PayPal Holdings
Jan 31, 2018
PDF

PayPal Reports Fourth Quarter and Full Year 2017 Results

Q4 GAAP EPS grew 57% to $0.50; Q4 non-GAAP EPS grew 30% to $0.55

Q4 GAAP revenue grew 26% to $3.74 billion; Q4 non-GAAP revenue grew 24% to $3.71 billion

SAN JOSE, Calif.--(BUSINESS WIRE)-- Global technology platform and digital payments leader PayPal Holdings, Inc. (NASDAQ: PYPL) today announced fourth quarter and full year results for the period ended December 31, 2017.

"PayPal had a transformative year in 2017. We brought record numbers of new customer accounts to our platform by democratizing financial services for consumers and commerce capabilities for merchants. We also substantially expanded our opportunities for future growth and redefined our competitive position through our successful partnership strategy driven by our open platform architecture," said Dan Schulman, President and CEO of PayPal.

Schulman continued, "I am very pleased to announce that PayPal and eBay have signed a term sheet to make PayPal available, as a way to pay on eBay, through July 2023. We enter 2018 with strong momentum supporting an increasingly differentiated and expansive value proposition, and a focused commitment to deliver increasing value to our customers and shareholders."

Significant events in fourth quarter 2017

Financial highlights for fourth quarter 2017 include:

Financial highlights for full year 2017 include:

Fourth quarter and full year 2017 impact of held for sale accounting on cash flow

The application of held for sale accounting resulted in a change to the characterization of cash flows related to the U.S. consumer credit portfolio. Cash flows related to repayments of loans originated prior to the application of held for sale accounting continue to be reflected in cash flow from investing activities. Cash flows related to the net changes in loans originated following our application of held for sale accounting are now reflected in cash flow from operating activities. In the fourth quarter, $1.3 billion of net cash outflows recognized in cash flow from operating activities would previously have been recognized in cash flow from investing activities. This change resulted in operating cash flow of ($147) million with free cash flow of ($327) million in the fourth quarter. For full year 2017, inclusive of the impact from held for sale accounting, PayPal is reporting operating cash flow of $2.5 billion with free cash flow of $1.9 billion.

Operating highlights for fourth quarter 2017 include:

Operating highlights for full year 2017 include:

PayPal's expanding value proposition

PayPal processed $131 billion in TPV in the fourth quarter, representing growth of 32%, or 29% on an FX-neutral basis. Merchant Services TPV grew 36%, or 33% on an FX-neutral basis, and represented 87% of overall TPV for the quarter. eBay volume grew 10%, or 7% on an FX-neutral basis, and represented approximately 13% of overall TPV for the fourth quarter versus approximately 16% a year ago.

Person-to-Person (P2P) volume grew 50% to approximately $27 billion, and represented approximately 20% of TPV in the fourth quarter. Venmo, the company's social payments platform, processed $10.4 billion in payment volume in the fourth quarter, an increase of 86% year over year, and for the first time surpassed $10 billion in payment volume processed in a quarter. For the full year, Venmo's volume increased 97% with approximately $35 billion in payment volume processed.

Driven by strong mobile engagement on our platform over the holiday shopping season, PayPal processed approximately $48 billion in mobile payment volume in the fourth quarter, representing approximately 53% growth year over year.

Extending PayPal's global reach and merchant offering

During the fourth quarter, PayPal announced the launch of domestic operations in India. Merchants offering PayPal will be able to process both local and global payments through the platform, gaining access to PayPal's more than 200 million customers around the world and in India through a single integration.

PayPal also made progress introducing Pay with Venmo to consumers. More than two million U.S. merchants now offer Venmo as a mobile payment option through the PayPal and Braintree platforms.

One Touch, PayPal's innovative checkout experience, continues its global roll out, ending the fourth quarter with 80 million consumers opted in, up from 40 million a year ago. At the end of 2017, eight million merchants offered One Touch compared with five million a year ago.

Subsequent to the end of the fourth quarter, PayPal and eBay signed a term sheet to continue to feature PayPal at checkout on the eBay Marketplace through July 2023.

Fourth Quarter 2017 Financial and Operating Highlights

 

Fourth Quarter

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

2017

 

2016

 

YoY Growth

 

FX-Neutral
YoY Growth

Total Payment Volume (TPV) $ 131,449 $ 99,348 $ 32,101   32 % 29 %
GAAP
Net revenues $ 3,744 $ 2,981 $ 763 26 % 26 %
Operating margin 22.5 % 15.4 % ** 708bps N/A
Effective tax rate 28.2 % 16.8 % ** 1,140 bps N/A
Net income $ 620 $ 390 $ 230 59 % N/A
Earnings per diluted share $ 0.50 $ 0.32 $ 0.18 57 % N/A
Net cash provided by operating activities $ (147 ) $ 923 $ (1,070 ) (116 %) N/A
Non-GAAP
Net revenues $ 3,705 $ 2,981 $ 724 24 % 24 %
Operating margin 21.8 % 20.8 % ** 102bps N/A
Effective tax rate 19.1 % 18.5 % ** 61bps N/A
Net income $ 670 $ 512 $ 158 31 % N/A
Earnings per diluted share $ 0.55 $ 0.42 $ 0.13 30 % N/A
Free cash flow $ (327 ) $ 771 $ (1,098 ) (142 %) N/A
 

** Not meaningful.

 

Cash, Cash Equivalents and Investments - PayPal's cash, cash equivalents and investments totaled $7.7 billion as of December 31, 2017.

2018 Financial Guidance

Full year 2018 revenue and earnings guidance

First 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 fourth quarter and full year 2017 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 handle (@PayPal), 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/) 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 227 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 by 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.

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 revenue, non-GAAP net income, non-GAAP earnings per diluted share, non-GAAP operating income, non-GAAP operating margin, non-GAAP effective tax rate and 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 Net Revenues to Non-GAAP Net Revenues and 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."

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 first quarter and full year 2018, the expected impact of the Tax Cuts and Jobs Act, 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 and economic 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, Paydiant 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 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 the planned transaction with Synchrony Financial will not be completed or that we may not realize the expected benefits of the transaction; 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 is as of January 31, 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

 

December 31,
2017

December 31,
2016

(In millions, except par value)
ASSETS
Current assets:
Cash and cash equivalents $ 2,883 $ 1,590
Short-term investments 2,812 3,385
Accounts receivable, net 283 214
Loans and interest receivable, net 1,314 5,348
Loans and interest receivable, held for sale 6,398
Funds receivable and customer accounts 18,242 14,363
Prepaid expenses and other current assets 713   833  
Total current assets 32,645   25,733  
Long-term investments 1,961 1,539
Property and equipment, net 1,528 1,482
Goodwill 4,339 4,059
Intangible assets, net 168 211
Other assets 133   79  
Total assets $ 40,774   $ 33,103  
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 257 $ 192
Notes payable 1,000
Funds payable and amounts due to customers 19,742 15,163
Accrued expenses and other current liabilities 1,781 1,459
Income taxes payable 83   64  
Total current liabilities 22,863 16,878
Deferred tax liability and other long-term liabilities 1,917   1,513  
Total liabilities 24,780   18,391  
Equity:
Common stock, $0.0001 par value; 4,000 shares authorized; 1,200 and 1,207 shares outstanding as of December 31, 2017 and 2016, respectively
Treasury stock at cost, 47 and 27 shares as of December 31, 2017 and 2016, respectively (2,001 ) (995 )
Additional paid-in-capital 14,314 13,579
Retained earnings 3,823 2,069
Accumulated other comprehensive income (loss) (142 ) 59  
Total equity 15,994   14,712  
Total liabilities and equity $ 40,774   $ 33,103  
 
   

PayPal Holdings, Inc.

Unaudited Condensed Consolidated Statement of Income

 
Three Months Ended December 31, Year Ended December 31,
2017   2016 2017   2016
(In millions, except per share amounts)
 
Net revenues $ 3,744 $ 2,981 $ 13,094 $ 10,842
Operating expenses:
Transaction expense 1,266 954 4,419 3,346
Transaction and loan losses 40 307 1,011 1,088

Customer support and operations (1)

366 328 1,364 1,267

Sales and marketing (1)

328 253 1,128 969

Product development (1)

267 215 953 834

General and administrative (1)

315 275 1,155 1,028

Depreciation and amortization (1)

227 189 805 724

Restructuring and other charges

92     132  
Total operating expenses 2,901   2,521   10,967   9,256
Operating income 843 460 2,127 1,586
Other income (expense), net 21   9   73   45
Income before income taxes 864 469 2,200 1,631
Income tax expense 244   79   405   230
Net income $ 620   $ 390   $ 1,795   $ 1,401
Net income per share:
Basic $ 0.52 $ 0.32 $ 1.49 $ 1.16
Diluted $ 0.50 $ 0.32 $ 1.47 $ 1.15
Weighted average shares:
Basic 1,203 1,207 1,203 1,210
Diluted 1,228 1,216 1,221 1,218
 
(1) Includes stock-based compensation as follows:
Customer support and operations 40 24 142 85
Sales and marketing 43 25 140 84
Product development 72 37 240 139
General and administrative 63 39 210 130
Depreciation and amortization 4   2   12   6
$ 222   $ 127   $ 744   $ 444
 
   

PayPal Holdings, Inc.

Unaudited Condensed Consolidated Statement of Cash Flows

 
Three Months Ended December 31, Year Ended December 31,
2017   2016 2017   2016

(In millions)

 
Cash flows from operating activities:
Net income $ 620 $ 390 $ 1,795 $ 1,401
Adjustments:
Transaction and loan losses 40 307 1,011 1,088
Depreciation and amortization 227 189 805 724
Stock-based compensation 219 125 733 438
Deferred income taxes (1,312 ) (19 ) (1,299 ) 52
Excess tax benefits from stock-based compensation (4 ) (40 )
Gain on sale of principal loans receivable held for sale, net (9 ) (7 ) (25 ) (24 )
Cost basis adjustments to loans and interest receivable held for sale 92 92
Changes in assets and liabilities:
Accounts receivable 17 (27 ) 12 (77 )
Changes in loans and interest receivable held for sale, net (1,324 ) 7 (1,308 ) 24
Accounts payable 58 (17 ) 62 11
Income taxes payable (5 ) 18 19 69
Other assets and liabilities 1,230   (39 ) 634   (508 )
Net cash provided by operating activities (147 ) 923   2,531   3,158  
Cash flows from investing activities:
Purchases of property and equipment (180 ) (152 ) (667 ) (669 )
Changes in principal loans receivable, net 234 (639 ) (920 ) (1,523 )
Purchases of investments (5,191 ) (4,057 ) (19,418 ) (21,041 )
Maturities and sales of investments 5,423 3,815 18,450 18,429
Acquisitions, net of cash acquired (323 ) (19 )
Funds receivable and customer accounts (1,244 ) (796 ) (2,480 ) (176 )
Net cash used in investing activities (958 ) (1,829 ) (5,358 ) (4,999 )
Cash flows from financing activities:
Proceeds from issuance of common stock 44 51 144 109
Purchases of treasury stock (300 ) (50 ) (1,006 ) (995 )
Excess tax benefits from stock-based compensation 4 40
Tax withholdings related to net share settlements of equity awards (26 ) (23 ) (166 ) (118 )
Borrowings under financing arrangements, net of repayments 200 820 (21 )
Funds payable and amounts due to customers 1,739   1,161   4,292   3,023  
Net cash provided by financing activities 1,657   1,143   4,084   2,038  
Effect of exchange rate changes on cash and cash equivalents 1   (16 ) 36    
Net change in cash and cash equivalents 553 221 1,293 197
Cash and cash equivalents at beginning of period 2,330   1,369   1,590   1,393  
Cash and cash equivalents at end of period $ 2,883   $ 1,590   $ 2,883   $ 1,590  
Supplemental cash flow disclosures:
Cash paid for interest $ 3 $ 1 $ 6 $ 4
Cash paid for income taxes $ 29 $ 5 $ 117 $ 48
 
 

PayPal Holdings, Inc.

Unaudited Summary of Consolidated Net Revenues
 
We earn revenue from the following types of transactions:
  • Transaction revenues: Net transaction fees charged to consumers and merchants based on the volume of activity processed through our Payments Platform, including our PayPal, PayPal Credit, Venmo, Braintree, Xoom and TIO products.
  • Other value added services: Net revenues derived principally from interest and fees earned on our loans and interest receivable, net and held for sale portfolio, subscription fees, gateway fees, gains on sale of participation interest in certain consumer loans receivable and merchant working capital loans and advances, revenue share we earn through partnerships, interest earned on certain PayPal customer account balances, fees earned through our Paydiant products and other services that we provide to consumers and merchants.

Net Revenues by Type

Three Months Ended

December 31,
2017

 

September 30,
2017

June 30,
2017

March 31,
2017

December 31,
2016

(In millions, except percentages)
Transaction revenues $ 3,221 $ 2,833 $ 2,749 $ 2,599 $ 2,615

Current quarter vs prior quarter

14 % 3 % 6 % (1 )% 13 %
Current quarter vs prior year quarter 23 % 22 % 18 % 16 % 16 %
Percentage of total 86 % 87 % 88 % 87 % 88 %
 
Other value added services 523 406 387 376 366
Current quarter vs prior quarter 29 % 5 % 3 % 3 % 4 %
Current quarter vs prior year quarter 43 % 15 % 18 % 23 % 24 %
Percentage of total 14 % 13 % 12 % 13 % 12 %
 
Total net revenues $ 3,744 $ 3,239 $ 3,136 $ 2,975 $ 2,981
Current quarter vs prior quarter 16 % 3 % 5 % % 12 %
Current quarter vs prior year quarter 26 % 21 % 18 % 17 % 17 %

 

 

Net Revenues by Geography Three Months Ended

December 31,
2017

 

September 30,
2017

 

June 30,
2017

 

March 31,
2017

 

December 31,
2016

(In millions, except percentages)
U.S. net revenues $ 2,045 $ 1,743 $ 1,690 $ 1,606 $ 1,574
Current quarter vs prior quarter 17 % 3 % 5 % 2 % 10 %
Current quarter vs prior year quarter 30 % 21 % 20 % 20 % 21 %
Percent of total 55 % 54 % 54 % 54 % 53 %
 
International net revenues 1,699 1,496 1,446 1,369 1,407
Current quarter vs prior quarter 14 % 3 % 6 % (3 )% 14 %
Current quarter vs prior year quarter 21 % 22 % 16 % 14 % 12 %
(FXN) Current quarter vs prior year quarter 21 % 22 % 20 % 18 % 17 %
Percent of total 45 % 46 % 46 % 46 % 47 %
 
Total net revenues $ 3,744 $ 3,239 $ 3,136 $ 2,975 $ 2,981
Current quarter vs prior quarter 16 % 3 % 5 % % 12 %
Current quarter vs prior year quarter 26 % 21 % 18 % 17 % 17 %
(FXN) Current quarter vs prior year quarter 26 % 22 % 20 % 19 % 19 %
 
 

PayPal Holdings, Inc.

Unaudited Supplemental Operating Data

 
Three Months Ended,

December 31,
2017

 

September 30,
2017

 

June 30,
2017

 

March 31,
2017

 

December 31,
2016

(In millions, except percentages)
Active customer accounts(1) 227 218 210 203 197
Current quarter vs prior quarter 4 % 4 % 3 % 3 % 3 %
Current quarter vs prior year quarter 15 % 14 % 12 % 11 % 10 %
 
Number of payment transactions(2) 2,199 1,900 1,775 1,732 1,755
Current quarter vs prior quarter 16 % 7 % 2 % (1 )% 16 %
Current quarter vs prior year quarter 25 % 26 % 23 % 23 % 23 %
 
Payment transactions per active account(3) 33.6 32.8 32.3

31.7

31.1
Current quarter vs prior quarter 2 % 2 % 2 % 2 % 3 %
Current quarter vs prior year quarter 8 % 9 % 10 % 12 % 13 %
 
Total Payment Volume(4) $ 131,449 $ 114,045 $ 106,444 $ 99,327 $ 99,348
Current quarter vs prior quarter 15 % 7 % 7 % % 14 %
Current quarter vs prior year quarter 32 % 30 % 23 % 23 % 22 %
(FXN) Current quarter vs prior year quarter 29 % 29 % 26 % 25 % 25 %
 
Transaction Expense Rate(5) 0.96 % 0.97 % 1.00 % 0.99 % 0.96 %
Transaction and Loan Loss Rate(6) 0.03 % 0.32 % 0.29 % 0.30 % 0.31 %
Transaction Margin(7) 65.1 % 54.8 % 56.3 % 56.7 % 57.7 %
 

(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 are 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 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.

 

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 revenues, non-GAAP net income, non-GAAP net income per diluted share, non-GAAP operating income, non-GAAP operating margin, non-GAAP effective tax rate and 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 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 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 Net Revenues to Non-GAAP Net Revenues and

GAAP Operating Margin to Non-GAAP Operating Margin

 
Three Months Ended December 31, Year Ended December 31,
2017   2016 2017   2016
(In millions)
GAAP net revenues $ 3,744 $ 2,981 $ 13,094 $ 10,842
Other(1) (39 )     (39 )
Non-GAAP net revenues $ 3,705   $ 2,981   $ 13,055   $ 10,842
 

(1) Elimination of allowance on interest receivable due to the U.S. consumer credit portfolio designation as held for sale.

 
Three Months Ended December 31, Year Ended December 31,
2017 2016 2017 2016
(In millions, except percentages)
GAAP operating income $ 843 $ 460 $ 2,127 $ 1,586
Stock-based compensation expense and related employer payroll taxes 223 127 761 455
Amortization of acquired intangible assets(1) 58 32 129 133
Restructuring 40
Other(2) (317 )     (302 )  
Total non-GAAP operating income adjustments (36 ) 159     628   588  
Non-GAAP operating income $ 807   $ 619   $ 2,755   $ 2,174  
Non-GAAP operating margin 22 % 21 % 21 % 20 %
 

(1) Includes $30 million impairment related to a portion of acquired TIO customer-related intangible assets in 2017.

(2) Includes elimination of allowance on loans receivable ($283 million), allowance on interest receivable ($39 million) due to the U.S. consumer credit portfolio designation as held for sale and certain fees associated with the sale ($5 million), and impairment of an investment in an intellectual property fund ($15 million).

 
   

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, Year Ended December 31,
2017   2016 2017   2016
(In millions, except percentages)
(unaudited)
GAAP income before income taxes $ 864 $ 469 $ 2,200 $ 1,631
GAAP income tax expense 244   79     405   230  
GAAP net income 620 390 1,795 1,401
Non-GAAP adjustments to net income:
Non-GAAP operating income adjustments (see table above) (36 ) 159 628 588
Other(1) 201 224
Tax effect of non-GAAP adjustments (115 ) (37 )   (329 ) (164 )
Non-GAAP net income $ 670   $ 512   $ 2,318   $ 1,825  
 
Diluted net income per share:
GAAP $ 0.50 $ 0.32 $ 1.47 $ 1.15
Non-GAAP $ 0.55 $ 0.42 $ 1.90 $ 1.50
Shares used in GAAP diluted share calculation 1,228 1,216 1,221 1,218
Shares used in non-GAAP diluted share calculation 1,228 1,216 1,221 1,218
 
GAAP effective tax rate 28 % 17 % 18 % 14 %
Tax effect of non-GAAP adjustments to net income (9 )% 1 % % 4 %
Non-GAAP effective tax rate 19 % 18 % 18 % 18 %
 

(1) Tax expense related to the Tax Act ($180 million) and intra-entity transfer of intellectual property ($44 million).

 
   

PayPal Holdings, Inc.

Reconciliation of Operating Cash Flow to Free Cash Flow

 
Three Months Ended December 31, Year Ended December 31,
2017   2016 2017   2016
(In millions/unaudited)
Net cash provided by operating activities $ (147 ) $ 923 $ 2,531 $ 3,158
Less: Purchases of property and equipment (180 ) (152 ) (667 ) (669 )
Free cash flow $ (327 ) $ 771   $ 1,864   $ 2,489  

PayPal Holdings, Inc.
Investor Relations Contacts
Gabrielle Rabinovitch
Vice President, Investor Relations
grabinovitch@paypal.com
or
Akila Moorthy
Director, Investor Relations
amoorthy@paypal.com
or
Media Relations Contacts
Martha Cass
Senior Director, Corporate Communications
mcass@paypal.com
or
Amanda Miller, 408-219-0563
Director, Corporate Communications
amandacmiller@paypal.com

Source: PayPal Holdings, Inc.

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