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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019.
OR
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)
  
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $0.0001 par value per share
PYPL
NASDAQ Global Select Market
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      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      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.

1


Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
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  
As of October 18, 2019, there were 1,174,192,449 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
 
September 30,
2019
 
December 31,
2018
 
(In millions, except par value)
 
(Unaudited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
6,877

 
$
7,575

Short-term investments
3,585

 
1,534

Accounts receivable, net
417

 
313

Loans and interest receivable, net of allowances of $243 and $172 as of September 30, 2019 and December 31, 2018, respectively
3,477

 
2,532

Funds receivable and customer accounts
22,511

 
20,062

Prepaid expenses and other current assets
881

 
947

Total current assets
37,748

 
32,963

Long-term investments
2,771

 
971

Property and equipment, net
1,701

 
1,724

Goodwill
6,178

 
6,284

Intangible assets, net
629

 
825

Other assets
1,196

 
565

Total assets
$
50,223

 
$
43,332

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
193

 
$
281

Short-term debt

 
1,998

Funds payable and amounts due to customers
24,011

 
21,562

Accrued expenses and other current liabilities
2,038

 
2,002

Income taxes payable
98

 
61

Total current liabilities
26,340

 
25,904

Deferred tax liability and other long-term liabilities
2,436

 
2,042

Long-term debt
4,964

 

Total liabilities
33,740

 
27,946

Commitments and Contingencies (Note 13)

 


Equity:
 
 
 
Common stock, $0.0001 par value; 4,000 shares authorized; 1,174 shares outstanding as of both September 30, 2019 and December 31, 2018

 

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

 

Treasury stock at cost, 102 and 91 shares as of September 30, 2019 and December 31, 2018, respectively
(6,566
)
 
(5,511
)
Additional paid-in-capital
15,266

 
14,939

Retained earnings
7,835

 
5,880

Accumulated other comprehensive income (loss)
(52
)
 
78

Total equity
16,483

 
15,386

Total liabilities and equity
$
50,223

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(In millions, except per share data)
 
(Unaudited)
Net revenues
$
4,378

 
$
3,683

 
$
12,811

 
$
11,225

Operating expenses:
 
 
 
 
 
 
 
Transaction expense
1,701

 
1,366

 
4,877

 
4,003

Transaction and loan losses
340

 
295

 
999

 
934

Customer support and operations
390

 
350

 
1,177

 
1,030

Sales and marketing
316

 
325

 
1,001

 
913

Technology and development
533

 
452

 
1,527

 
1,341

General and administrative
401

 
377

 
1,239

 
1,111

Restructuring and other charges

 
28

 
71

 
297

Total operating expenses
3,681

 
3,193

 
10,891

 
9,629

Operating income
697

 
490

 
1,920

 
1,596

Other income (expense), net
(213
)
 
43

 
224

 
94

Income before income taxes
484

 
533

 
2,144

 
1,690

Income tax expense
22

 
97

 
192

 
217

Net income
$
462

 
$
436

 
$
1,952

 
$
1,473

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
Basic
$
0.39

 
$
0.37

 
$
1.66

 
$
1.24

Diluted
$
0.39

 
$
0.36

 
$
1.64

 
$
1.22

 
 
 
 
 
 
 
 
Weighted average shares:
 
 
 
 
 
 
 
Basic
1,175

 
1,181

 
1,174

 
1,187

Diluted
1,188

 
1,199

 
1,188

 
1,206

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


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PayPal Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(In millions)
 
(Unaudited)
Net income
$
462

 
$
436

 
$
1,952

 
$
1,473

Other comprehensive income (loss), net of reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation
(90
)
 
(6
)
 
(148
)
 
(33
)
Unrealized (losses) gains on investments, net
(5
)
 
4

 
16

 
(6
)
Tax benefit (expense) on unrealized (losses) gains on investments, net
1

 
(1
)
 
(5
)
 
2

Unrealized gains on hedging activities, net
71

 
34

 
7

 
249

Tax expense on unrealized gains on hedging activities, net
(1
)
 
(1
)
 

 
(4
)
Other comprehensive income (loss), net of tax
(24
)
 
30

 
(130
)
 
208

Comprehensive income
$
438

 
$
466

 
$
1,822

 
$
1,681

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


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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 lease accounting 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

Net income

 

 

 

 
823

 
823

Foreign currency translation

 

 

 
9

 

 
9

Unrealized gains on investments, net

 

 

 
10

 

 
10

Tax expense on unrealized gains 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
5

 

 
(73
)
 

 

 
(73
)
Common stock repurchased

 

 

 

 

 

Stock-based compensation

 

 
235

 

 

 
235

Balances at June 30, 2019
1,177

 
$
(6,216
)
 
$
15,010

 
$
(28
)
 
$
7,373

 
$
16,139

Net income

 

 

 

 
462

 
462

Foreign currency translation

 

 

 
(90
)
 

 
(90
)
Unrealized losses on investments, net

 

 

 
(5
)
 

 
(5
)
Tax benefit on unrealized losses on investments, net

 

 

 
1

 

 
1

Unrealized gains on hedging activities, net

 

 

 
71

 

 
71

Tax expense on unrealized gains on hedging activities, net

 

 

 
(1
)
 

 
(1
)
Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes

 

 
(19
)
 

 

 
(19
)
Common stock repurchased
(3
)
 
(350
)
 

 

 

 
(350
)
Stock-based compensation

 

 
275

 

 

 
275

Balances at September 30, 2019
1,174

 
$
(6,566
)
 
$
15,266

 
$
(52
)
 
$
7,835

 
$
16,483

 

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Table of Contents


PayPal Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
 
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

Net income

 

 

 

 
526

 
526

Foreign currency translation

 

 

 
(29
)
 

 
(29
)
Unrealized gains on investments, net

 

 

 
5

 

 
5

Tax expense on unrealized gains on investments, net

 

 

 
(1
)
 

 
(1
)
Unrealized gains on hedging activities, net

 

 

 
233

 

 
233

Tax expense on unrealized losses on hedging activities, net

 

 

 
(3
)
 

 
(3
)
Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes
7

 

 
(67
)
 

 

 
(67
)
Common stock repurchased
(6
)
 
(500
)
 

 

 

 
(500
)
Stock-based compensation

 

 
214

 

 

 
214

Balances at June 30, 2018
1,184

 
$
(4,311
)
 
$
14,434

 
$
36

 
$
4,860

 
$
15,019

Net income

 

 

 

 
436

 
436

Foreign currency translation

 

 

 
(6
)
 

 
(6
)
Unrealized gains on investments, net

 

 

 
4

 

 
4

Tax expense on unrealized gains on investments, net

 

 

 
(1
)
 

 
(1
)
Unrealized gains on hedging activities, net

 

 

 
34

 

 
34

Tax expense 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
1

 

 
9

 

 

 
9

Common stock repurchased
(7
)
 
(600
)
 

 

 

 
(600
)
Stock-based compensation

 

 
221

 

 

 
221

Balances at September 30, 2018
1,178

 
$
(4,911
)
 
$
14,664

 
$
66

 
$
5,296

 
$
15,115

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 CASH FLOWS
 
Nine Months Ended September 30,
 
2019
 
2018
 
(In millions)
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
1,952

 
$
1,473

Adjustments:
 
 
 
Transaction and loan losses
999

 
934

Depreciation and amortization
685

 
553

Stock-based compensation
736

 
623

Deferred income taxes
(122
)
 
(34
)
Cost basis adjustments to loans and interest receivable held for sale

 
244

Unrealized gains on strategic investments
(170
)
 
(31
)
Other
(130
)
 
(48
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(103
)
 
(133
)
Changes in loans and interest receivable held for sale, net
4

 
1,407

Accounts payable
(51
)
 
5

Income taxes payable
(33
)
 
(21
)
Other assets and liabilities
(470
)
 
(623
)
Net cash provided by operating activities
3,297

 
4,349

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(530
)
 
(599
)
Proceeds from sales of property and equipment
17

 

Changes in principal loans receivable, net
(1,111
)
 
3,573

Purchases of investments
(19,808
)
 
(15,641
)
Maturities and sales of investments
17,390

 
15,947

Acquisitions, net of cash and restricted cash acquired

 
(2,136
)
Funds receivable
(1,292
)
 
(427
)
Net cash (used in) provided by investing activities
(5,334
)
 
717

Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock
78

 
83

Purchases of treasury stock
(1,106
)
 
(2,925
)
Tax withholdings related to net share settlements of equity awards
(473
)
 
(392
)
Borrowings under financing arrangements
5,471

 
2,075

Repayments under financing arrangements
(2,509
)
 
(1,101
)
Funds payable and amounts due to customers
2,376

 
2,767

Net cash provided by financing activities
3,837

 
507

Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(49
)
 
(89
)
Net change in cash, cash equivalents, and restricted cash
1,751

 
5,484

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

 
8,285

Cash, cash equivalents, and restricted cash at end of period
$
14,984

 
$
13,769

 
 
 
 
Supplemental cash flow disclosures:
 
 
 
Cash paid for interest
$
76

 
$
47

Cash paid for income taxes, net
$
220

 
$
228

 
 
 
 
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
$
6,877

 
$
8,147

Short term investments
10

 
16

Funds receivable and customer accounts
8,097

 
5,606

Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows
$
14,984

 
$
13,769

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

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Table of Contents



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 a 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 and nine months ended September 30, 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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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 condensed 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 tables present the effects of the changes on the presentation of these operating expenses to the previously reported condensed consolidated statements of income:

 
Three Months Ended September 30, 2018
 
(In millions)
 
As Previously Reported
 
Adjustments
 
Revised
 
 
 
 
 
 
Transaction expense
$
1,366

 
$

 
$
1,366

Transaction and loan losses
295

 

 
295

Customer support and operations
367

 
(17
)
 
350

Sales and marketing
326

 
(1
)
 
325

Product development
269

 
(