculated by dividing transaction and loan loss by TPV. |
(8) Transaction margin is total revenue less transaction expense and transaction and loan loss, divided by total revenue. |
Non-GAAP Measures of Financial
Performance
To supplement the company's condensed consolidated financial statements presented in accordance with generally accepted accounting principles, or GAAP, the company uses non-GAAP measures of certain components of financial performance. These non-GAAP measures include non-GAAP net income, non-GAAP net income per diluted share, non-GAAP operating income, non-GAAP operating margin, non-GAAP effective tax rate, free cash flow and adjusted free cash flow.
These non-GAAP measures are not in accordance with, or an alternative to, measures prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with the company's results of operations as determined in accordance with GAAP. These measures should only be used to evaluate the company's results of operations in conjunction with the corresponding GAAP measures.
Reconciliation to the most directly comparable GAAP measure of all non-GAAP measures included in this press release can be found in the tables included in this press release.
These non-GAAP measures are provided to enhance investors' overall understanding of the company's current financial performance and its prospects for the future. Specifically, the company believes the non-GAAP measures provide useful information to both management and investors by excluding certain expenses, gains and losses, as the case may be, that may not be indicative of its core operating results and business outlook. In addition, because the company has historically reported certain non-GAAP results to investors, the company believes that the inclusion of non-GAAP measures provides consistency in the company's financial reporting.
For its internal budgeting process, and as discussed further below, the company's management uses financial measures that do not include stock-based compensation expense, employer payroll taxes on stock-based compensation, amortization or impairment of acquired intangible assets, impairment of goodwill, restructuring-related charges, other certain gains, losses, benefits or charges that are not indicative of the company's core operating results and the income taxes associated with the foregoing. In addition to the corresponding GAAP measures, the company's management also uses the foregoing non-GAAP measures in reviewing the financial results of the company.
The company excludes the following items from non-GAAP net income, non-GAAP net income per diluted share, non-GAAP operating income, non-GAAP operating margin and non-GAAP effective tax rate:
Stock-based compensation expense and related employer payroll taxes. This consists of expenses for equity awards under our equity incentive plans. We exclude stock-based compensation expense from our non-GAAP measures primarily because they are non-cash expenses. The related employer payroll taxes are dependent on our stock price and the timing and size of exercises and vesting of equity awards, over which management has limited to no control, and as such management does not believe it correlates to the operation of our business.
Amortization or impairment of acquired intangible assets, impairment of goodwill, and transaction expenses from the acquisition or disposal of a business. We incur amortization or impairment of acquired intangible assets and goodwill in connection with acquisitions and may incur significant gains or losses or transactional expenses from the acquisition or disposal of a business and therefore exclude these amounts from our non-GAAP measures. We exclude these items because management does not believe they are reflective of our ongoing operating results.
Restructuring. These consist of expenses for employee severance and other exit and disposal costs. The company excludes significant restructuring charges primarily because management does not believe they are reflective of ongoing operating results.
Certain other significant gains, losses, benefits, or charges that are not indicative of the company's core operating results. These are significant gains, losses, benefits, or charges during a period that are the result of isolated events or transactions which have not occurred frequently in the past and are not expected to occur regularly in the future. The company excludes these amounts from its non-GAAP results because management does not believe they are indicative of its current or ongoing operating results.
Tax effect of non-GAAP adjustments. This adjustment is made to present stock-based compensation and the other amounts described above on an after-tax basis consistent with the presentation of non-GAAP net income.
The company also uses free cash flow, a non-GAAP measure. Free cash flow represents operating cash flows less purchases of property and equipment. The company considers free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after the purchases of property, buildings, and equipment, which can then be used to, among other things, invest in the company's business, make strategic acquisitions, and repurchase stock. A limitation of the utility of free cash flow as a measure of financial performance is that it does not represent the total increase or decrease in the company's cash balance for the period.
In addition to the non-GAAP measures discussed above, the company also analyzes certain measures, including net revenues and operating expenses, on an FX-neutral basis to better measure the comparability of operating results between periods. The company believes that changes in foreign currency exchange rates are not indicative of the company's operations and evaluating growth in net revenues and operating expenses on an FX-neutral basis provides an additional meaningful and comparable assessment of these measures to both management and investors. FX-neutral results are calculated by translating the current period's local currency results with the prior period's exchange rate. FX-neutral growth rates are calculated by comparing the current period's FX-neutral results by the prior period's results, excluding the impact from hedging activities.
|
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Reconciliation of GAAP Operating Margin to Non-GAAP Operating Margin | ||||||||
Three Months Ended |
||||||||
2018 | 2017 | |||||||
(In millions, except percentages) | ||||||||
(unaudited) | ||||||||
GAAP operating income | $ | 572 | $ | 430 | ||||
Stock-based compensation expense and related employer payroll taxes | 223 | 192 | ||||||
Amortization of acquired intangible assets | 25 | 22 | ||||||
Other(1) | — | 15 | ||||||
Total non-GAAP operating income adjustments | 248 | 229 | ||||||
Non-GAAP operating income | $ | 820 | $ | 659 | ||||
Non-GAAP operating margin | 21 | % | 21 | % | ||||
(1) Impairment of investment in intellectual property fund. |
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Reconciliation of GAAP Net Income to Non-GAAP Net Income, | ||||||||
GAAP Diluted EPS to Non-GAAP Diluted EPS, | ||||||||
and GAAP Effective Tax Rate to Non-GAAP Effective Tax Rate | ||||||||
Three Months Ended |
||||||||
2018 | 2017 | |||||||
(In millions, except per share data and percentages) | ||||||||
(unaudited) | ||||||||
GAAP income before income taxes | $ | 609 | $ | 447 | ||||
GAAP income tax expense | 83 | 36 | ||||||
GAAP net income | 526 | 411 | ||||||
Non-GAAP adjustments to net income: | ||||||||
Non-GAAP operating income adjustments (see table above) | 248 | 229 | ||||||
Other(1) | 32 | — | ||||||
Tax effect of non-GAAP adjustments | (103 | ) | (86 | ) | ||||
Non-GAAP net income | $ | 703 | $ | 554 | ||||
Diluted net income per share: | ||||||||
GAAP | $ | 0.44 | $ | 0.34 | ||||
Non-GAAP | $ | 0.58 | $ | 0.46 | ||||
Shares used in GAAP diluted share calculation | 1,202 | 1,215 | ||||||
Shares used in non-GAAP diluted share calculation | 1,202 | 1,215 | ||||||
GAAP effective tax rate | 14 | % | 8 | % | ||||
Tax effect of non-GAAP adjustments to net income | 4 | % | 10 | % | ||||
Non-GAAP effective tax rate | 18 | % | 18 | % | ||||
(1) Tax expense related to the Tax Cuts and Jobs Act. |
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Reconciliation of Operating Cash Flow to Free Cash Flow and Adjusted Free Cash Flow | ||||||||
Three Months Ended |
||||||||
2018 | 2017 | |||||||
(In millions/unaudited) | ||||||||
Net cash provided by operating activities | $ | 28 | $ | 921 | ||||
Less: Purchases of property and equipment | (198 | ) | (174 | ) | ||||
Free cash flow | $ | (170 | ) | $ | 747 | |||
Impact of held for sale accounting presentation on cash flow from operating activities | 907 | — | ||||||
Adjusted free cash flow | $ | 737 | $ | 747 | ||||
View source version on businesswire.com: https://www.businesswire.com/news/home/20180725005842/en/
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