PayPal Holdings
Jan 27, 2016
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PayPal Reports Strong Fourth Quarter and Full Year 2015 Results

Company Delivers 21% Q4 and 19% Full Year FX-Neutral Revenue Growth

Announces $2 Billion Stock Repurchase Program

SAN JOSE, Calif.--(BUSINESS WIRE)-- Global technology platform and payments leader PayPal Holdings, Inc. (Nasdaq:PYPL) today reported revenue and earnings that exceeded the company's full year guidance, posting strong payment volume, customer account and revenue growth. PayPal's Board of Directors authorized a $2 billion stock repurchase program, demonstrating the business' substantial cash flow generation and management's confidence in long-term growth.

Results for the fourth quarter include:

Results for full year 2015 include:

"We exited 2015 with great momentum," said Dan Schulman, President and CEO of PayPal. "Our strong results reflect PayPal's progress in delivering on our strategy to drive the digital payments revolution. In the face of a slow global economy and foreign exchange headwinds, PayPal exceeded its full year revenue, earnings, and free cash flow commitments to shareholders. As money becomes digital and the world goes mobile, we see tremendous opportunity ahead to expand our leadership, transform the way people move and manage their money and deliver increased value to shareholders."

Exceeding Commitments

  Full Year 2015   Full Year 2015
    Guidance   Results*

Non-GAAP Pro Forma FX-Neutral Revenue Growth Year-Over-Year

  15 - 18%   19%

Non-GAAP Pro Forma Operating Margin Growth Year-Over-Year

  Up 0 - 100 basis points   Up 90 basis points

Non-GAAP Pro Forma EPS and Growth Year-Over-Year

  $1.23 - $1.27

15% - 19%

  $1.28

19%

Free Cash Flow   $1.6 - $1.8B   $1.8B

 *For a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures, see the tables that follow "Non-GAAP Measures of Financial Performance."

 

Returning Value to Shareholders with Share Repurchase

PayPal also announced that its board of directors has authorized a new share repurchase program, under which the company may repurchase up to $2 billion in outstanding common stock.

"We have proven our ability to generate cash, and this share repurchase authorization demonstrates our confidence in our strategic plan and long-term growth," said John Rainey, Chief Financial Officer of PayPal.

Gaining Market Share

In the fourth quarter, PayPal gained market share and extended its leadership position. PayPal processed $82 billion in total payment volume (TPV), representing FX-neutral growth of 29%, which was faster than the growth rate of e-commerce. Merchant services TPV growth accelerated to 36%, and represented 81% of overall TPV for the quarter. Finally, PayPal processed $20 billion in mobile payment volume, up 45%, representing 25% of TPV for the quarter.

Expanding PayPal's Customer Base

Throughout the holiday season, customers and merchants signed up for the company's products and services in record numbers. The company grew its active account base by 6.6 million in the fourth quarter, ending the year with 179 million active customer accounts.

Deepening and Extending PayPal's Engagement with Customers

The company is extending how consumers are able to manage and move money and driving engagement with PayPal's merchant base by giving them solutions to propel their businesses forward and connect with their customers in new and powerful ways. In the fourth quarter, the company processed 1.4 billion payment transactions, which translates to 27 payment transactions per active account, an increase from 25 transactions per active account compared to the same period last year. Venmo, the company's social payments platform, processed $2.5 billion of TPV, up 174% year-over-year.

During the fourth quarter, PayPal closed the acquisition of Xoom Corporation to help accelerate its growth in the global remittances market with a leading mobile innovator in this space. Xoom added 1 point to revenue growth in the fourth quarter and 1.6 million active customer accounts to the PayPal platform.

PayPal expanded its technology platform, and further solidified its role as the operating system for digital payments worldwide, by signing business deals with new partners, including First Data, Alibaba Wholesale, and Facebook Messenger, giving PayPal expanded opportunities to increase customer engagement and gain market share.

PayPal signed a strategic agreement with First Data to enable the acceptance of PayPal's tokenized payments in-store by First Data's acquiring clients and businesses. This is an important step forward in driving availability of PayPal at the point-of-sale as First Data is the largest U.S. merchant processor, with approximately 40% market share.

In the fourth quarter, PayPal extended its existing business relationship with Alibaba.com by launching a limited pilot program to accept PayPal payments for select vendors who sell on Alibaba Wholesale, the B2B section of Alibaba's website.

In December, PayPal announced Braintree is powering the commerce experience for transportation services, including Uber, on the Facebook Messenger platform. With this new feature, users can request a ride from a car service without ever needing to download an extra app or leave a conversation.

PayPal also expanded the ways to use the popular social payments app Venmo by introducing the ability for Venmo users to make in-app purchases at participating merchants in the U.S. Now in limited release, select users can use Venmo to pay for concert and sports tickets on Gametime, and gourmet meals delivered on Munchery. The pilot program will gradually open to more consumers and merchants with a general public launch planned for later this year.

Fourth Quarter 2015 Financial Highlights

   

Fourth Quarter

           

FX-Neutral YoY

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

2015

2014

YoY Growth

Growth

Total Payment Volume (TPV) $81,523 $66,039 $15,484     23% 29%
GAAP
Net revenue $2,556 $2,193 $363 17% 21%
Net income $367 $286 $81 28% N/A
Earnings per diluted share $0.30 $0.23 $0.07 28% N/A
Non-GAAP Pro Forma
Net revenue $2,556 $2,189 $367 17% 21%
Net income $443 $348 $95 27% N/A
Earnings per diluted share $0.36 $0.28 $0.08 27% N/A
 

Other Selected Financial and Operational Results

Operating Margin - GAAP operating margin for the fourth quarter of 2015 increased to 16.1%, compared to 15.9% for the same period last year. Non-GAAP operating margin increased to 20.8%, compared to non-GAAP pro forma operating margin of 19.9% for the same period last year. Assuming the operating agreement and other commercial agreements with eBay Inc. entered into in connection with the spin-off had been in effect during the fourth quarter of 2014, non-GAAP operating margin increased 90 basis points during the fourth quarter of 2015 compared to the same period last year.

Other Value Added Services (OVAS) - OVAS revenue increased 30% to $0.3 billion in the fourth quarter of 2015. OVAS benefited from the previously announced amendment and extension of the company's agreement with Synchrony Financial and the growth of interest income and fees from its PayPal Credit products.

Taxes - The GAAP effective tax rate for the fourth quarter of 2015 was 12.2%, compared to 17.6% for the fourth quarter of 2014. The non-GAAP effective tax rate was 17.8% compared to the non-GAAP pro forma effective tax rate of 20.0% for the fourth quarter of 2014.

Cash Flow - PayPal generated $728 million of operating cash flow and $564 million of free cash flow during the fourth quarter of 2015.

Cash and Cash Equivalents and Non-equity Investments - PayPal's cash and cash equivalents and non-equity investments totaled $5.7 billion at December 31, 2015.

2016 Financial Guidance

Full Year 2016:

First Quarter 2016:

Guidance net revenue growth rates represent year-over-year comparisons versus non-GAAP pro forma measures. 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 fourth quarter and full year 2015 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 and non-GAAP pro forma 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 at https://investor.paypal-corp.com, its PayPal Stories Blog https://www.paypal.com/stories/us, Twitter handle (@PayPal) and LinkedIn page https://www.linkedin.com/company/paypal 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

At PayPal (Nasdaq:PYPL), we put people at the center of everything we do. Founded in 1998, we continue to be at the forefront of the digital payments revolution. In 2015, 28% of the 4.9 billion payments we processed were made on a mobile device. PayPal gives people better ways to connect to their money and to each other, helping them safely access and move their money and offering a choice of how they would like to pay or be paid. With our 179 million active customer accounts, we have created an open and secure payments ecosystem that people and businesses choose to securely transact with each other online, in stores and on mobile devices. PayPal is a truly global payments platform that is available to people in more than 200 markets, allowing customers to get paid in more than 100 currencies, withdraw funds to their bank accounts in 57 currencies and hold balances in their PayPal accounts in 26 currencies. For more information on PayPal, visit https://about.paypal-corp.com. For PYPL 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's local currency results by 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. All amounts in tables are presented in U.S. dollars, rounded to the nearest millions, except as otherwise noted. As a result, certain amounts may not sum or recalculate using the rounded dollar amounts provided.

Non-GAAP Financial Measures

This press release includes the following financial measures defined as "non-GAAP financial measures" by the Securities and Exchange Commission (SEC): non-GAAP net income, non-GAAP earnings per diluted share, non-GAAP operating margin, non-GAAP effective tax rate and free cash flow. In addition, the company has included certain pro forma adjustments in its presentation of non-GAAP net revenue, non-GAAP net income, non-GAAP earnings per diluted share, and non-GAAP operating margin in this presentation (collectively referred to as "non-GAAP pro forma measures"). These adjustments reflect items that are factually supportable, directly attributable to the separation of the company from eBay Inc. on July 17, 2015, and expected to have a continuing impact on the company's results of operations. The company has included these pro forma adjustments because management believes that they help to facilitate comparisons of the company's operating results between periods. In discussing year-over-year comparisons, including guidance net revenue growth rates, the company has chosen to present non-GAAP pro forma measures because it believes that these measures provide investors a consistent basis for reviewing the company's performance across different periods. 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," "Reconciliation of Operating Cash Flow to Free Cash Flow," "Reconciliation of GAAP Operating Margin to Non-GAAP Pro Forma Operating Margin, GAAP Net Income to Non-GAAP Pro Forma Net Income, and GAAP Diluted EPS to Non-GAAP Pro Forma Diluted EPS," and "Reconciliation of GAAP Net Revenues by Type to Non-GAAP Pro Forma Net Revenues by Type, and GAAP Net Revenues by Geography to Non-GAAP Pro Forma Net Revenues by Geography" included in this press release.

Forward-Looking Statements

This press release contains forward-looking statements relating to, among other things, the future performance of PayPal Holdings, Inc. and its consolidated subsidiaries that are based on the company's current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include, but are not limited to, statements regarding expected financial results for first quarter and full year 2016 and future growth in the company's businesses. Actual results could differ materially from those predicted or implied and reported results should not be considered as an indication of future performance. Factors that could cause or contribute to such differences include, but are not limited to: changes in political, business and economic conditions, including any regional general economic downturn or crisis and any conditions that affect e-commerce growth; fluctuations in foreign currency exchange rates; the competitive, regulatory, payment card association-related and other risks specific to the company's PayPal, PayPal Credit, Braintree, Venmo, Xoom and Paydiant 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 company's ability to successfully react to the increasing importance of mobile payments and mobile commerce; the company's ability to deal with the increasingly competitive environment for its businesses, including competition for consumers and merchants; changes to the company's capital allocation or management of operating cash; the company's need to manage an increasingly large enterprise with a broad range of businesses of varying degrees of maturity and in many different geographies; the effect of management changes and business initiatives; the company's need and ability to manage other regulatory, tax and litigation risks as its services are offered in more jurisdictions and applicable laws become more restrictive; any changes the company may make to its product offerings; the company's ability to timely upgrade and develop its technology systems, infrastructure and customer service capabilities at reasonable cost; the company's ability to maintain stability and performance of its Payment Platform while adding new products and features in a timely fashion; and the company'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 affect the company's operating results is included under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the company's registration statement on Form 10, as amended, subsequent annual reports on Form 10-K, and subsequent quarterly reports on Form 10-Q, copies of which may be obtained by visiting the company's Investor Relations website at https://investor.paypal-corp.com or the SEC's website at www.sec.gov. All information in this release is as of January 27, 2016. Undue reliance should not be placed on the forward-looking statements in this press release, which are based on information available to the company on the date hereof. The company assumes no obligation to update such statements.

 
PayPal Holdings, Inc.
Unaudited Condensed Combined and Consolidated Balance Sheet
       
December 31, December 31,
2015 2014
(In millions, except par value)
ASSETS
Current assets:
Cash and cash equivalents $ 1,393 $ 2,201
Short-term investments 2,018 29
Accounts receivable, net 137 65
Loans and interest receivable, net 4,184 3,586
Funds receivable and customer accounts 12,261 10,612
Notes and receivables from eBay 694
Prepaid expenses and other current assets   655     378
Total current assets   20,648     17,565
Long-term investments 2,348 31
Property and equipment, net 1,344 922
Goodwill 4,069 3,189
Intangible assets, net 358 156
Other assets   114     54
Total assets $ 28,881   $ 21,917
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 145 $ 115
Funds payable and amounts due to customers 12,261 10,612
Notes and payables to eBay 1,093
Accrued expenses and other current liabilities 1,179 1,434
Income taxes payable   32     29
Total current liabilities 13,617 13,283
Deferred tax liability and other long-term liabilities   1,505     386
Total liabilities 15,122 13,669
Equity:
Net parent investment 8,138
Common stock, $0.0001 par value; 4,000 shares authorized; 1,224 and 1,218 outstanding
Additional paid-in-capital 13,100
Retained earnings 668
Accumulated other comprehensive income   (9 )   110
Total equity   13,759     8,248
Total liabilities and equity $ 28,881   $ 21,917
 
 
PayPal Holdings, Inc.
Unaudited Condensed Combined and Consolidated Statement of Income
       
Three Months Ended December 31,

   Year Ended December 31,   

2015   2014 2015   2014
(In millions, except per share amounts)
 
Net revenues $ 2,556 $ 2,193 $ 9,248 $ 8,025
Operating expenses:
Transaction expense 750 594 2,610 2,170
Transaction and loan losses 245 193 809 646
Customer support and operations(1) 320 280 1,220 1,055
Sales and marketing (1) 269 263 985 998
Product development (1) 252 239 947 890
General and administrative (1) 146 144 560 482
Depreciation and amortization (1) 164 132 608 516
Restructuring   (1 )       48      
Total operating expenses   2,145     1,845     7,787     6,757  
Operating income 411 348 1,461 1,268
Other income (expense), net   7     (1 )   27     (7 )
Income before income taxes 418 347 1,488 1,261
Income tax expense   51     61     260     842  
Net income $ 367   $ 286   $ 1,228   $ 419  
Net income per share:
Basic $ 0.30   $ 0.23   $ 1.00   $ 0.34  
Diluted $ 0.30   $ 0.23   $ 1.00   $ 0.34  
Weighted average shares:
Basic   1,223     1,218     1,222     1,218  
Diluted   1,230     1,224     1,229     1,224  
 
(1) Includes stock-based compensation as follows:
Customer support and operations 18 13 62 52
Sales and marketing 10 19 52 59
Product development 35 28 132 108
General and administrative 26 19 94 75
Depreciation and amortization   1     1     7     4  
$ 90   $ 80   $ 347   $ 298  
 
 
PayPal Holdings, Inc.
Unaudited Condensed Combined and Consolidated Statement of Cash Flows
       
Three Months Ended December 31,

   Year Ended December 31,   

2015   2014 2015   2014
(In millions)
 
Cash flows from operating activities:
Net income $ 367 $ 286 $ 1,228 $ 419
Adjustments:
Transaction and loan losses 245 193 809 646
Depreciation and amortization 164 132 608 516
Stock-based compensation 90 81 346 299
Deferred income taxes 40 3 127 680
Excess tax benefits from stock-based compensation (2 ) (6 ) (26 ) (41 )
Gain on sale of principal loans receivable held for sale (5 ) (40 )
Changes in assets and liabilities:
Accounts receivable 76 (15 ) (22 ) (13 )
Receivable from eBay (48 ) 121 (24 )
Changes in principal loans receivable held for sale, net 5 14
Accounts payable 10 14 12 42
Payable to eBay 114 (217 ) (2 )
Income taxes payable (35 ) 11 40 37
Other assets and liabilities   (227 )   (134 )   (454 )   (339 )
Net cash provided by operating activities   728     631     2,546     2,220  
Cash flows from investing activities:
Purchases of property and equipment (164 ) (123 ) (722 ) (492 )
Proceeds from sales of property and equipment 26
Changes in principal loans receivable, net (673 ) (528 ) (819 ) (1,023 )
Purchases of investments (820 ) (11 ) (7,542 ) (76 )
Maturities and sales of investments 1,342 20 3,318 409
Acquisitions, net of cash acquired (942 ) (1 ) (1,225 ) (2 )
Notes and receivable from eBay       (14 )   575     (362 )
Net cash used in investing activities   (1,257 )   (657 )   (6,389 )   (1,546 )
Cash flows from financing activities:
Proceeds from issuance of common stock 39 75
Excess tax benefits from stock-based compensation 2 6 26 41
Contribution from (to) eBay (69 ) 3,858 (71 )
Tax withholdings related to net share settlements of restricted stock units and restricted stock awards (11 ) (18 )
Repayments borrowings under financing arrangements 15 40 (862 ) (21 )
Funds receivable and customer accounts (459 ) (637 ) (1,649 ) (1,335 )
Funds payable and amounts due to customers   459     637     1,649     1,335  
Net cash provided by (used in) financing activities   45     (23 )   3,079     (51 )
Effect of exchange rate changes on cash and cash equivalents   (3 )   (9 )   (44 )   (26 )
Net increase (decrease) in cash and cash equivalents (487 ) (58 ) (808 ) 597
Cash and cash equivalents at beginning of period   1,880     2,259     2,201     1,604  
Cash and cash equivalents at end of period $ 1,393   $ 2,201   $ 1,393   $ 2,201  
Supplemental cash flow disclosures:
Cash paid for interest $ 2 $ 6 $ 16 $ 19
Cash paid for income taxes $ 160 $ 14 $ 216 $ 47
 

PayPal Holdings, Inc.
Unaudited Summary of Combined and Consolidated Net Revenues

We earn revenue from the following types of transactions:

   
Net Revenues by Type Three Months Ended
December 31,     September 30,    

   June 30,   

   

  March 31,  

    December 31,
2015 2015 2015 2015 2014

(In millions, except percentages)

Transaction revenues(1) 2,262 1,982 1,966 1,911 1,963
Current quarter vs prior quarter 14 % 1 % 3 % (3 )% 12 %
Current quarter vs prior year quarter 15 % 13 % 15 % 14 % N/A
Percentage of total 88 % 88 % 86 % 90 % 90 %
 
Other value added services(1) 294 276 327 223 226
Current quarter vs prior quarter 7 % (16 )% 47 % (1 )% 2 %
Current quarter vs prior year quarter 30 % 25 % 21 % 12 % N/A
Percentage of total 12 % 12 % 14 % 10 % 10 %
 
Total net revenues(1) $2,556 $2,258 $2,293 $2,134 $2,189
Current quarter vs prior quarter 13 % (2 )% 7 % (3 )% 11 %
Current quarter vs prior year quarter 17 % 15 % 16 % 14 % N/A

(1) Q4'14 - Q2'15 net revenues are presented on a non-GAAP pro forma basis to reflect the impact of lower transaction revenues from payment services provided by PayPal to eBay as the result of the terms of certain commercial agreements negotiated between the parties that stipulate lower transaction fees than those historically charged to eBay. For a reconciliation to GAAP net revenues, please see "Reconciliation of GAAP Net Revenues by Type to Non-GAAP Pro Forma Net Revenues by Type, and GAAP Net Revenues by Geography to Non-GAAP Pro Forma Net Revenues by Geography" included in the press release.

 
 
Net Revenues by Geography     Three Months Ended
December 31,     September 30,    

   June 30,   

   

  March 31,  

    December 31,
2015 2015 2015 2015 2014

(In millions, except percentages)

U.S. net revenues(1)(2) $ 1,302 $ 1,138 $ 1,167 $ 1,028 $ 1,040
Current quarter vs prior quarter 14 % (2 )% 14 % (1 )% 10 %
Current quarter vs prior year quarter 25 % 20 % 19 % 14 % N/A
Percent of total 51 % 50 % 51 % 48 % 48 %
 
International net revenues(1)(2) 1,254 1,120 1,126 1,106 1,149
Current quarter vs prior quarter 12 % (1 )% 2 % (4 )% 12 %
Current quarter vs prior year quarter 9 % 9 % 13 % 14 % N/A
(FXN) Current quarter vs prior year quarter 18 % 17 % 18 % 20 % N/A
Percent of total 49 % 50 % 49 % 52 % 52 %
 
Total net revenues(1)(2) $ 2,556 $ 2,258 $ 2,293 $ 2,134 $ 2,189
Current quarter vs prior quarter 13 % (2 )% 7 % (3 )% 11 %
Current quarter vs prior year quarter 17 % 15 % 16 % 14 % N/A
(FXN) Current quarter vs prior year quarter 21 % 19 % 19 % 17 % N/A

(1) Net revenues are attributed to U.S. and international geographies primarily based upon the country in which the merchant is located, or in the case of a cross border transaction, may be earned from each of the respective countries in which the consumer and merchant reside. Net revenues earned from value added services are typically attributed to the country in which either the consumer or the merchant reside.

(2) Q4'14 - Q2'15 net revenues are presented on a non-GAAP pro forma basis to reflect the impact of lower transaction revenues from payment services provided by PayPal to eBay as the result of the terms of certain commercial agreements negotiated between the parties that stipulate lower transaction fees than those historically charged to eBay. For a reconciliation to GAAP net revenues, please see "Reconciliation of GAAP Net Revenues by Type to Non-GAAP Pro Forma Net Revenues by Type, and GAAP Net Revenues by Geography to Non-GAAP Pro Forma Net Revenues by Geography" included in the press release.

 
 
PayPal Holdings, Inc.
Unaudited Supplemental Operating Data
 
    Three Months Ended
December 31,     September 30,    

   June 30,   

   

  March 31,  

    December 31,
2015 2015 2015 2015 2014

(In millions, except percentages)

Active customer accounts(1) 179 173 169 165 162
Current quarter vs prior quarter 4 % 2 % 2 % 2 % 3 %
Current quarter vs prior year quarter 11 % 10 % 11 % 11 % 13 %
 
Number of payment transactions(2) 1,428 1,216 1,161 1,123 1,144
Current quarter vs prior quarter 17 % 5 % 3 % (2 )% 18 %
Current quarter vs prior year quarter 25 % 25 % 25 % 22 % 23 %
 
Payment transactions per active account(3) 27.5 26.9 26.1 25.2 24.5
Current quarter vs prior quarter 2 % 3 % 3 % 3 % 3 %
Current quarter vs prior year quarter 12 % 12 % 11 % 9 % 7 %
 
Total Payment Volume(4) $ 81,523 $ 69,738 $ 67,482 $ 63,021 $ 66,039
Current quarter vs prior quarter 17 % 3 % 7 % (5 )% 14 %
Current quarter vs prior year quarter 23 % 20 % 19 % 17 % 23 %
(FXN) Current quarter vs prior year quarter 29 % 27 % 27 % 25 % 26 %
 
Transaction Expense Rate(5) 0.92 % 0.93 % 0.94 % 0.91 % 0.90 %
Transaction and Loan Loss Rate(6) 0.30 % 0.29 % 0.29 % 0.30 % 0.31 %
Transaction Margin(7) 61.1 % 62.3 % 63.8 % 64.2 % 63.5 %
(1) An active customer account is a registered account that successfully sent or received at least one payment or payment reversal through our Payments Platform, excluding transactions processed through our gateway and Paydiant products, in the past 12 months.
(2) Payment transactions is the total number of payments, net of payment reversals, successfully completed through our Payments Platform, excluding transactions processed through our gateway and Paydiant products.

(3) Number of payment transactions per active customer account reflects the total number of payment transactions within the previous 12 month period, divided by active customer accounts at the end of the period.

(4) Total Payment Volume or "TPV" is the value of payments, net of payment reversals, successfully completed through our Payments Platform, excluding transactions processed through our gateway and Paydiant products.

(5) Transaction expense rate is calculated by dividing transaction expense by TPV.

(6) Transaction and loan loss rate is calculated by dividing transaction and loan loss by TPV.

(7) Transaction margin is total revenue less transaction expense and transaction and loan loss, divided by total revenue.

Q4'14 - Q2'15 transaction expense rate, transaction and loan loss rate, and transaction margin include the impact of pro forma adjustments directly attributable to the separation of the company from eBay Inc. on July 17, 2015 had they existed historically.
 

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 earnings per diluted share, non-GAAP operating margin, non-GAAP effective tax rate and free cash flow. In addition, the company has included certain pro forma adjustments in its presentation of non-GAAP net revenue, non-GAAP net income, non-GAAP earnings per diluted share, and non-GAAP operating margin in this presentation (collectively referred to as "non-GAAP pro forma measures"). These adjustments reflect items that are factually supportable, directly attributable to the separation of the company from eBay Inc. on July 17, 2015, and expected to have a continuing impact on the company's results of operations. The company has included these pro forma adjustments because management believes that they help to facilitate comparisons of the company's operating results between periods. In discussing year-over-year comparisons, the company has chosen to present non-GAAP pro forma measures because it believes that these measures provide investors a consistent basis for reviewing the company's performance across different periods.

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, significant gains or losses from the disposal/acquisition of a business, certain effects of the separation from eBay, certain gains and losses on investments, restructuring-related charges 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 earnings per diluted share, non-GAAP operating margin and non-GAAP effective tax rate:

Stock-based compensation expense and related employer payroll taxes. This consists of expenses for stock options, restricted stock and employee stock purchases. The company excludes stock-based compensation expense from its non-GAAP measures primarily because they are non-cash expenses that management does not believe are reflective of ongoing operating results. The related employer payroll taxes is dependent on the company's stock price and the timing and size of exercises by employees of their stock options and the vesting of their restricted stock, over which management has limited to no control, and as such management does not believe it correlates to the company's operation of the 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 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.

Other certain significant gains, losses, or charges that are not indicative of the Company's core operating results. These expenses are significant gains, losses, 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 or be repeated in the future. The company excludes these amounts from its results primarily because management does not believe they are indicative of its current or ongoing operating results.

Separation. These are significant expenses related to the separation of PayPal from eBay Inc. into an independent publicly traded company. These consist primarily of third-party consulting fees, legal fees, employee retention payments and other income and expenses incurred to complete the separation.

Tax effect of non-GAAP adjustments. This amount is used 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 revenue 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 revenue 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 by 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 December 31,
2015   2014

(In millions, except percentages)

(unaudited)

GAAP operating income $ 411 $ 348
Stock-based compensation expense and related employer payroll taxes 90 81
Acquisition related transaction expense 5
Separation (2 )
Restructuring (1 ) 1
Amortization of acquired intangible assets   29     17  
Total non-GAAP operating income adjustments   121     99  
Non-GAAP operating income $ 532   $ 447  
Non-GAAP operating margin   20.8 %   20.4 %
 
 
Year Ended December 31,
2015 2014

(In millions, except percentages)

(unaudited)

GAAP operating income $ 1,461 $ 1,268
Stock-based compensation expense and related employer payroll taxes 356 309
Amortization of acquired intangible assets 85 70
Separation 15
Restructuring 48 1
Acquisition related transaction expense   10      
Total non-GAAP operating income adjustments   514     380  
Non-GAAP operating income $ 1,975   $ 1,648  
Non-GAAP operating margin   21.4 %   20.5 %
 
 

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 December 31,

2015   2014

(In millions, except percentages and
per share amounts)

(unaudited)

GAAP income before income taxes $ 418

$

347

GAAP provision for income taxes   51  

 

61

 
GAAP net income $ 367

$

286

Non-GAAP adjustments to net income:
Non-GAAP operating income adjustments (see table above) 121

 

99

Amortization of investments

 

Other certain significant gains, losses, or charges

 

Separation (other income and expense)

 

Tax effect of non-GAAP adjustments   (45 )

 

(27

)
Non-GAAP net income $ 443

$

358

 
Diluted net income per share:(1)(2)
GAAP $ 0.30  

$

0.23

 
Non-GAAP $ 0.36  

$

0.29

 
Shares used in GAAP diluted net income per-share calculation   1,230  

 

1,224

 
Shares used in non-GAAP diluted net income per-share calculation   1,230  

 

1,224

 
 
GAAP effective tax rate   12 %

 

18

%
Tax effect of non-GAAP adjustments to net income   6 %

 

2

%
Non-GAAP effective tax rate   18 %

 

20

%
 

(1) On July 17, 2015, the distribution date, eBay stockholders of record as of the close of business on July 8, 2015 received one share of PayPal common stock for every share of eBay common stock held as of the record date. GAAP and Non-GAAP net income per diluted share for the three months ended December 31, 2014 was based on the number of shares of PayPal common stock outstanding on the distribution date. The same number of shares was used to calculate the amount for the prior year since no PayPal equity was outstanding for those periods.

(2) GAAP and Non-GAAP net income per diluted share for the three months ended December 31, 2015 was based on the weighted average number of common shares outstanding.

 
 
Year Ended December 31,
2015 2014

(In millions, except percentages and
per share amounts)

(unaudited)

GAAP income before income taxes $ 1,488 $ 1,261
GAAP provision for income taxes   260     842  
GAAP net income 1,228 419
Non-GAAP adjustments to net income:
Non-GAAP operating income adjustments (see table above) 514 380
Amortization of investments 4
Other certain significant gains, losses, or charges 646
Separation (other income and expense) (12 )
Tax effect of non-GAAP adjustments   (142 )   (106 )
Non-GAAP net income $ 1,588 $ 1,343
 
Diluted net income per share:(1)(2)
GAAP $ 1.00 $ 0.34
Non-GAAP $ 1.29 $ 1.10
Shares used in GAAP diluted net income per-share calculation 1,229 1,224
Shares used in non-GAAP diluted net income per-share calculation 1,229 1,224
 
GAAP effective tax rate 17 % 67 %
Tax effect of non-GAAP adjustments to net income   3 %   (49 )%
Non-GAAP effective tax rate   20 %   18 %
 

(1) On July 17, 2015, the distribution date, eBay stockholders of record as of the close of business on July 8, 2015 received one share of PayPal common stock for every share of eBay common stock held as of the record date. Basic and diluted net income per share for the year ended December 31, 2014 was calculated using the number of common shares distributed on the distribution date.

(2) Basic and diluted net income per share for the year ended December 31, 2015 was calculated using the weighted average number of common shares outstanding for the period beginning after the distribution date.

 
 

Reconciliation of Operating Cash Flow to Free Cash Flow

       
Three Months Ended December 31,

   Year Ended December 31,   

2015   2014 2015   2014

(In millions/unaudited)

Net cash provided by operating activities $ 728 $ 631 $ 2,546 $ 2,220
Less: Purchases of property and equipment   (164 )   (123 )   (722 )   (492 )
Free cash flow $ 564   $ 508   $ 1,824   $ 1,728  
 
 

PayPal Holdings, Inc.

Reconciliation of GAAP Operating Margin to Non-GAAP Pro Forma Operating Margin,
GAAP Net Income to Non-GAAP Pro Forma Net Income,
and GAAP Diluted EPS to Non-GAAP Pro Forma Diluted EPS
 
    Three Months Ended December 31, 2014
    Non-GAAP         Pro Forma     Non-GAAP  
Reported Entries Non-GAAP Adjustments Pro Forma

(In millions, except percentages and per share amounts/unaudited)

Net revenues $ 2,193 $ 2,193 $ (4 ) (f) $ 2,189
Operating expenses
Transaction expense 594 594 594
Transaction and loan losses 193 193 11 (g) 204
Customer support and operations 280 (13 ) (a) 267 5 (g)(h)(i) 272
Sales and marketing 263 (19 ) (a) 244 (15 ) (k) 229
Product development 239 (28 ) (a) 211 211
General and administrative 144 (19 ) (a) 123 2 (g) 125
(1 ) (b)
(1 ) (e)
Depreciation and amortization 132 (1 ) (a) 114 4 (j) 118
    (17 ) (c)        
Total operating expense   1,845     (99 )   1,746     7     1,753  
Operating income 348 99 447 (11 ) 436
Other income (expense), net   (1 )       (1 )       (1 )
Income before income taxes   347     99     446     (11 )   435  
Income tax expense   61     27   (d)   88     (1 ) (l)   87  
Net income (loss) $ 286   $ 72   $ 358   $ (10 ) $ 348  
 

Net income per share:

Basic $ 0.23 $ 0.29 $ 0.29
Diluted $ 0.23 $ 0.29 $ 0.28
 
Weighted average shares:
Basic $ 1,218 (m) $ 1,218 (m) $ 1,218 (m)
Diluted $ 1,224 (m) $ 1,224 (m) $ 1,224 (m)
 
Operating margin 16 % 4 % 20 %

%

20 %
Effective tax rate 18 % 2 % 20 %

%

20 %
 
   
Year Ended December 31, 2014
    Non-GAAP         Pro Forma     Non-GAAP  
Reported Entries Non-GAAP Adjustments Pro Forma

(In millions, except percentages and per share amounts/unaudited)

Net revenues $ 8,025 $ 8,025 $ (13 ) (f) $ 8,012
Operating expenses
Transaction expense 2,170 2,170 2,170
Transaction and loan losses 646 646 43 (g) 689
Customer support and operations 1,055 (52 ) (a) 1,003 13 (g)(h)(i) 1,016
Sales and marketing 998 (59 ) (a) 939 (60 ) (k) 879
Product development 890 (108 ) (a) 782 782
General and administrative 482 (75 ) (a) 395 6 (g) 401
(11 ) (b)
(1 ) (e)
Depreciation and amortization 516 (4 ) (a) 442 16 (j) 458
  (70 ) (c)      
Total operating expense   6,757   (380 )   6,377     18     6,395  
Operating income 1,268 380 1,648 (31 ) 1,617
Other income (expense), net (7 ) 4 (n) (7 ) (7 )
  (4 ) (o)      
Income before income taxes   1,261   380     1,641     (31 )   1,610  
Income tax expense   842   (544 ) (d)   298     (3 ) (l)   295  
Net income (loss) $ 419   $ 924   $ 1,343   $ (28 ) $ 1,315  
 

Net income per share:

Basic $ 0.34 $ 1.10 $ 1.08
Diluted $ 0.34 $ 1.10 $ 1.07
 
Weighted average shares:
Basic $ 1,218 (m) $ 1,218 (m) $ 1,218 (m)
Diluted $ 1,224 (m) $ 1,224 (m) $ 1,224 (m)
 
Operating margin 16 % 5 % 21 % (1 )% 20 %
Effective tax rate 67 % (49 )% 18 %

%

 

18

%

Notes:

(a) Stock-based compensation expense
(b) Employer payroll taxes on stock-based compensation
(c) Amortization of acquired intangible assets
(d) Income taxes associated with certain non-GAAP entries
(e) Intangible amortization
(f) Reflects the impact of lower transaction revenues from payment services provided by PayPal to eBay as the result of the terms of certain commercial agreements negotiated between the parties that stipulate lower transaction fees than those historically charged to eBay.
(g) Reflects the effect of the protection program losses and service costs that were historically reimbursed to PayPal by eBay for the administration of eBay's customer protection programs. Following the separation, this program is no longer being administered by PayPal, and therefore these costs are no longer reimbursed by eBay. Following the separation, PayPal's customer protection programs have been extended to its customers' purchases on eBay, and therefore PayPal expects to incur incremental costs associated with its customer protection programs.
(h) Reflects the impact of additional costs for shared data centers and information technology facilities, except for the facilities in Phoenix, Arizona, and Denver, Colorado, that continue to be managed by eBay after the separation pursuant to the colocation services agreements between the parties.
(i) Reflects the reversal of historically allocated amounts from eBay to PayPal related to data center facilities in Phoenix, Arizona, and Denver, Colorado, pursuant to the colocation services agreements between the parties.
(j) Reflects depreciation expense related to data center facilities in Phoenix, Arizona, and Denver, Colorado, pursuant to the colocation services agreements between the parties.
(k) Reflects the net reduction of costs charged to PayPal by eBay for referral services and user penetration.
(l) Reflects the tax effect of pro forma adjustments using the statutory tax rate for the three months ended December 31, 2014 and year ended December 31, 2014.
(m) The weighted average number of common shares outstanding for basic and diluted earnings per share for the period is based on the number of shares of PayPal common stock outstanding as of July 17, 2015, the distribution date from eBay.
(n) Amortization of investments
(o) Other certain gains and losses on investments
 
 

Reconciliation of GAAP Net Revenues by Type to Non-GAAP Pro Forma Net Revenues by Type,

and GAAP Net Revenues by Geography to Non-GAAP Pro Forma Net Revenues by Geography

 
Net Revenues by Type Three Months Ended
December 31,   September 30,  

  June 30,  

 

  March 31,  

  December 31,
2015   2015   2015   2015   2014

(In millions/unaudited)

Transaction revenues $ 2,262 $ 1,982 $ 1,970 $ 1,914 $ 1,967
Pro forma adjustment(1)               (4 )     (3 )     (4 )
Pro forma transaction revenues   2,262       1,982       1,966       1,911       1,963  
 
Other value added services $ 294 $ 276 $ 327 $ 223 $ 226
Pro forma adjustment(1)                            
Pro forma other value added services   294       276       327       223       226  
 
Total net revenues $ 2,556 $ 2,258 $ 2,297 $ 2,137 $ 2,193
Pro forma adjustment(1)               (4 )     (3 )     (4 )
Total pro forma net revenues   2,556       2,258       2,293       2,134       2,189  
 

(1) Reflects the impact of lower transaction revenues from payment services provided by PayPal to eBay as the result of the terms of certain commercial agreements negotiated between the parties that stipulate lower transaction fees than those historically charged to eBay.

 
 
Net Revenues by Geography Three Months Ended
December 31, September 30,

  June 30,  

  March 31,  

December 31,
2015   2015   2015   2015   2014

(In millions/unaudited)

U.S. net revenues $ 1,302 $ 1,138 $ 1,170 $ 1,030 $ 1,043
Pro forma adjustment(1)               (3 )     (2 )     (3 )
Total pro forma U.S. net revenues   1,302       1,138       1,167       1,028       1,040  
 
International net revenues $ 1,254 $ 1,120 $ 1,127 $ 1,107 $ 1,150
Pro forma adjustment(1)               (1 )     (1 )     (1 )
Total pro forma International net revenues   1,254       1,120       1,126       1,106       1,149  
 
Total net revenues $ 2,556 $ 2,258 $ 2,297 $ 2,137 $ 2,193
Pro forma adjustment(1)               (4 )     (3 )     (4 )
Total pro forma net revenues   2,556       2,258       2,293       2,134       2,189  
 

(1) Reflects the impact of lower transaction revenues from payment services provided by PayPal to eBay as the result of the terms of certain commercial agreements negotiated between the parties that stipulate lower transaction fees than those historically charged to eBay.

 

PayPal
Investor Relations Contacts
Tom Hudson
Vice President, Investor Relations
tom@paypal.com
or
Tracey Ford
Senior Director, Investor Relations
tford@paypal.com
or
Media Relations Contact
Martha Cass, 416-860-6213
Senior Director, Corporate Communications
mcass@paypal.com

Source: PayPal Holdings, Inc.

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