Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019.
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from             to             .
Commission file number 001-36859
   
 
PayPal Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
 
Delaware
47-2989869
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
2211 North First Street
San Jose, California
95131
(Address of Principal Executive Offices)
(Zip Code)
(408) 967-1000
(Registrant’s telephone number, including area code)
  
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  [x]    No  [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  [x]    No  [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý 
Accelerated filer
o
Non-accelerated filer
o  
Smaller reporting company
o
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  [ ]    No  [x]
As of April 19, 2019, there were 1,174,933,013 shares of the registrant’s common stock, $0.0001 par value, outstanding, which is the only class of common or voting stock of the registrant issued.
 

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PayPal Holdings, Inc.
TABLE OF CONTENTS

 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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Table of Contents

PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

PayPal Holdings, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
March 31,
2019
 
December 31,
2018
 
(In millions, except par value)
 
(Unaudited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,515

 
$
7,575

Short-term investments
3,334

 
1,534

Accounts receivable, net
409

 
313

Loans and interest receivable, net of allowances of $195 and $172 as of March 31, 2019 and December 31, 2018, respectively
2,856

 
2,532

Funds receivable and customer accounts
22,738

 
20,062

Prepaid expenses and other current assets
1,039

 
947

Total current assets
34,891

 
32,963

Long-term investments
1,695

 
971

Property and equipment, net
1,731

 
1,724

Goodwill
6,234

 
6,284

Intangible assets, net
750

 
825

Other assets
979

 
565

Total assets
$
46,280

 
$
43,332

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
226

 
$
281

Notes payable
1,999

 
1,998

Funds payable and amounts due to customers
24,238

 
21,562

Accrued expenses and other current liabilities
2,097

 
2,002

Income taxes payable
75

 
61

Total current liabilities
28,635

 
25,904

Deferred tax liability and other long-term liabilities
2,488

 
2,042

Total liabilities
31,123

 
27,946

Commitments and Contingencies (Note 13)

 


Equity:
 
 
 
Common stock, $0.0001 par value; 4,000 shares authorized; 1,172 and 1,174 shares outstanding as of March 31, 2019 and December 31, 2018, respectively

 

Preferred stock, $0.0001 par value; 100 shares authorized, unissued

 

Treasury stock at cost, 99 and 91 shares as of March 31, 2019 and December 31, 2018, respectively
(6,216
)
 
(5,511
)
Additional paid-in-capital
14,848

 
14,939

Retained earnings
6,550

 
5,880

Accumulated other comprehensive income (loss)
(25
)
 
78

Total equity
15,157

 
15,386

Total liabilities and equity
$
46,280

 
$
43,332

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

PayPal Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
Three Months Ended March 31,
 
2019
 
2018
 
(In millions, except per share data)
 
(Unaudited)
Net revenues
$
4,128

 
$
3,685

Operating expenses:
 
 
 
Transaction expense
1,549

 
1,275

Transaction and loan losses
341

 
305

Customer support and operations
388

 
342

Sales and marketing
329

 
281

Technology and development
511

 
448

General and administrative
419

 
347

Restructuring and other charges
73

 
153

Total operating expenses
3,610

 
3,151

Operating income
518

 
534

Other income (expense), net
199

 
14

Income before income taxes
717

 
548

Income tax expense
50

 
37

Net income
$
667

 
$
511

 
 
 
 
Net income per share:
 
 
 
Basic
$
0.57

 
$
0.43

Diluted
$
0.56

 
$
0.42

 
 
 
 
Weighted average shares:
 
 
 
Basic
1,171

 
1,192

Diluted
1,188

 
1,217

The accompanying notes are an integral part of these condensed consolidated financial statements.


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Table of Contents

PayPal Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended March 31,
 
2019
 
2018
 
(In millions)
 
(Unaudited)
Net income
$
667

 
$
511

Other comprehensive income (loss), net of reclassification adjustments:
 
 
 
Foreign currency translation
(67
)
 
2

Unrealized gains (losses) on investments, net
11

 
(15
)
Tax (expense) benefit on unrealized gains (losses) on investments, net
(2
)
 
4

Unrealized losses on hedging activities, net
(46
)
 
(18
)
Tax benefit on unrealized losses on hedging activities, net
1

 

Other comprehensive income (loss), net of tax
(103
)
 
(27
)
Comprehensive income
$
564

 
$
484

The accompanying notes are an integral part of these condensed consolidated financial statements.


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Table of Contents

PayPal Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
Common Stock Shares
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Other
Comprehensive Income (Loss)
 
Retained Earnings
 
Total 
Equity
 
 
(In millions)
 
(Unaudited)
Balances at December 31, 2018
1,174

 
$
(5,511
)
 
$
14,939

 
$
78

 
$
5,880

 
$
15,386

Adoption of leases standard

 

 

 

 
3

 
3

Net income

 

 

 

 
667

 
667

Foreign currency translation

 

 

 
(67
)
 

 
(67
)
Unrealized gains on investments, net

 

 

 
11

 

 
11

Tax expense on unrealized gains on investments, net

 

 

 
(2
)
 

 
(2
)
Unrealized losses on hedging activities, net

 

 

 
(46
)
 

 
(46
)
Tax benefit on unrealized losses on hedging activities, net

 

 

 
1

 

 
1

Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes
6

 

 
(302
)
 

 

 
(302
)
Common stock repurchased
(8
)
 
(705
)
 
(45
)
 

 

 
(750
)
Stock-based compensation

 

 
256

 

 

 
256

Balances at March 31, 2019
1,172

 
$
(6,216
)
 
$
14,848

 
$
(25
)
 
$
6,550

 
$
15,157


 
Common Stock Shares
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Other
Comprehensive Income (Loss)
 
Retained Earnings
 
Total 
Equity
 
 
(In millions)
 
(Unaudited)
Balances at December 31, 2017
1,200

 
$
(2,001
)
 
$
14,314

 
$
(142
)
 
$
3,823

 
$
15,994

Net income

 

 

 

 
511

 
511

Foreign currency translation

 

 

 
2

 

 
2

Unrealized losses on investments, net

 

 

 
(15
)
 

 
(15
)
Tax benefit on unrealized losses on investments, net

 

 

 
4

 

 
4

Unrealized losses on hedging activities, net

 

 

 
(18
)
 

 
(18
)
Tax benefit on unrealized losses on hedging activities, net

 

 

 

 

 

Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes
7

 

 
(226
)
 

 

 
(226
)
Common stock repurchased
(24
)
 
(1,810
)
 
(15
)
 

 

 
(1,825
)
Stock-based compensation

 

 
214

 

 

 
214

Balances at March 31, 2018
1,183

 
$
(3,811
)
 
$
14,287

 
$
(169
)
 
$
4,334

 
$
14,641



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Table of Contents

PayPal Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended March 31,
 
2019
 
2018
 
(In millions)
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
667

 
$
511

Adjustments:
 
 
 
Transaction and loan losses
341

 
305

Depreciation and amortization
230

 
185

Stock-based compensation
247

 
205

Deferred income taxes
74

 
91

Cost basis adjustments to loans and interest receivable held for sale

 
128

Unrealized gains on strategic investments
(180
)
 

Other
(44
)
 
(5
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(96
)
 
25

Changes in loans and interest receivable held for sale, net
4

 
(1,291
)
Accounts payable
(3
)
 
(35
)
Income taxes payable
14

 

Other assets and liabilities
(227
)
 
(468
)
Net cash provided by (used in) operating activities
1,027

 
(349
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(218
)
 
(178
)
Changes in principal loans receivable, net
(357
)
 
738

Purchases of investments
(8,138
)
 
(5,275
)
Maturities and sales of investments
6,028

 
4,291

Funds receivable
(2,175
)
 
429

Net cash (used in) provided by investing activities
(4,860
)
 
5

Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock
7

 
13

Purchases of treasury stock
(756
)
 
(1,825
)
Tax withholdings related to net share settlements of equity awards
(309
)
 
(335
)
Borrowings under financing arrangements

 
2,075

Funds payable and amounts due to customers
2,560

 
865

Net cash provided by financing activities
1,502

 
793

Effect of exchange rate changes on cash, cash equivalents and restricted cash
1

 
(7
)
Net change in cash, cash equivalents and restricted cash
(2,330
)
 
442

Cash, cash equivalents and restricted cash at beginning of period
13,233

 
8,285

Cash, cash equivalents and restricted cash at end of period
$
10,903

 
$
8,727

 
 
 
 
Supplemental cash flow disclosures:
 
 
 
Cash paid for interest
$
20

 
$
8

Cash paid (refund received) for income taxes, net
$
22

 
$
(6
)
 
 
 
 
The below table reconciles cash, cash equivalents and restricted cash as reported in the condensed consolidated balance sheet to the total of the same amounts shown in the condensed consolidated statement of cash flows:
 
 
 
Cash and cash equivalents
$
4,515

 
$
2,879

Short term investments
15

 
16

Funds receivable and customer accounts
6,373

 
5,832

Total cash, cash equivalents and restricted cash shown in the condensed consolidated statement of cash flows
$
10,903

 
$
8,727

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents
PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1—Overview and Summary of Significant Accounting Policies

Overview and Organization

PayPal Holdings, Inc. (“PayPal,” the “Company,” “we,” “us,” or “our”) was incorporated in Delaware in January 2015 and is a leading technology platform and digital payments company that enables digital and mobile payments on behalf of consumers and merchants worldwide. PayPal is committed to democratizing financial services and empowering people and businesses to join and thrive in the global economy. Our goal is to enable our consumers and merchants to manage and move their money anywhere in the world, anytime, on any platform, and using any device. We also facilitate person-to-person payments through our PayPal, Venmo, and Xoom products. Our combined payment solutions, including our PayPal, PayPal Credit, Braintree, Venmo, Xoom, and iZettle products, comprise our proprietary Payments Platform.

We operate globally and in a rapidly evolving regulatory environment characterized by a heightened regulatory focus on all aspects of the payments industry. That focus continues to become even more heightened as regulators on a global basis focus on important issues such as countering terrorist financing, anti-money laundering, privacy, cybersecurity, and consumer protection. Some of the laws and regulations to which we are subject were enacted recently, and the laws and regulations applicable to us, including those enacted prior to the advent of digital and mobile payments, are continuing to evolve through legislative and regulatory action and judicial interpretation. New or changing laws and regulations, including the way laws and regulations are interpreted and implemented, as well as increased penalties and enforcement actions related to non-compliance could have a material adverse impact on our business, results of operations, and financial condition. Therefore, we monitor these areas closely to design compliant solutions for our customers who depend on us.

Significant Accounting Policies

Basis of Presentation and Principles of Consolidation
The condensed consolidated financial statements include the financial statements of PayPal and our wholly- and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Investments in entities where we have the ability to exercise significant influence, but not control, over the investee are accounted for using the equity method of accounting. For such investments, our share of the investee’s results of operations is included in other income (expense), net on our condensed consolidated statements of income and our investment balance is included in long-term investments on our condensed consolidated balance sheets. Investments in entities where we do not have the ability to exercise significant influence over the investee are accounted for at fair value or cost minus impairment, if any, adjusted for changes resulting from observable price changes, which are included in other income (expense), net on our condensed consolidated statements of income. Our investment balance is included in long-term investments on our condensed consolidated balance sheets.
These condensed consolidated financial statements and accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”) filed with the Securities and Exchange Commission.
In the opinion of management, these condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for fair statement of the condensed consolidated financial statements for interim periods. Certain amounts for prior years have been reclassified to conform to the financial statement presentation as of and for the three months ended March 31, 2019.

Reclassifications

Beginning with the first quarter of 2019, we reclassified certain operating expenses within the condensed consolidated statements of income. Prior period amounts have been reclassified to conform to this presentation. These changes have no impact on our previously reported consolidated net income for prior periods, including total operating expenses, financial position, or cash flows for any periods presented.


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Table of Contents
PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The classification changes relate primarily to the combination of costs incurred to develop and operate our Payments Platform into a new caption entitled technology and development. This new caption includes: (a) costs incurred in operating, maintaining, and enhancing our Payments Platform, including network and infrastructure costs, which were previously classified in the customer support and operations caption, and (b) costs incurred in developing new and improving existing products, which were previously classified in the product development caption on our consolidated statements of income. In addition, we have eliminated the presentation of depreciation and amortization expense as a separate financial statement caption by reclassifying these expenses into financial statement captions aligned with the internal organizations that are the primary beneficiaries of the depreciation and amortization of such assets.

The following table presents the effects of the changes on the presentation of these operating expenses to the previously reported condensed consolidated statements of income:

 
Three Months Ended March 31, 2018
 
(In millions)
 
As Reported
 
Adjustments
 
Revised
 
 
 
 
 
 
Transaction expense
$
1,275

 
$

 
$
1,275

Transaction and loan losses
305

 

 
305

Customer support and operations
351

 
(9
)
 
342

Sales and marketing
285

 
(4
)
 
281

Product development
258

 
(258
)
 

Technology and development

 
448

 
448

General and administrative
339

 
8

 
347

Depreciation and amortization
185

 
(185
)
 

Restructuring and other charges
153

 

 
153

Total operating expenses
$
3,151

 
$

 
$
3,151


Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses, during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to provisions for transaction and loan losses, loss contingencies, income taxes, revenue recognition, and the valuation of goodwill and intangible assets. We base our estimates on historical experience and various other assumptions which we believe to be reasonable under the circumstances. Actual results could differ from those estimates.

Leases

We determine whether an arrangement is a lease for accounting purposes at contract inception. Operating leases are recorded as right-of-use (“ROU”) assets, which are included in other assets, and lease liabilities, which are included in accrued expenses and other liabilities and other long-term liabilities on our condensed consolidated balance sheets. As of March 31, 2019, we had no finance leases. 

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Our leases do not provide an implicit rate; we use an incremental borrowing rate for specific terms on a collateralized basis based on the information available on the commencement date in determining the present value of lease payments. The ROU asset calculation includes lease payments to be made and excludes lease incentives. The ROU asset and lease liability may include amounts attributed to options to extend or terminate the lease when it is reasonably certain we will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

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Table of Contents
PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

We have lease agreements with lease and non-lease components. We have elected to apply the practical expedient and account for the lease and non-lease components as a single lease component for all leases. In addition, we have elected the practical expedients related to lease classification, hindsight, and land easement. We apply a single portfolio approach to effectively account for the ROU assets and lease liabilities.

Recent Accounting Guidance

In 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance on the measurement of credit losses on financial instruments. Credit losses on loans, trade and other receivables, held-to-maturity debt securities, and other instruments will reflect our current estimate of the expected credit losses and generally will result in the earlier recognition of allowances for losses. Credit losses on available-for-sale debt securities with unrealized losses will be recognized as allowances for credit losses limited to the amount by which fair value is below amortized cost. Additional disclosures will be required, including information used to track credit quality by year of origination for most financing receivables. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We will adopt the new guidance effective January 1, 2020. We are required to apply the provisions of this guidance as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted with impairment of available-for-sale debt securities applied prospectively after adoption. We are evaluating the impact of and approach to adopting this new accounting guidance on our condensed consolidated financial statements.

Recently Adopted Accounting Guidance

In 2016, the FASB issued new accounting guidance related to accounting for leases, which requires lessees to recognize lease assets and lease liabilities on the balance sheet for the rights and obligations created by all leases with terms greater than 12 months. As we are not a lessor, other changes in the guidance applicable to lessors do not apply. Additionally, in 2018, the FASB issued codification and targeted improvements to this guidance effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. We adopted the new guidance on January 1, 2019, using a modified retrospective basis and applied the optional practical expedients related to the transition. We recorded $511 million for the ROU assets and $521 million for the lease liabilities associated with our operating leases upon adoption. The adoption of this guidance did not have a significant impact to our consolidated statements of earnings, stockholders’ equity, and cash flows. For additional information, see Note 6—“Leases.”

There are other new accounting pronouncements issued by the FASB that we have adopted or will adopt, as applicable, and we do not believe any of these accounting pronouncements has had, or will have, a material impact on our condensed consolidated financial statements or disclosures.

Note 2—Revenue

PayPal enables its customers to send and receive payments. We earn revenue primarily by completing payment transactions for our customers on our Payments Platform and from other value added services. Our revenues are classified into two categories, transaction revenues and revenues from other value added services.
Disaggregation of Revenue

We determine operating segments based on how our chief operating decision maker (“CODM”) manages the business, makes operating decisions around the allocation of resources and evaluates operating performance. Our CODM is our Chief Executive Officer, who reviews our operating results on a consolidated basis. We operate in one segment and have one reportable segment. Based on the information provided to and reviewed by our CODM, we believe that the nature, amount, timing, and uncertainty of our revenue and cash flows and how they are affected by economic factors is most appropriately depicted through our primary geographical markets and type of revenue (transaction and other value added services) categories. Revenues recorded within these categories are earned from similar services for which the nature of associated fees and the related revenue recognition models are substantially the same.


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Table of Contents
PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table presents our revenues disaggregated by primary geographical markets and revenues by major products and services:
 
Three Months Ended March 31,
 
2019
  
2018
 
(In millions)
Primary geographical markets
 
 
 
United States (“U.S.”)
$
2,187

 
$
2,023

United Kingdom (“U.K.”)
433

 
392

Other countries(1)
1,508

 
1,270

Total revenues(2)
$
4,128

 
$
3,685

 
 
 
 
Types of revenues
 
 
 
Transaction revenues
$
3,731

 
$
3,197

Other value added services
397

 
488

Total revenues(2)
$
4,128

 
$
3,685

(1) No single country included in the other countries category generated more than 10% of total revenue.
(2) Total revenues include $346 million and $359 million for the three months ended March 31, 2019 and 2018, respectively, which do not represent revenues recognized in the scope of ASC Topic 606, Revenue from contracts with customers. These relate to interest, fees, and gains earned on loan and interest receivables, net and held for sale portfolio, as well as hedging gains or losses and interest earned on certain PayPal customer balances.

Net revenues are attributed to the country in which the merchant is located, or in the case of a cross-border transaction, may be earned from the country in which the consumer and the merchant respectively reside. Net revenues earned from other value added services are typically attributed to the country in which either the customer or partner reside.

Note 3—Net Income Per Share

Basic net income per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding for the period. The dilutive effect of outstanding equity incentive awards is reflected in diluted net income per share by application of the treasury stock method. The calculation of diluted net income per share excludes all anti-dilutive common shares.

The following table sets forth the computation of basic and diluted net income per share for the periods indicated:
 
Three Months Ended March 31,
 
2019
  
2018
 
(In millions, except per share amounts)
Numerator:
 
 
 
Net income
$
667

 
$
511

Denominator:
 
 
 
Weighted average shares of common stock - basic
1,171

 
1,192

Dilutive effect of equity incentive awards
17

 
25

Weighted average shares of common stock - diluted
1,188

 
1,217

Net income per share:
 
 
 
Basic
$
0.57

 
$
0.43

Diluted
$
0.56

 
$
0.42

Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive
3

 



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Table of Contents
PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 4—Business Combinations

There were no acquisitions or divestitures completed in either the three months ended March 31, 2019 or 2018.

Significant Acquisitions Completed in 2018

Hyperwallet

We completed the acquisition of HWLT Holdings Inc. (“Hyperwallet”) in November 2018 by acquiring all outstanding shares for a total purchase price of approximately $400 million, consisting of cash consideration. We acquired Hyperwallet to enhance our payout capabilities and improve our ability to provide an integrated suite of payment solutions to ecommerce platforms and marketplaces around the world. The allocation of purchase consideration resulted in approximately $100 million of customer-related intangible assets, approximately $30 million of developed technology intangible assets, and approximately $2 million of marketing related intangible assets with estimated useful lives ranging from 3 to 7 years, funds receivable and customer accounts of $412 million, funds payable and amounts due to customers of $412 million, net liabilities of approximately $32 million, and initial goodwill of approximately $300 million, which is attributable to the workforce of Hyperwallet and the synergies expected to arise from the acquisition. We do not expect goodwill to be deductible for income tax purposes. The allocation of the purchase price for this acquisition has been prepared on a preliminary basis and changes to the allocation to certain assets, liabilities, and tax estimates may occur as additional information becomes available.

iZettle

We completed the acquisition of iZettle AB (publ) (“iZettle”) in September 2018 by acquiring all outstanding shares for a total purchase price of $2.2 billion, consisting of cash consideration paid of approximately $2.1 billion (net of cash acquired of $103 million) and restricted shares of PayPal with a fair value of approximately $22 million. We acquired iZettle to expand our in-store presence and strengthen our Payments Platform to help small businesses around the world grow and thrive in an omnichannel retail environment.

The following table summarizes the preliminary allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed:
 
(In millions)
Goodwill
$
1,602

Customer lists and user base
426

Marketing related
102

Developed technology
121

All other
1

Total intangibles
$
650

Cash
103

Funds receivable and customer accounts
47

Funds payable and amounts due to customers
(47
)
Deferred tax liabilities, net
(118
)
Other net liabilities
(55
)
Total purchase consideration
$
2,182

The intangible assets acquired consists primarily of merchant relationships, trade name/trademarks, developed technology, and existing acquirer relationships with estimated useful lives ranging from 3 to 7 years. The excess of the purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill, which is attributable to the workforce of iZettle and the synergies expected to arise from the acquisition. We do not expect goodwill to be deductible for income tax purposes. The allocation of the purchase price for this acquisition has been prepared on a preliminary basis and changes to the allocation to certain assets, liabilities, and tax estimates may occur as additional information becomes available.


12

Table of Contents
PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Simility

We completed the acquisition of Simility, Inc. (“Simility”) in July 2018 by acquiring all outstanding shares for a total purchase price of $107 million, consisting of cash consideration. We acquired Simility to enhance our ability to deliver fraud prevention and risk management solutions to merchants globally. The allocation of purchase consideration resulted in approximately $18 million of developed technology intangible assets with an estimated useful life of 3 years, net assets of approximately $10 million, and initial goodwill of approximately $79 million, which is attributable to the workforce of Simility and the synergies expected to arise from the acquisition. We do not expect goodwill to be deductible for income tax purposes. The allocation of the purchase price for this acquisition has been prepared on a preliminary basis and changes to the allocation to certain assets, liabilities, and tax estimates may occur as additional information becomes available.

Note 5—Goodwill and Intangible Assets

Goodwill

The following table presents goodwill balances and adjustments to those balances during the three months ended March 31, 2019:
 
December 31,
2018
 
Goodwill
Acquired
 
Adjustments
 
March 31,
2019
 
 (In millions)
Total goodwill
$
6,284

 
$

 
$
(50
)
 
$
6,234


The adjustments to goodwill during the three months ended March 31, 2019 are related to foreign currency translation adjustments.

Intangible Assets

The components of identifiable intangible assets are as follows:
 
March 31, 2019
 
December 31, 2018
 
Gross Carrying Amount  
 
Accumulated Amortization 
 
Net Carrying Amount
 
Weighted Average Useful Life (Years)
 
Gross Carrying Amount 
 
Accumulated Amortization 
 
Net Carrying Amount
 
Weighted Average Useful Life (Years)
 
(In millions, except years)
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer lists and user base
$
1,121

 
$
(644
)
 
$
477

 
7
 
$
1,134

 
$
(623
)
 
$
511

 
7
Marketing related
298

 
(215
)
 
83

 
3
 
301

 
(207
)
 
94

 
3
Developed technology
449

 
(290
)
 
159

 
3
 
453

 
(269
)
 
184

 
3
All other
245

 
(214
)
 
31

 
5
 
245

 
(209
)
 
36

 
5
Intangible assets, net
$
2,113

 
$
(1,363
)
 
$
750

 
 
 
$
2,133

 
$
(1,308
)
 
$
825

 
 
        
Amortization expense for intangible assets was $57 million and $30 million for the three months ended March 31, 2019 and 2018, respectively.


13

Table of Contents
PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Expected future intangible asset amortization as of March 31, 2019 was as follows (in millions):
Fiscal years:
 
Remaining 2019
$
152

2020
190

2021
137

2022
72

2023
72

Thereafter
127

 
$
750


Note 6—Leases

PayPal enters into various leases, which are primarily real estate operating leases. We use these properties for executive and administrative offices, data centers, product development offices, and customer service and operations centers. Our leases have remaining lease terms of 1 year to 10 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year. When we reach a decision to exercise a lease renewal or termination option, we will recognize the associated impact to the ROU asset and lease liability.

While a majority of lease payments are based on the stated rate in the lease, some lease payments are subject to annual changes based on the Consumer Price Index (“CPI”) or another referenced index. While lease liabilities are not re-measured as a result of changes to the CPI, changes to the CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments is incurred. All of PayPal’s variable lease payments are based on an index or rate.

The short-term lease exemption has been adopted for all leases with a duration of less than 12 months.

PayPal’s lease portfolio contains a small number of subleases. A sublease situation can arise when currently leased real estate space is available and is surplus to operational requirements.

The components of lease expense were as follows:
 
March 31, 2019
 
(in millions, except weighted-average figures)
Lease expense
 
Operating lease expense
$
34

Sublease income
(2
)
Total lease expense cost
$
32

 
 
Other information:
 
Cash paid for amounts included in the measurement of lease liabilities
 
Operating cash flows from operating leases
$
31

Right-of-use assets obtained in exchange for new operating lease liabilities as of January 1, 2019
$
511

Weighted-average remaining lease term - operating leases
6.3 years

Weighted-average discount rate - operating leases
4
%


14

Table of Contents
PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Future minimum lease payments for our operating leases as of March 31, 2019 were as follows:
 
Operating Leases
Fiscal years:
(In millions)
Remaining 2019
$
92

2020
110

2021
88

2022
69

2023
52

Thereafter
169

Total
$
580

Less: present value discount
(82
)
Lease liability
$
498

Future minimum lease payments for our operating leases as of December 31, 2018, prior to the adoption of new lease guidance as described in Note 1—“Overview and Summary of Significant Accounting Policies,” were as follows:
 
Operating Leases
Fiscal years:
(In millions)
2019
$
124

2020
111

2021
96

2022
81

2023
63

Thereafter
189

Total minimum lease payments
$
664


Operating lease amounts include minimum lease payments under our non-cancelable operating leases primarily for office and data center facilities. The amounts presented are consistent with contractual terms and are not expected to differ significantly from actual results under our existing leases.

As of March 31, 2019, we have additional operating leases with minimum lease payments aggregating to $52.8 million, primarily for real estate and data centers, that have not yet commenced. These operating leases will commence between fiscal year 2019 and fiscal year 2020 with lease terms of 3 years to 7 years.

Note 7—Other Financial Statement Details
Accumulated Other Comprehensive Income (Loss)

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended March 31, 2019:
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized Gains (Losses) on Investments
 
Foreign
Currency
Translation
 
Estimated Tax Benefit (Expense)
 
Total
 
(In millions)
Beginning balance
$
182

 
$
(13
)
 
$
(93
)
 
$
2

 
$
78

Other comprehensive income (loss) before reclassifications
6

 
11

 
(67
)
 
(1
)
 
(51
)
Less: Amount of gain (loss) reclassified from accumulated other comprehensive income
52

 

 

 

 
52

Net current period other comprehensive income (loss)
(46
)
 
11

 
(67
)
 
(1
)
 
(103
)
Ending balance
$
136

 
$
(2
)
 
$
(160
)
 
$
1

 
$
(25
)


15

Table of Contents
PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended March 31, 2018:
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized Gains (Losses) on Investments
 
Foreign
Currency
Translation
 
Estimated Tax Benefit
 
Total
 
(In millions)
Beginning balance
$
(111
)
 
$
(12
)
 
$
(25
)
 
$
6

 
$
(142
)
Other comprehensive income (loss) before reclassifications
(62
)
 
(16
)
 
2

 
4

 
(72
)
Less: Amount of gain (loss) reclassified from accumulated other comprehensive income
(44
)
 
(1
)
 

 

 
(45
)
Net current period other comprehensive income (loss)
(18
)
 
(15
)
 
2

 
4

 
(27
)
Ending balance
$
(129
)
 
$
(27
)
 
$
(23
)
 
$
10

 
$
(169
)

The following table provides details of reclassifications from accumulated other comprehensive income (loss) for the three months ended March 31, 2019 and 2018:
Details of Accumulated Other Comprehensive
Income (Loss) Components
 
Amount of Gains (Losses) Reclassified from Accumulated Other Comprehensive Income (Loss)
 
Affected Line Item in the Statement of Income
 
 
Three Months Ended March 31,
 
 
 
 
2019
 
2018
 
 
 
 
(In millions)
 
 
Gains (losses) on cash flow hedgesforeign exchange contracts
 
$
52

 
$
(44
)
 
Net revenues
Unrealized (losses) on investments
 

 
(1
)
 
Other income (expense), net
 
 
$
52

 
$
(45
)
 
Income before income taxes
 
 

 

 
Income tax expense
Total reclassifications for the period
 
$
52

 
$
(45
)
 
Net income


Other Income (Expense), Net

The following table reconciles the components of other income (expense), net for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
 
2019
  
2018
 
(In millions, except per share amounts)
Interest income
$
49

 
$
28

Interest expense
(22
)
 
(16
)
Gains (losses) on strategic investments
180

 

Other
(8
)
 
2

Other income (expense), net
$
199

 
$
14




16

Table of Contents
PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 8—Funds Receivable and Customer Accounts and Investments

The following table summarizes the assets underlying our funds receivable and customer accounts, short-term investments, and long-term investments as of March 31, 2019 and December 31, 2018:
 
March 31,
2019
 
December 31,
2018
 
(In millions)
Funds receivable and customer accounts:
 
 
 
Cash and cash equivalents
$
6,373

 
$
5,642

Time deposits
370

 
389

Available-for-sale debt securities
10,699

 
10,940

Funds receivable
5,296

 
3,091

Total funds receivable and customer accounts
$
22,738

 
$
20,062

Short-term investments:
 
 
 
Time deposits
$
743

 
$
774

Available-for-sale debt securities
2,518

 
685

Restricted cash
73

 
75

Total short-term investments
$
3,334

 
$
1,534

Long-term investments:
 
 
 
Available-for-sale debt securities
$
451

 
$
676

Restricted cash
2

 
2

Strategic investments
1,242

 
293

Total long-term investments
$
1,695

 
$
971



17

Table of Contents
PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

As of March 31, 2019 and December 31, 2018, the estimated fair value of our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments was as follows:
 
March 31, 2019
 
Gross
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In millions)
Funds receivable and customer accounts:
 
 
 
 
 
 
 
U.S. government and agency securities
$
7,123

 
$
5

 
$

 
$
7,128

Foreign government and agency securities
788

 

 

 
788

Corporate debt securities
627

 

 

 
627

Short-term investments:
 
 
 
 
 
 


U.S. government and agency securities
298

 

 

 
298

Foreign government and agency securities
26

 

 

 
26

Corporate debt securities
1,913

 

 
(3
)
 
1,910

Long-term investments:
 
 
 
 
 
 


Foreign government and agency securities
12

 

 

 
12

Corporate debt securities
433

 

 
(4
)
 
429

Total available-for-sale debt securities(1)
$
11,220

 
$
5

 
$
(7
)
 
$
11,218

(1) Excludes foreign-currency denominated available-for-sale investments accounted for under the fair value option. Refer to Note 9“Fair Value Measurement of Assets and Liabilities”

 
December 31, 2018
 
Gross
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In millions)
Funds receivable and customer accounts:
 
 
 
 
 
 
 
U.S. government and agency securities
$
6,945

 
$
2

 
$

 
$
6,947

Foreign government and agency securities
772

 

 
(1
)
 
771

Corporate debt securities
883

 

 

 
883

Short-term investments:
 
 
 
 
 
 


Corporate debt securities
393

 

 
(3
)
 
390

Long-term investments:
 
 
 
 
 
 


Foreign government and agency securities
38

 

 

 
38

Corporate debt securities
639

 

 
(11
)
 
628

Total available-for-sale debt securities(1)
$
9,670

 
$
2

 
$
(15
)
 
$
9,657

(1) Excludes foreign-currency denominated available-for-sale investments accounted for under the fair value option. Refer to Note 9“Fair Value Measurement of Assets and Liabilities”


18

Table of Contents
PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

As of March 31, 2019 and December 31, 2018, the gross unrealized losses and estimated fair value of our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments by length of time those individual securities have been in a continuous loss position was as follows:
 
March 31, 2019
 
Less than 12 months
 
12 months or longer
 
Total
 
Fair Value
  
Gross
Unrealized
Losses
  
Fair Value
  
Gross
Unrealized
Losses
 
Fair Value
  
Gross
Unrealized
Losses
 
(In millions)
Funds receivable and customer accounts:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
124

 
$

 
$

 
$

 
$
124

 
$

Foreign government and agency securities
74

 

 
49

 

 
123

 

Corporate debt securities
25

 

 
7

 

 
32

 

Short-term investments:
 
 
 
 
 
 


 

 

Foreign government and agency securities

 

 
26

 

 
26

 

Corporate debt securities
39

 

 
518

 
(3
)
 
557

 
(3
)
Long-term investments:
 
 
 
 
 
 


 
 
 
 
Foreign government and agency securities

 

 
12

 

 
12

 

Corporate debt securities
18

 

 
395

 
(4
)
 
413

 
(4
)
Total available-for-sale debt securities
$
280

 
$

 
$
1,007

 
$
(7
)
 
$
1,287

 
$
(7
)
— Denotes gross unrealized loss or fair value of less than $1 million in a given position.

 
December 31, 2018
 
Less than 12 months
 
12 months or longer
 
Total
 
Fair Value
  
Gross
Unrealized
Losses
  
Fair Value
  
Gross
Unrealized
Losses
 
Fair Value
  
Gross
Unrealized
Losses
 
(In millions)
Funds receivable and customer accounts:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
2,419

 
$

 
$
18

 
$

 
$
2,437

 
$

Foreign government and agency securities
295

 

 
49

 
(1
)
 
344

 
(1
)
Corporate debt securities
281

 

 
7

 

 
288

 

Short-term investments:
 
 
 
 
 
 


 
 
 
 
Corporate debt securities
57

 

 
333

 
(3
)
 
390

 
(3
)
Long-term investments:
 
 
 
 
 
 


 
 
 
 
Foreign government and agency securities
10

 

 
28

 

 
38

 

Corporate debt securities
94

 
(2
)
 
534

 
(9
)
 
628

 
(11
)
Total available-for-sale debt securities
$
3,156

 
$
(2
)
 
$
969

 
$
(13
)
 
$
4,125

 
$
(15
)
— Denotes gross unrealized loss or fair value of less than $1 million in a given position.

We believe the decline in value is due to temporary market conditions and expect to recover the entire amortized cost basis of the available-for-sale debt securities. We neither intend nor anticipate the need to sell the securities before recovery. We will continue to monitor the performance of the investment portfolio and assess market and interest rate risk when evaluating whether other-than-temporary impairment exists. Amounts reclassified to earnings from unrealized gains and losses were not material for the three months ended March 31, 2019 and 2018.

19

Table of Contents
PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments classified by date of contractual maturity were as follows:
 
March 31, 2019
 
Amortized Cost
Fair Value
 
(In millions)
(In millions)
One year or less
$
10,746

$
10,748

After one year through five years
468

464

After five years through ten years
6

6

Total
$
11,220

$
11,218


Strategic Investments

Our marketable equity securities have readily determinable fair values and are recorded as long-term investments on our condensed consolidated balance sheets at fair value with changes in fair value recorded in other income (expense), net. Marketable equity securities totaled $873 million as of March 31, 2019. We had no such securities as of December 31, 2018.

We also have non-marketable equity securities recorded in long-term investments on our condensed consolidated balance sheets. Our non-marketable equity securities do not have a readily determinable fair value, therefore we measure these equity investments at cost minus impairment, if any, and adjust for changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer (the “Measurement Alternative”). All gains and losses on these investments, realized and unrealized, are recognized in other income (expense), net on our condensed consolidated statements of income. The carrying value of our non-marketable equity securities totaled $369 million and $293 million as of March 31, 2019 and December 31, 2018, respectively.

Measurement Alternative Adjustments

The adjustments to the carrying value of our non-marketable equity securities accounted for under the Measurement Alternative in the three months ended March 31, 2019 were as follows:
 
(In millions)
Carrying amount, beginning of period
$
293

Adjustments related to non-marketable equity securities:
 
Additions, net of sales
19

Gross unrealized gains
57

Gross unrealized losses and impairments

Carrying amount, end of period
$
369


Cumulative gross unrealized gains and cumulative gross unrealized losses and impairment related to non-marketable equity securities accounted for under the Measurement Alternative held at March 31, 2019 were approximately $148 million and $5 million, respectively.

Gains (losses) on marketable and non-marketable equity securities

Net unrealized gains recognized in the three months ended March 31, 2019 related to marketable and non-marketable equity securities held at March 31, 2019 were approximately $180 million.



20

Table of Contents
PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 9—Fair Value Measurement of Assets and Liabilities

Financial Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018:

 
March 31, 2019
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
 
Significant Other
Observable Inputs
(Level 2)
 
 
(In millions)
Assets:
 
 
 
 
 
 
Cash and cash equivalents(1)
 
$
2,167

 
$

 
$
2,167

Short-term investments(2):
 
 
 
 
 
 
U.S. government and agency securities
 
299

 

 
299

Foreign government and agency securities
 
287

 

 
287

Corporate debt securities
 
1,932

 

 
1,932

Total short-term investments
 
$
2,518

 
$

 
$
2,518

Funds receivable and customer accounts(3):
 


 
 
 


Cash and cash equivalents
 
1,051

 

 
1,051

U.S. government and agency securities
 
7,128

 

 
7,128

Foreign government and agency securities
 
2,316

 

 
2,316

        Corporate debt securities
 
1,255

 

 
1,255

Total funds receivable and customer accounts
 
$
11,750

 
$

 
$
11,750

Derivatives
 
223

 

 
223

Long-term investments(2).(4):
 
 
 
 
 
 
Foreign government and agency securities
 
22

 

 
22

Corporate debt securities
 
429

 

 
429

Marketable equity securities
 
873

 
873

 

Total long-term investments
 
$
1,324

 
$
873

 
$
451

Total financial assets
 
$
17,982

 
$
873

 
$
17,109

Liabilities:
 
 
 
 
 
 
Derivatives
 
$
68

 
$

 
$
68

(1) Excludes cash of $2.3 billion not measured and recorded at fair value.
(2) Excludes restricted cash of $75 million and time deposits of $743 million not measured and recorded at fair value.
(3) Excludes cash, time deposits, and funds receivable of $11.0 billion underlying funds receivable and customer accounts not measured and recorded at fair value.
(4) Excludes non-marketable equity securities of $369 million measured using the Measurement Alternative.


21

Table of Contents
PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
December 31, 2018
 
Significant Other
Observable Inputs
(Level 2)
 
 
(In millions)
Assets:
 
 
 
 
Cash and cash equivalents(1)
 
$
3,678

 
$
3,678

Short-term investments(2):
 
 
 
 
Foreign government and agency securities
 
235

 
235

Corporate debt securities
 
450

 
450

Total short-term investments
 
685

 
685

Funds receivable and customer accounts(3):
 


 
 
Cash and cash equivalents
 
605

 
605

U.S. government and agency securities
 
6,946

 
6,946

Foreign government and agency securities
 
2,434

 
2,434

Corporate debt securities
 
1,560

 
1,560

Total funds receivable and customer accounts
 
11,545

 
11,545

Derivatives
 
320

 
320

Long-term investments(2),(4):
 
 
 
 
Foreign government and agency securities
 
48

 
48

Corporate debt securities
 
628

 
628

Total long-term investments
 
676

 
676

Total financial assets
 
$
16,904

 
$
16,904

Liabilities:
 
 
 
 
Derivatives
 
$
67

 
$
67

(1) Excludes cash of $3.9 billion not measured and recorded at fair value.
(2) Excludes restricted cash of $77 million and time deposits of $774 million not measured and recorded at fair value.
(3) Excludes cash, time deposits, and funds receivable of $8.5 billion underlying funds receivable and customer accounts not measured and recorded at fair value.
(4) Excludes non-marketable equity investments of $293 million measured using the Measurement Alternative.

Our marketable equity securities are valued using quoted prices for identical assets in active markets (Level 1). All other financial assets and liabilities are valued using market prices on less active markets (Level 2). Level 2 instrument valuations are obtained from readily available pricing sources for comparable instruments, identical instruments in less active markets, or models using market observable inputs.

A majority of our derivative instruments are valued using pricing models that take into account the contract terms as well as multiple inputs where applicable, such as currency rates, interest rate yield curves, option volatility, and equity prices. Our derivative instruments are primarily short-term in nature, generally one month to one year in duration. Certain foreign currency contracts designated as cash flow hedges may have a duration of up to 18 months.

We did not have any transfers of financial instruments between valuation levels during the three months ended March 31, 2019 and 2018. As of March 31, 2019, we did not have any assets or liabilities requiring measurement at fair value without observable market values that would require a high level of judgment to determine fair value (Level 3).


22

Table of Contents
PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

We elect to account for foreign currency denominated available-for-sale debt securities under the fair value option. Election of the fair value option allows us to recognize any gains and losses from fair value changes on such investments in other income (expense), net on the condensed consolidated statements of income to significantly reduce the accounting asymmetry that would otherwise arise when recognizing the corresponding foreign exchange gains and losses relating to customer liabilities. The following table summarizes the estimated fair value of our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments and long-term investments under the fair value option as of March 31, 2019 and December 31, 2018:
 
March 31, 2019
 
December 31, 2018
 
(In millions)
Funds receivable and customer accounts
$
2,156

 
$
2,339

Short-term investments
$
284

 
$
295

Long-term investments
$
10

 
$
10


The following table summarizes the gains (losses) from fair value changes recognized in other income (expense), net related to the available-for-sale debt securities included within funds receivable and customer accounts, short-term investments and long-term investments under the fair value option for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
 
2019
 
2018
 
(In millions)
Funds receivable and customer accounts
$
(29
)
 
$
40

Short-term investments
$

 
$
8


Financial Assets and Liabilities Measured and Recorded at Fair Value on a Non-Recurring Basis

The following table summarizes our financial assets and liabilities held as of March 31, 2019 and December 31, 2018 for which a non-recurring fair value measurement was recorded during the three months ended March 31, 2019 and the year ended December 31, 2018:

 
 
March 31, 2019
 
Significant Other
Observable Inputs
(Level 2)
 
 
(In millions)
Non-marketable equity investments measured using the Measurement Alternative(1)
 
$
103

 
103

(1) Excludes non-marketable equity investments of $266 million for which no observable price changes occurred during the three months ended March 31, 2019.

 
 
December 31, 2018
 
Significant Other
Observable Inputs
(Level 2)
 
 
(In millions)
Non-marketable equity investments measured using the Measurement Alternative(1)
 
$
116

 
116

(1) Excludes non-marketable equity investments of $177 million for which no observable price changes occurred during the year ended December 31, 2018.

We measured these non-marketable equity investments at cost minus impairment, if any, plus adjustments resulting from observable price changes in orderly transactions for an identical or a similar investment in the same issuer.

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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Financial Assets and Liabilities Not Measured and Recorded at Fair Value

Our financial instruments, including cash, restricted cash, time deposits, loans and interest receivable, net, certain customer accounts, notes receivable, and notes payable are carried at amortized cost, which approximates their fair value. If these financial instruments were measured at fair value in the financial statements, cash would be classified as Level 1; restricted cash, time deposits, certain customer accounts, and notes payable would be classified as Level 2; and the remaining financial instruments would be classified as Level 3 in the fair value hierarchy.

Note 10—Derivative Instruments

Summary of Derivative Instruments

Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. Our derivatives expose us to credit risk to the extent that our counterparties may be unable to meet the terms of the arrangement. We seek to mitigate such risk by limiting our counterparties to, and by spreading the risk across, major financial institutions and by entering into collateral security arrangements. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis.

Foreign Exchange Contracts

We transact business in various foreign currencies and have significant international revenues and costs denominated in foreign currencies, which subjects us to foreign currency risk. We have a foreign currency exposure management program whereby we designate certain foreign currency exchange contracts, generally with maturities of 18 months or less, to reduce the volatility of cash flows primarily related to forecasted revenues denominated in foreign currencies. The objective of the foreign exchange contracts is to help mitigate the risk that the U.S. dollar-equivalent cash flows are adversely affected by changes in the applicable U.S. dollar/foreign currency exchange rate. These derivative instruments are designated as cash flow hedges and accordingly, the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into revenue in the same period the forecasted transaction affects earnings. We evaluate the effectiveness of our foreign currency exchange contracts on a quarterly basis by comparing the critical terms of the derivative instruments with the critical terms of the forecasted cash flows of the hedged item; if the critical terms are the same we conclude the hedge will be perfectly effective. We did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness. We do not use any foreign exchange contracts for trading or speculative purposes.

As of March 31, 2019, we estimate that $131 million of net derivative gains related to our cash flow hedges included in accumulated other comprehensive income (loss) is expected to be reclassified into earnings within the next 12 months. During the three months ended March 31, 2019 and 2018, we did not discontinue any cash flow hedges because it was probable that the original forecasted transaction would not occur and as such, did not reclassify any gains or losses to earnings prior to the occurrence of the hedged transaction. If we elect to discontinue our cash flow hedges and it is probable that the original forecasted transaction will occur, we continue to report them in accumulated other comprehensive income (loss) until the forecasted transaction affects earnings, at which point we also reclassify the de-designated hedges into earnings. Gains and losses on derivatives held after we discontinue our cash flow hedge and gains and losses on derivative instruments that are not designated as cash flow hedges are recorded in the same financial statement line item to which the derivative relates.

We have an additional foreign currency exposure management program whereby we use foreign exchange contracts to offset the foreign exchange risk on our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries. These contracts are not designated as hedging instruments and reduce, but do not entirely eliminate, the impact of currency exchange rate movements on our assets and liabilities. The foreign currency gains and losses on our assets and liabilities are recorded in other income (expense), net, which is offset by the gains and losses on the foreign exchange contracts.

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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Fair Value of Derivative Contracts

The fair value of our outstanding derivative instruments as of March 31, 2019 and December 31, 2018 was as follows:
 
Balance Sheet Location
 
March 31,
2019
 
December 31,
2018
 
 
 
(In millions)
Derivative Assets:
 
 
 
 
 
Foreign exchange contracts designated as cash flow hedges
Other current assets
 
$
140

 
$
170

Foreign exchange contracts designated as cash flow hedges
Other assets (non-current)
 
8

 
11

Foreign exchange contracts not designated as hedging instruments
Other current assets
 
75

 
139

Total derivative assets
 
 
$
223

 
$
320

 
 
 
 
 
 
Derivative Liabilities:
 
 
 
 
 
Foreign exchange contracts designated as cash flow hedges
Other current liabilities
 
$
9

 
$
3

Foreign exchange contracts designated as cash flow hedges
Other long-term liabilities
 
3

 

Foreign exchange contracts not designated as hedging instruments
Other current liabilities
 
56

 
64

Total derivative liabilities
 
 
$
68

 
$
67


Master Netting Agreements - Rights of Setoff

Under master netting agreements with respective counterparties to our foreign exchange contracts, subject to applicable requirements, we are allowed to net settle transactions of the same type with a single net amount payable by one party to the other. However, we have elected to present the derivative assets and derivative liabilities on a gross basis in our condensed consolidated balance sheets. Rights of setoff associated with our foreign exchange contracts represented a potential offset to both assets and liabilities by $50 million as of March 31, 2019 and $45 million as of December 31, 2018. During the year ended December 31, 2018, we entered into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. We posted $4 million cash collateral related to our derivative liabilities as of March 31, 2019, which is recognized in other current assets on our condensed consolidated balance sheets, and is related to the right to reclaim cash collateral. We posted no cash collateral as of December 31, 2018. We received $153 million and $195 million in counterparty cash collateral related to our derivative assets as of March 31, 2019 and December 31, 2018, respectively, which is recognized in other current liabilities on our condensed consolidated balance sheets, and is related to the obligation to return cash collateral. Additionally, as of March 31, 2019 and December 31, 2018, we received nil and $6 million, respectively, in counterparty non-cash collateral in the form of debt securities.

Effect of Derivative Contracts on Accumulated Other Comprehensive Income (Loss)

The following tables summarize the activity of derivative contracts that qualify for hedge accounting as of March 31, 2019 and December 31, 2018, and the impact of designated derivative instruments on accumulated other comprehensive income (loss) for the three months ended March 31, 2019 and 2018:
 
December 31, 2018
 
Amount of gains (losses)
recognized in other
comprehensive income
 
Less: Amount of gains (losses)
reclassified from
accumulated other
comprehensive income
to net revenue
 
March 31, 2019
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
182

 
$
6

 
$
52

 
$
136


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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
December 31, 2017
 
Amount of gains (losses)
recognized in other
comprehensive income
 
Less: Amount of gains (losses)
reclassified from
accumulated other
comprehensive income
to net revenue
 
March 31, 2018
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
(111
)
 
$
(62
)
 
$
(44
)
 
$
(129
)
 
Effect of Derivative Contracts on Condensed Consolidated Statements of Income
The following table provides the location in the condensed consolidated statements of income and amount of recognized gains or losses related to our derivative instruments designated as hedging instruments:
 
Three Months Ended March 31,
 
2019
 
2018
 
(In millions)
 
Net revenues
Total amounts presented in the condensed consolidated statements of income in which the effects of cash flow hedges are recorded
$
4,128

 
$
3,685

Gains (losses) on foreign exchange contracts designated as cash flow hedges reclassified from accumulated other comprehensive income
$
52

 
$
(44
)

The following table provides the location in the condensed consolidated statements of income and amount of recognized gains or losses related to our derivative instruments not designated as hedging instruments:
 
Three Months Ended March 31,
 
2019
 
2018
 
(In millions)
Gains (losses) on foreign exchange contracts recognized in other income (expense), net
$
(10
)
 
$
(44
)
Gains (losses) on foreign exchange contracts recognized in net revenues

 
(6
)
Total gains (losses) recognized from foreign exchange contracts not designated as hedging instruments
$
(10
)
 
$
(50
)

Notional Amounts of Derivative Contracts