PayPal Holdings
Jul 25, 2018
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PayPal Reports Second Quarter 2018 Results

GAAP EPS of $0.44, an increase of 29%; non-GAAP EPS of $0.58, an increase of 28%

Announces $10 billion stock repurchase authorization

SAN JOSE, Calif.--(BUSINESS WIRE)-- Global technology platform and digital payments leader PayPal Holdings, Inc. (NASDAQ: PYPL) today announced second quarter results for the period ended June 30, 2018.

Financial highlights for second quarter 2018

Operating highlights for second quarter 2018

"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 PayPal can offer our customers, both consumers and merchants," said Dan Schulman, President and CEO of PayPal.

PayPal's expanding value proposition

PayPal processed $139 billion in TPV in the second quarter, representing growth of 29%, or 27% on an FX-neutral basis. Merchant Services TPV grew 30% on an FX-neutral basis, and represented 88% of overall TPV for the quarter versus approximately 86% a year ago. eBay Marketplaces volume grew 6% on an FX-neutral basis.

Person-to-Person (P2P) volume grew 50% to more than $33 billion, and represented approximately 24% of TPV in the second quarter. Venmo, the company's social payments platform, processed more than $46 billion of TPV over the past twelve months. In the second quarter, Venmo processed more than $14 billion of TPV, growing 78% over the same period last year.

Driven by strong mobile engagement on its platform, PayPal processed approximately $54 billion in mobile payment volume in the second quarter, representing approximately 49% growth year over year. In the quarter, mobile payment volume represented 39% of overall TPV.

PayPal announced four strategic acquisitions in the second quarter 2018

During the second quarter PayPal announced the acquisitions of iZettle, Hyperwallet, Simility and Jetlore:

PayPal and Synchrony complete U.S. consumer credit receivables sale

PayPal also announced the closing of its consumer credit receivables transaction with Synchrony in July 2018. Under the terms of the transaction, and related transactions with unaffiliated third parties, Synchrony acquired $7.6 billion in receivables, including PayPal's U.S. consumer credit receivables portfolio, which totaled $6.8 billion at the time of closing, and approximately $0.8 billion in participation interests in receivables held by unaffiliated third parties. PayPal received approximately $6.9 billion in total consideration at closing. The expanded agreement with Synchrony Bank for both the U.S. PayPal Credit online consumer financing program and the U.S. PayPal-branded consumer credit card program allows PayPal to collaborate with an industry leader to enrich and expand PayPal's consumer credit offerings.

$10 billion stock repurchase authorization

PayPal announced today that its board of directors has authorized a new stock repurchase program, under which the company may repurchase up to $10 billion in outstanding common stock. This program will become effective after completion of the company's previously announced $5 billion stock repurchase program, of which $2.7 billion remained available as of June 30, 2018.

 

Second Quarter 2018 Financial and Operating Highlights

 
 

Second Quarter

(presented in millions, except per share data and percentages)

2018

 

2017

 

YoY Growth

 

FX-Neutral
YoY Growth

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 $6.3 billion as of June 30, 2018.

Short-Term Borrowings - PayPal's notes payable totaled $2.0 billion as of June 30, 2018.

(1) All metrics are presented consistent with the updated definitions in the Form 8-K filed on April 10, 2018.

(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 $907 million on the U.S. consumer credit portfolio, free cash flow in the quarter would have been $737 million. In addition, cash flow from operations and free cash flow in the second quarter of 2018 reflect the impact of the first annual cash tax payment of $125 million relating to the transition tax under the U.S. Tax Cut and Jobs Act of 2017.

** Not meaningful.

2018 Financial Guidance

Full year 2018 revenue and earnings guidance

Third quarter 2018 revenue and earnings guidance

Please see "Non-GAAP Financial Measures" and "Non-GAAP Measures of Financial Performance" for important additional information.

Quarterly conference call and webcast

PayPal Holdings, Inc. will host a conference call to discuss second quarter 2018 results at 3:00 p.m. Pacific Time today. A live webcast of the conference call, together with a slide presentation that includes supplemental financial information and reconciliations of certain non-GAAP measures to their most directly comparable GAAP measures, can be accessed through the company's Investor Relations website at https://investor.paypal-corp.com. In addition, an archive of the webcast will be accessible for 90 days through the same link.

PayPal Holdings, Inc. uses its Investor Relations website (https://investor.paypal-corp.com), its PayPal Stories Blog (https://www.paypal.com/stories/us), Twitter handles (@PayPal and @PayPalNews), LinkedIn page (https://www.linkedin.com/company/paypal), Facebook page (https://www.facebook.com/PayPalUSA/), YouTube channel (https://www.youtube.com/paypal), Dan Schulman's LinkedIn profile (https://www.linkedin.com/in/dan-schulman/), John Rainey's LinkedIn profile (www.linkedin.com/in/john-rainey-pypl), Bill Ready's LinkedIn profile (https://www.linkedin.com/in/williamready/) and Dan Schulman's Facebook profile (https://www.facebook.com/DanSchulmanPayPal/) as a means of disclosing information about the company and for complying with its disclosure obligations under Regulation FD. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels in addition to PayPal's press releases, SEC filings, public conference calls and webcasts.

About PayPal

Fueled by a fundamental belief that having access to financial services creates opportunity, PayPal Holdings, Inc. (NASDAQ: PYPL) is committed to democratizing financial services and empowering people and businesses to join and thrive in the global economy. Our open digital payments platform gives PayPal's 244 million active account holders the confidence to connect and transact in new and powerful ways, whether they are online, on a mobile device, in an app, or in person. Through a combination of technological innovation and strategic partnerships, PayPal creates better ways to manage and move money, and offers choice and flexibility when sending payments, paying or getting paid. Available in more than 200 markets around the world, the PayPal platform, including Braintree, Venmo and Xoom, enables consumers and merchants to receive money in more than 100 currencies, withdraw funds in 56 currencies and hold balances in their PayPal accounts in 25 currencies. For more information on PayPal, visit https://www.paypal.com/about. For PayPal Holdings, Inc. financial information, visit https://investor.paypal-corp.com.

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 U.S. dollars, rounded to the nearest millions, except as otherwise noted. As a result, certain amounts and rates may not sum or recalculate using the rounded dollar amounts provided.

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 Securities and Exchange Commission on April 10, 2018.

Non-GAAP financial measures

This press release includes financial measures defined as "non-GAAP financial measures" by the Securities and Exchange Commission (SEC) including: non-GAAP net income, non-GAAP earnings per diluted share, non-GAAP operating income, non-GAAP operating margin, non-GAAP effective tax rate, free cash flow and adjusted free cash flow. For an explanation of the foregoing non-GAAP measures, please see "Non-GAAP Measures of Financial Performance" included in this press release. These measures may be different from non-GAAP financial measures used by other companies. The presentation of this financial information, which is not prepared under any comprehensive set of accounting rules or principles, is not intended to be considered in isolation of, or as a substitute for, the financial information prepared and presented in accordance with generally accepted accounting principles (GAAP). For a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures, see "Non-GAAP Measures of Financial Performance," "Reconciliation of GAAP Operating Margin to Non-GAAP Operating Margin," "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," and "Reconciliation of Operating Cash Flow to Free Cash Flow and Adjusted Free Cash Flow."

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 PayPal Holdings, Inc. and its consolidated subsidiaries that reflect PayPal's current projections and forecasts. Forward-looking statements can be identified by words such as "may," "will," "would," "should," "could," "expect," "anticipate," "believe," "estimate," "intend," "plan," "project," "forecast" and other similar expressions. Forward-looking statements include, but are not limited to, statements regarding projected financial results for the third quarter and full year 2018, impact and timing of acquisitions, and projected future growth of PayPal's businesses. Forward-looking statements are based upon various estimates and assumptions, as well as information known to PayPal as of the date of this press release, and are inherently subject to numerous risks and uncertainties. Accordingly, actual results could differ materially from those predicted or implied by forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to: changes in political, business, economic, market and trade conditions, including any regional or general economic downturn or crisis and any conditions that affect payments or e-commerce growth; fluctuations in foreign currency exchange rates; the competitive, regulatory, payment card association-related and other risks specific to the PayPal, PayPal Credit, Braintree, Venmo, Xoom and other products, especially as PayPal continues to expand geographically and introduce new products and as new laws and regulations related to payments and financial services come into effect; the impact of PayPal's customer choice initiatives, including on its funding mix and transaction expense; PayPal's ability to successfully compete in an increasingly competitive environment for its businesses, products and services, including competition for consumers and merchants and the increasing importance of mobile payments and mobile commerce; the outcome of legal and regulatory proceedings and PayPal's need and ability to manage regulatory, tax and litigation risks as its products and services are offered in more jurisdictions and applicable laws become more restrictive; changes to PayPal's capital allocation or management of operating cash; uncertainty surrounding the implementation and impact of the United Kingdom's formal notification of its intent to withdraw from the European Union; cyberattacks and security vulnerabilities in PayPal products and services that could disrupt business, reduce revenue, increase costs, harm us competitively, or lead to liability; the effect of management changes and business initiatives; any changes PayPal may make to its product offerings; the effect of any natural disasters or other business interruptions on PayPal or PayPal's customers; PayPal's ability to timely upgrade and develop its technology systems, infrastructure and customer service capabilities at reasonable cost; PayPal's ability to maintain the stability, security and performance of its Payment Platform while adding new products and features in a timely fashion; the risk that we may not realize the expected benefits of the sale of U.S. consumer credit receivables to Synchrony Financial; risks that planned acquisitions will not be completed on contemplated terms, or at all, and that any businesses PayPal may acquire will not perform in accordance with its expectations; and PayPal's ability to profitably integrate, manage and grow businesses that have been acquired or may be acquired in the future. The forward-looking statements in this release do not include the potential impact of any acquisitions or divestitures that may be announced and/or completed after the date hereof.

More information about factors that could adversely affect PayPal's results of operations, financial condition and prospects or that could cause actual results to differ from those expressed or implied in forward-looking statements is included under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in PayPal's most recent annual report on Form 10-K and its subsequent quarterly reports on Form 10-Q, copies of which may be obtained by visiting PayPal's Investor Relations website at https://investor.paypal-corp.com or the SEC's website at www.sec.gov. All information in this release speaks as of July 25, 2018. For the reasons discussed above, you should not place undue reliance on the forward-looking statements in this press release. PayPal assumes no obligation to update such forward-looking statements.

 
PayPal Holdings, Inc.
Unaudited Condensed Consolidated Balance Sheet
 
  June 30,   December 31,
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
Goodwill 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, $0.0001 par value; 4,000 shares authorized; 1,184 and 1,200 shares outstanding as of June 30, 2018 and December 31, 2017, respectively
Treasury stock at cost, 77 and 47 shares as of June 30, 2018 and December 31, 2017, respectively (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  
 
 
PayPal Holdings, Inc.
Unaudited Condensed Consolidated Statement of Income
 
  Three Months Ended June 30,   Six Months Ended June 30,
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
 
 
PayPal Holdings, Inc.
Unaudited Condensed Consolidated Statement of Cash Flows
 
  Three Months Ended June 30,   Six Months Ended June 30,
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
 

PayPal Holdings, Inc.
Unaudited Summary of Consolidated Net Revenues

We earn revenue from the following types of transactions:

 
Net Revenues by Type   Three Months Ended
June 30,   March 31,   December 31,   September 30,   June 30,
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 PayPal's Current Report on Form 8-K filed with the Securities and Exchange Commission on April 10, 2018.
 

Net Revenues by Geography

  Three Months Ended
June 30,   March 31,   December 31,   September 30,   June 30,
2018 2018 2017 2017 2017
(In millions, except percentages)
U.S. net revenues $ 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 %
 
 
PayPal Holdings, Inc.
Unaudited Supplemental Operating Data
 
  Three Months Ended,
June 30,   March 31,   December 31,   September 30,   June 30,
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 PayPal's Current Report on Form 8-K filed with the Securities and Exchange Commission on April 10, 2018.

(2) An active account is an account registered directly with PayPal or a platform access partner that has completed a transaction through our Payments Platform, not including gateway-exclusive transactions, within the past 12 months.

(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 PayPal via a partner payment solution, not including gateway-exclusive transactions.

(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.

 

PayPal Holdings, Inc.
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.

 
PayPal Holdings, Inc.
Reconciliation of GAAP Operating Margin to Non-GAAP Operating Margin
 
  Three Months Ended June 30,
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.

 
 
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 June 30,
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.

 
 
PayPal Holdings, Inc.
Reconciliation of Operating Cash Flow to Free Cash Flow and Adjusted Free Cash Flow
 
  Three Months Ended June 30,
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  
 

PayPal Holdings, Inc.
Investor Relations Contacts
Gabrielle Rabinovitch
grabinovitch@paypal.com
or
Akila Moorthy
amoorthy@paypal.com
or
Media Relations Contacts
Amanda Miller, 408-219-0563
amandacmiller@paypal.com

Source: PayPal Holdings, Inc.

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