PayPal Holdings
Oct 18, 2018
PDF

PayPal Reports Third Quarter 2018 Results

GAAP EPS of $0.36, increasing 17%; non-GAAP EPS of $0.58, increasing 26%

Announces partnerships with American Express and Walmart

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

Financial highlights for third quarter 2018

Operating highlights for third quarter 2018

"PayPal had another excellent quarter. New partnerships with American Express and Walmart will increase the value that we can offer to our customers. Our strong balance sheet and cash flow enable us to aggressively invest in innovation and growth, creating sustainable and long-term value for our shareholders," said Dan Schulman, President and CEO of PayPal.

PayPal's expanding value proposition

PayPal processed $143 billion in TPV in the third quarter, representing growth of 24%, or 25% on an FX-neutral basis. Merchant Services TPV grew 28% on an FX-neutral basis. eBay Marketplaces volume grew 3% on an FX-neutral basis, and represented 11% of overall TPV for the quarter versus approximately 13% a year ago. Person-to-Person (P2P) volume grew 50% to more than $36 billion, and represented approximately 25% of TPV in the third quarter.

Strong mobile engagement on PayPal's platform contributed to approximately $57 billion in mobile payment volume, growing approximately 45%. In the third quarter, mobile payment volume represented 40% of overall TPV. Venmo, the company's social payments platform, processed approximately $17 billion of TPV in the third quarter, growing 78%. On a trailing twelve month basis, Venmo processed approximately $54 billion of TPV.

As part of PayPal's efforts to further improve its value proposition for merchants, Funds Now was launched in the third quarter. This initiative gives merchants instant access to funds by eliminating holds, delays and reserves and is now available to sellers in the U.S., UK and Australia.

In the third quarter, PayPal closed the acquisition of iZettle, a leading small business commerce platform in Europe and Latin America. This acquisition expands PayPal's suite of products and services for small businesses.

PayPal partners with American Express and Walmart

PayPal and American Express announced a comprehensive strategic partnership today. The agreement will allow PayPal to access American Express tokens and enables a deep integration of PayPal capabilities with the American Express platform, including the ability to transfer and use American Express rewards points at PayPal merchants.

In October 2018, PayPal announced a partnership with Walmart to offer PayPal cash in and cash out money services at Walmart retail stores. Using the PayPal mobile app, customers can load cash into and withdraw money from their PayPal balance at all Walmart stores in the U.S. Additionally, PayPal Cash Mastercard customers can use their PayPal balance to shop in store, on a mobile device and online at Walmart, as well as withdraw cash at the register or from Walmart's ATM locations nationwide.

Third Quarter 2018 Financial and Operating Highlights

 

Third Quarter

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

2018

 

2017

 

YoY Growth

 

FX-Neutral
YoY Growth

Total Payment Volume (TPV)(1) $ 143,004 $ 115,224 $ 27,780   24 % 25 %
GAAP
Net revenues $ 3,683 $ 3,239 $ 444 14 % 14 %
Operating margin 13.3 % 13.1 % ** 24bps N/A
Effective tax rate 18.2 % 15.7 % ** 246 bps N/A
Net income $ 436 $ 380 $ 56 15 % N/A
Earnings per diluted share $ 0.36 $ 0.31 $ 0.05 17 % N/A
Net cash provided by operating activities $ 4,670 $ 1,006 $ 3,664 364 % N/A
Non-GAAP
Net revenues $ 3,683 $ 3,239 $ 444 14 % 14 %
Operating margin 21.4 % 19.9 % ** 142bps N/A
Effective tax rate 16.4 % 16.9 % ** (53)bps N/A
Net income $ 694 $ 560 $ 134 24 % N/A
Earnings per diluted share $ 0.58 $ 0.46 $ 0.12 26 % N/A
Free cash flow(2) $ 4,447 $ 841 $ 3,606 429 % N/A
 

(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 third quarter of 2018 reflect the impact of the sale of the U.S. consumer credit receivables portfolio to Synchrony. Adjusting for this sale, free cash flow in the third quarter would have been $772 million.

** Not meaningful.

 

Cash, Cash Equivalents and Investments - PayPal's cash, cash equivalents and investments totaled $10.5 billion as of September 30, 2018.

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

2018 Financial Guidance

Full year 2018 revenue and earnings guidance

Fourth 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 third quarter 2018 results at 2:00 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 page (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 that is posted 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 254 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 fourth 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; the timing and possible outcome of the UK Competition and Markets Authority's review of the acquisition of iZettle; 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 October 18, 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.

Copyright © 1999-2018 PayPal. All rights reserved. Other company and product names may be trademarks of their respective owners.

   

PayPal Holdings, Inc.

Unaudited Condensed Consolidated Balance Sheet

 

September 30,
2018

December 31,
2017

(In millions, except par value)
ASSETS
Current assets:
Cash and cash equivalents $ 8,147 $ 2,883
Short-term investments 1,440 2,812
Accounts receivable, net 412 283
Loans and interest receivable, net 2,112 1,314
Loans and interest receivable, held for sale 6,398
Funds receivable and customer accounts 20,951 18,242
Prepaid expenses and other current assets 928   713  
Total current assets 33,990   32,645  
Long-term investments 946 1,961
Property and equipment, net 1,646 1,528
Goodwill 6,054 4,339
Intangible assets, net 684 168
Other assets 404   133  
Total assets $ 43,724   $ 40,774  
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 247 $ 257
Notes payable 2,000 1,000
Funds payable and amounts due to customers 22,451 19,742
Accrued expenses and other current liabilities 1,866 1,781
Income taxes payable 76   83  
Total current liabilities 26,640 22,863
Deferred tax liability and other long-term liabilities 1,969   1,917  
Total liabilities 28,609   24,780  
Equity:
Common stock, $0.0001 par value; 4,000 shares authorized; 1,178 and 1,200 shares outstanding as of September 30, 2018 and December 31, 2017, respectively
Treasury stock at cost, 84 and 47 shares as of September 30, 2018 and December 31, 2017, respectively (4,911 ) (2,001 )
Additional paid-in-capital 14,664 14,314
Retained earnings 5,296 3,823
Accumulated other comprehensive income (loss) 66   (142 )
Total equity 15,115   15,994  
Total liabilities and equity $ 43,724   $ 40,774  
 
   

PayPal Holdings, Inc.

Unaudited Condensed Consolidated Statement of Income

 
Three Months Ended September 30, Nine Months Ended September 30,
2018   2017 2018   2017
(In millions, except per share amounts)
 
Net revenues $ 3,683 $ 3,239 $ 11,225 $ 9,350
Operating expenses:
Transaction expense 1,366 1,102 4,003 3,153
Transaction and loan losses 295 363 934 971
Customer support and operations(1) 367 346 1,075 998
Sales and marketing (1) 326 278 924 800
Product development (1) 269 240 782 686

General and administrative (1)

354 293 1,061 840

Depreciation and amortization (1)

188 194 553 578
Restructuring and other charges 28     297   40
Total operating expenses 3,193   2,816   9,629   8,066
Operating income 490 423 1,596 1,284
Other income (expense), net 43   28   94   52
Income before income taxes 533 451 1,690 1,336
Income tax expense 97   71   217   161
Net income $ 436   $ 380   $ 1,473   $ 1,175
Net income per share:
Basic $ 0.37 $ 0.32 $ 1.24 $ 0.98
Diluted $ 0.36 $ 0.31 $ 1.22 $ 0.96
Weighted average shares:
Basic 1,181 1,202 1,187 1,203
Diluted 1,199 1,223 1,206 1,218
 
(1) Includes stock-based compensation as follows:
Customer support and operations 42 38 119 102
Sales and marketing 39 36 122 97
Product development 66 64 194 168
General and administrative 65 54 187 147
Depreciation and amortization 5   3   14   8
$ 217   $ 195   $ 636   $ 522
 
   

PayPal Holdings, Inc.

Unaudited Condensed Consolidated Statement of Cash Flows

 
Three Months Ended September 30, Nine Months Ended September 30,
2018   2017 2018   2017
(In millions)
 
Cash flows from operating activities:
Net income $ 436 $ 380 $ 1,473 $ 1,175
Adjustments:
Transaction and loan losses 295 363 934 971
Depreciation and amortization 188 194 553 578
Stock-based compensation 213 193 623 514
Deferred income taxes (123 ) (89 ) (34 ) 13
Cost basis adjustments to loans and interest receivable held for sale 244
Other (38 ) (4 ) (79 ) (16 )
Changes in assets and liabilities:
Accounts receivable (134 ) (43 ) (133 ) (5 )
Changes in loans and interest receivable held for sale, net 3,675 4 1,407 16
Accounts payable 22 5 4
Income taxes payable (7 ) 3 (21 ) 24
Other assets and liabilities 143   5   (623 ) (596 )
Net cash provided by operating activities 4,670   1,006   4,349   2,678  
Cash flows from investing activities:
Purchases of property and equipment (223 ) (165 ) (599 ) (487 )
Changes in principal loans receivable, net 2,573 (527 ) 3,573 (1,154 )
Purchases of investments (5,025 ) (2,271 ) (15,641 ) (14,227 )
Maturities and sales of investments 6,278 3,493 15,947 13,029
Acquisitions, net of cash acquired (2,120 ) (323 ) (2,136 ) (323 )
Funds receivable (1,329 ) (858 ) (427 ) (461 )
Net cash provided by (used in) investing activities 154   (651 ) 717   (3,623 )
Cash flows from financing activities:
Proceeds from issuance of common stock 5 14 83 100
Purchases of treasury stock (600 ) (100 ) (2,925 ) (706 )
Tax withholdings related to net share settlements of equity awards (20 ) (16 ) (392 ) (140 )
Borrowings under financing arrangements 800 2,075 800
Repayments under financing arrangements (25 ) (174 ) (1,101 ) (180 )
Funds payable and amounts due to customers 1,689   915   2,767   2,553  
Net cash provided by financing activities 1,049   1,439   507   2,427  
Effect of exchange rate changes on cash, cash equivalents and restricted cash (26 ) 12   (89 ) 35  
Net change in cash, cash equivalents and restricted cash 5,847 1,806 5,484 1,517
Cash, cash equivalents and restricted cash at beginning of period 7,922   5,830   8,285   6,119  
Cash, cash equivalents and restricted cash at end of period $ 13,769   $ 7,636   $ 13,769   $ 7,636  
Supplemental cash flow disclosures:

Cash paid for interest

$ 21 $ 1 $ 47 $ 3
Cash paid for income taxes, net $ 48 $ 15 $ 228 $ 88
 

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

September 30,
2018

 

June 30,
2018

 

March 31,
2018

 

December 31,
2017

 

September 30,
2017

(In millions, except percentages)
Transaction revenues(1) $ 3,343 $ 3,318 $ 3,197 $ 3,244 $ 2,858
Current quarter vs prior quarter 1 % 4 % (1 )% 14 % 3 %
Current quarter vs prior year quarter 17 % 20 % 22 % 23 % 22 %
Percentage of total 91 % 86 % 87 % 87 % 88 %
 
Other value added services(1) 340 539 488 500 381
Current quarter vs prior quarter (37 )% 10 % (2 )% 31 % 6 %
Current quarter vs prior year quarter (11 )% 49 % 39 % 47 % 15 %
Percentage of total 9 % 14 % 13 % 13 % 12 %
 
Total net revenues $ 3,683 $ 3,857 $ 3,685 $ 3,744 $ 3,239
Current quarter vs prior quarter (5 )% 5 % (2 )% 16 % 3 %
Current quarter vs prior year quarter 14 % 23 % 24 % 26 % 21 %
(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

September 30,
2018

 

June 30,
2018

 

March 31,
2018

 

December 31,
2017

 

September 30,
2017

(In millions, except percentages)
U.S. net revenues $ 1,962 $ 2,150 $ 2,023 $ 2,045 $ 1,743
Current quarter vs prior quarter (9 )% 6 % (1 )% 17 % 3 %
Current quarter vs prior year quarter 13 % 27 % 26 % 30 % 21 %
Percent of total 53 % 56 % 55 % 55 % 54 %
 
International net revenues 1,721 1,707 1,662 1,699 1,496
Current quarter vs prior quarter 1 % 3 % (2 )% 14 % 3 %
Current quarter vs prior year quarter 15 % 18 % 21 % 21 % 22 %
(FXN) Current quarter vs prior year quarter 15 % 16 % 18 % 21 % 22 %
Percent of total 47 % 44 % 45 % 45 % 46 %
 
Total net revenues $ 3,683 $ 3,857 $ 3,685 $ 3,744 $ 3,239
Current quarter vs prior quarter (5 )% 5 % (2 )% 16 % 3 %
Current quarter vs prior year quarter 14 % 23 % 24 % 26 % 21 %
(FXN) Current quarter vs prior year quarter 14 % 22 % 22 % 26 % 22 %
 
 

PayPal Holdings, Inc.

Unaudited Supplemental Operating Data

 
Three Months Ended,

September 30,
2018

 

June 30,
2018

 

March 31,
2018

 

December 31,
2017

 

September 30,
2017

(In millions, except percentages)
Active accounts(1),(2) 254 244 237 229 220
Current quarter vs prior quarter 4 % 3 % 4 % 4 % 4 %
Current quarter vs prior year quarter 15 % 15 % 15 % 15 % 13 %
 
Number of payment transactions(1),(3) 2,463 2,327 2,214 2,240 1,941
Current quarter vs prior quarter 6 % 5 % (1 )% 15 % 7 %
Current quarter vs prior year quarter 27 % 28 % 25 % 25 % 25 %
 
Payment transactions per active account(1),(4) 36.5 35.7 34.7 34.0 33.3
Current quarter vs prior quarter 2 % 3 % 2 % 2 % 2 %
Current quarter vs prior year quarter 9 % 9 % 8 % 8 % 8 %
 
Total Payment Volume(1),(5) $ 143,004 $ 139,403 $ 132,364 $ 132,515 $ 115,224
Current quarter vs prior quarter 3 % 5 % % 15 % 7 %
Current quarter vs prior year quarter 24 % 29 % 32 % 32 % 30 %
(FXN) Current quarter vs prior year quarter 25 % 27 % 27 % 29 % 28 %
 
Transaction Expense Rate(1),(6) 0.96 % 0.98 % 0.96 % 0.96 % 0.96 %
Transaction and Loan Loss Rate(1),(7) 0.21 % 0.24 % 0.23 % 0.03 % 0.32 %
Transaction Margin(8) 54.9 % 56.0 % 57.1 % 65.1 % 54.8 %
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 on 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 on our Payments Platform or enabled by PayPal via a partner payment solution, 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 on 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, certain other 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 September 30,
2018   2017
(In millions, except percentages)
(unaudited)
GAAP operating income $ 490 $ 423
Stock-based compensation expense and related employer payroll taxes 219 197
Amortization of acquired intangible assets 33 26
Other(1) 28
Acquisition related transaction expense 17    
Total non-GAAP operating income adjustments 297   223  
Non-GAAP operating income $ 787   $ 646  
Non-GAAP operating margin 21 % 20 %
 

(1) Net loss related to the sale of our U.S. consumer credit receivables portfolio.

   
 

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 September 30,
2018   2017

(In millions, except per share data
and percentages)

(unaudited)
GAAP income before income taxes $ 533 $ 451
GAAP income tax expense 97   71  
GAAP net income 436 380
Non-GAAP adjustments to net income:
Non-GAAP operating income adjustments (see table above) 297 223
Other(1) 14 23
Tax effect of non-GAAP adjustments (53 ) (66 )
Non-GAAP net income $ 694   $ 560  
 
Diluted net income per share:
GAAP $ 0.36 $ 0.31
Non-GAAP $ 0.58 $ 0.46
Shares used in GAAP diluted share calculation 1,199 1,223
Shares used in non-GAAP diluted share calculation 1,199 1,223
 
GAAP effective tax rate 18 % 16 %
Tax effect of non-GAAP adjustments to net income (2 )% 1 %
Non-GAAP effective tax rate 16 % 17 %
 

(1) Tax expense related to the Tax Act and intra-entity transfer of intellectual property for the three months ended September 30, 2018. Intra-entity transfer of intellectual property for the three months ended September 30, 2017.

   
 

PayPal Holdings, Inc.

Reconciliation of Operating Cash Flow to Free Cash Flow and Adjusted Free Cash Flow

 
 
Three Months Ended September 30,
2018   2017
(In millions/unaudited)
Net cash provided by operating activities $ 4,670 $ 1,006
Less: Purchases of property and equipment (223 ) (165 )
Free cash flow $ 4,447   $ 841  
Impact of held for sale accounting presentation related to our U.S. consumer credit receivables portfolio on cash flow from operating activities (3,675 )  
Adjusted free cash flow $ 772   $ 841  
 

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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